#87: A world economy snapshot

SEEDS STATISTICAL SUMMARY #1

Some readers have expressed interest in the data used in articles here and, as we have been discussing growth and borrowing on a global scale, this seems a good opportunity to make a SEEDS dataset available for download. You will find it at the end of this article.

First, some basics. There is nothing very mysterious about SEEDS (the Surplus Energy Economics Data System). As its name suggests, it’s a system designed to manage information from a surplus energy economics perspective. The database covers over fifty years, stretching back to 1980 and delivering projections out to 2030, though some classes of data go back well before 1980. In addition to aggregate global coverage, SEEDS operates at the regional and national level. When the 2017 version (“SEEDS 17”) is launched, coverage will increase from 19 countries to 21, with the addition of the Netherlands and Poland.

The cost of energy

The energy component of SEEDS contains data on consumption and production of primary energy, broken out nationally and by fuel type. To each series have been attached estimates of EROEI (Energy Return On Energy Invested) and ECoE (the Energy Cost of Energy). As you may know, data availability in these categories is patchy, so SEEDS uses a lot of estimates and cross-referencing, and results are not to be regarded as definitive. Rather, the aim is to provide an indicative guide to important trends.

This set of volume and cost numbers delivers global and national matrices. Put simply, if one knows the energy consumption by fuel of a given country in a specific year, one can calculate an estimated overall trend ECoE. This is known as the consumption ECoE. But what really matters is the overall ECoE, which adjusts the consumption calculation for net imports and exports. Thus, in 2000 the United Kingdom had an estimated consumption ECoE of 3.7%. The overall number was lower (2.8%), because Britain was a substantial net exporter of energy. By 2015, the consumption ECoE for the UK had risen to 7.5% (in line with a worldwide increase), but the overall number was now higher than this (at 12.2%) because Britain had become a big net importer of energy.

Globally, of course, there is only an overall ECoE number, and this is included in the dataset attached here. World trend ECoE is estimated at 7.8% in 2015 – up from 6.4% in 2010 – and is projected to rise to 10.0% by 2021. The latter corresponds to an EROEI of just 9:1 which, if you understand EROEI, spells very big trouble. ECoEs are already high enough to help explain why the world economy is now stuck in “secular stagnation”.

ECoE is best understood as an economic rent. It is a “cost”, but not in the conventional sense of that word because, of course, no money actually leaves the system. Rather, a rising ECoE compels us to spend more on energy and, therefore, less on everything else.

This shows up most obviously in household budgets as a rise in the cost of essentials, which leaves the individual or household less to spend on everything else. Again taking Britain as an example, the cost of household essentials rose by 48% between 2006 and 2016, far outstripping much smaller increases in wages (+21%) and general CPI inflation (+25%). At the level of national economies, much the same occurs, with the cost of essentials outpacing both income and broad inflation as ECoE increases.

This is one reason why seemingly-positive data on the economy as a whole increasingly clashes with individual experience – the data says the economy is growing, but the individual feels poorer, not wealthier. An increasing ECoE – and its transmission through the cost of essentials – helps explain this apparent contradiction. As neither conventional economics nor governments understand this mechanism, policymakers find themselves baffled by trends which do not seem to accord with the data available to them.

The economy – output and borrowing

As you will see from the first line of the datasheet, world GDP increased by 11% (to $114tn, from $102tn) between 2010 and 2015, and is projected to be 20% higher (at $136tn) by 2021. The latter number is essentially based on consensus estimates. It needs to be understood, first, that these are “constant” numbers, stated at 2015 values, adjusted for inflation. Second, non-American GDP has been converted into what are known as “international dollars” using the standard convention of “purchasing power parity”, or PPP.  The conventions of constant value and PPP conversion are used throughout the datasheet, for debt as well as GDP.

So global GDP increased by an aggregate of $20.1tn in the ten years culminating in 2015. But, as you will also see, world debt increased by far more – $76.5tn – over the same period. This means that, aggregated over a trailing ten-year (T10Y) period, $3.81 was borrowed for each $1 of reported growth in GDP.

Obviously, this trajectory is not sustainable – over ten years, economic growth of 22% was far exceeded by an increase of 45% in debt. If the projected increase of $23tn in GDP between 2015 and 2021 happens, and is accompanied by borrowing at the same ratio as the T10Y number (of $3.81 per growth dollar), debt would increase by $87tn, or 36%, over that period.

Ominously, the T10Y measure has been rising steadily – back in 2010, the T10Y ratio was only $2.84 of borrowing for each growth dollar. Even at the $3.81 multiple, however, the ratio of world debt-to-GDP would rise from 216% to 244% – and even this number requires acceptance that reported GDP numbers are an accurate reflection of underlying output.

Borrowed consumption and underlying growth

In fact, this assumption must be open to considerable question. It seems pretty clear that the enormous rate of borrowing in recent years has flattered GDP by creating “growth” that is really no more than the spending of borrowed money. This, of course, brings forward consumption at the cost of increased liabilities in the future.

SEEDS uses country-by-country estimates of what proportion of aggregate borrowing is used to inflate consumption in this way. For the period between 2005 and 2015, the global estimate is that, of the $76tn borrowed globally, $12tn (or 16% of all net borrowing) was used to fuel consumption. The remaining $64tn of borrowing was, therefore, used for purposes other than funding consumption.

On this basis, underlying world GDP in 2015 was $95tn, 17% below the reported $114tn. Just as important, trend growth is far lower when measured on an underlying basis, where world economic output is growing at about 1.2% annually.

This figure is nowhere near a consensus in the range 3-4%. That consensus rate of growth may be deliverable – but only if we carry on spending borrowed money.

A world in denial

Logically, the practice of inflating GDP by spending borrowed money cannot continue indefinitely. This is not a “new normal”, but a “new abnormal”. Most obviously, the aggregate amount of debt is rising much more rapidly than economic output, making the debt burden ever harder to support. Since the global financial crisis (GFC) of 2008, the economy has only managed to co-exist with this debt mountain at all thanks to the slashing of interest rates to near-zero levels.

ZIRP (meaning “zero interest rate policy”) has its own costs, some of which are only now gaining recognition. Savers have suffered very seriously from monetary policies designed to keep borrowers afloat, which, perhaps, is why the concept of “moral hazard” seems to have fallen out of the vocabulary. Last summer, after the most recent cut in interest rates, the deficit in British pension funds rose to £945bn, more than 50% of GDP, and evidence of pension value destruction has emerged on a worldwide basis. Ultra-cheap money keeps afloat businesses which in normal times would have gone under, creating space for new, vibrant enterprises – so the necessary process of “creative destruction” has been stymied by monetary manipulation.

In short, we are living in an unsustainable “never-never-land”, in which cheap debt both misrepresents and undermines real economic performance. It is hoped that this first dataset will help readers to see what is happening in an informative context.

seeds-dataset-world-feb-2017

154 thoughts on “#87: A world economy snapshot

  1. Hi – The pitiful few people who are interested in all this can’t influence those with the power to effect any real change to remedy this looming crash, while most of the population don’t care.

    But has anything similar happened back in history that we can take lessons from? …..perhaps from when empires or other econo-political entities collapsed, like the Austro-Hungarian Empire. A simple solution would be to shuffle the deck & form new structures, conveniently disappearing the former debts – realistically this can probably only happen after a major war or series of wars though; so unfortunately it looks unlikely we’ll dodge the bullet.

    Maybe a world-wide debt forgiveness program for all countries, once it must have also been thought of as impossible for so many nations to get together to form entities like the UN…….

    • Yes, if there isn’t some kind of Great Unravelling (see my own post below), then one assumes that some sort of coordinated, global debt forgiveness programme is the alternative at the opposite end of the spectrum.

      However, I just fail to see how The Powers That Be would ever be able to plan and coordinate such a programme. God, just look at what happens when nations and quangos and NGOs and the like try to organise anything as it is. It seems to me that the prospects for a coordinated, international programme of debt forgiveness (would it include any debts that I might have?) ever working in practice are slim indeed. But you never know, I guess.

    • There’s a couple of big problems with debt forgiveness – it would destroy demand in the system – one mans debt is another’s asset. So pension funds would become worthless overnight for example.
      Two, it doesn’t solve the underlying energy and overshoot problem. Regardless of what financial shenanigans get conjured up, energy wise as stated by David Korowicz … “what’s potentially left, renewable or not, is less economy-adaptive, is of lower quality and lower energy return than what it’s replacing. So there is no magic way around our central predicament”

    • Where do you get the idea that debt forgiveness would destroy demand? Not forgiving debt is more likely to destroy demand as debt diminishes aggregate demand to eventually leave no one with spare capacity to spend.The economy would tank if few can afford to spend.
      This is happening already and we are effectively in deflation. Also paying debts drives money towards the top elite end of society[banks]
      The banks are awash with funds they can’t use productively.$US2.4 Trillion is sitting in bonds in the US fed basically withdrawn from circulation.
      Steve Keen has proposed a private debt jubilee. Here MS governments buy the debts. They give money to borrowers with the obligation to pay down their debts. To compensate the good guys with no debts, they would receive a cash injection. The economy can then reset.
      PS the government, being MS [monetary sovereign] cannot go broke in its own currency so they can spend whatever it takes.
      I feel confident something like this will have to happen.

    • @unravel. ‘doesn’t solve the underlying energy and overshoot problem’
      Agreed, I wasn’t ignoring this, just discussing the other point. Unlike a lot of others, I believe (wrongly or rightly) that the current economic system of full-speed, mass consumption – now globalised over most of the planet is almost designed for maximum waste.

      I’m not saying that this is intentional, just an inevitable consequence of optimising for profit vs sustainability. I have seen a lot of the 3rd world & that really shows how much 1st worlders waste. So between us re-designing our lifestyles to be less wanton, combined with fulfilling the planet’s full potential in renewables, I think we could do a lot better.

      Critics of that will say it wont be enough, fair point perhaps, most solutions to complex problems will have to be similarly multifaceted, so we probably have to have a massive reduction in population, between breeding restrictions (only 2 kids say) to more extreme options such as euthanasia. In more open-minded countries, (granted there are very few at this stage, but necessity might change that) the call for euthanasia as a voluntary option is increasing – it would certainly beat a miserable end when pensionless, sick & helplessly old. I’d take it …..what’s the point of living ever longer if that gain is only of poor quality life – balance is all.

    • How does Debt Forgiveness solve anything ?
      Will the debtors say, “Sorry, we were wrong to borrow and blow so much money, we are sorry we destroyed the retirement lives of so many people, we won’t do it again, we are so sorry.”
      Will letting them off the hook so easily make them change their ways ?
      No, The debtor nations must suffer the consequences of their actions, the whole cabal must implode in catastrophic failure. The worst offenders must hang from the neck from lampposts, their minions must be paraded naked through the streets and be pelted with rotten fruit and excrement.
      If we do not have a very painful re-set, then we will just make the same mistake again.
      This will end in war, and in the USA in Civil War.

    • If you look at history debt forgiveness is very common throughout so it’s not a new idea.

      However, Steve Keen’s idea would not in my view work. For a start MS buy the debts thus pushing up their own debts and thus potentially constraining them in future.

      Secondly, forgiveness that was sufficient to make a real difference to the indebted may cause inflation because of spending by the unindebted as well as pushing up the debt ratio of the MS to egregious levels.

      The obvious way of cancelling debts and savings won’t work morally or politically; I’m a saver and would not relish being told that my deposits had been reduced in order that someone else can stay in their mansion that they should never have bought in the first place. One should be reminded that the introduction of limited liability was resisted fiercely in the 19th century because people thought that you should pay your debts or go to prison.

      Debts that can’t be repaid won’t be but there are two classic methods: inflation and war.

      Inflation hasn’t worked in recent years due to globalization and may not work forte in future due to the spread of robotics.

      And that leaves the final depressing alternative – war.

    • Please be very clear on this fundamental issue. When an MS government spends, every single time it spends new money it creates, [by the act of spending] as a net credit into the economy. It does not use any taxpayer money, not even 1 cent!. So a debt jubilee is not going into debt. but countering debt, forcing it to zero.

      I personally don’t see why the banks should be reimbursed even with free money as they are the culprits in the debt catastrophe caused after going off the metal money stage in 1971. It is the banksters who got Glass-Steagal ,and now Dodd-Frank repealed. It is to them that all the wealth is accumulating. Let them wear the losses! Definitely do not bail them for their junk bonds etc and derivatives – a $555trillion sum.

    • ejhr2015

      You are right that the bankers should pay but, in terms of debt forgiveness, I doubt if they have the equity to withstand even a small jubilee. Even if we get away from the “privatising profits and socialising losses” meme – more difficult a second time around – this is not I fear a practical solution, as much as I might wish it otherwise.

    • “But has anything similar happened back in history that we can take lessons from?”

      Yes, read Peter Turchin: Secular cycles – it has happened several times during history, always as the effect of failing energy surplus:
      Secular Cycles elaborates and expands upon the demographic-structural theory first advanced by Jack Goldstone, which provides an explanation of long-term oscillations. This book tests that theory’s specific and quantitative predictions by tracing the dynamics of population numbers, prices and real wages, elite numbers and incomes, state finances, and sociopolitical instability. Turchin and Nefedov study societies in England, France, and Russia during the medieval and early modern periods, and look back at the Roman Republic and Empire. Incorporating theoretical and quantitative history, the authors examine a specific model of historical change and, more generally, investigate the utility of the dynamical systems approach in historical applications.

    • Savant

      This is a fascinating area. One example that might interest you is Spain, which was the great power in the sixteenth century. Spain was effectively laid low by its gold and silver wealth from the Americas. Spain didn’t need to make anything – it just bought what it needed. This stunted development. The government became spendthrift – and who wouldn’t, with gold flowing in? – and took on trying to reverse the Reformation in northern Europe, single-handedly, by force. Government borrowed against future bullion shipments – which sometimes failed to turn up when intercepted by English seafarers.

      Some studies have illustrated EROEI as the cause of the collapse of the western Roman Empire. That collapse included a 95% decline in population numbers.

    • Yes, truely interesting, I read an interesting archaeological article which stated that the evidence suggests there’s no civilisation yet discovered that recovered from the elite wasting available resources past the sustainable point of balance….. This doesn’t bode well what with our current elites seemingly doubling down by reversing even the hugely inadequate attempts to stop the bank(er)s trying to crash the economy again.

      I wonder though if some solution might be possible this time that wouldn’t in the past on the basis that the world has never been this globalised? In the past a whole empire could go down & while its people might implode locally, the neighbours wouldn’t necessarily be hurt. Perhaps a sense of us all being in it together at some level would spur common sense co-operation to mutually survive ……..as in 2008?

      Finally, some people get very upset with the idea of debt forgiveness, whether for reasons of morality or fairness, but most people aren’t aware that often the overwhelming majority of entire countries had no say in the acquisition of those debts. Not only is a hell of a lot of debt non-personal, but that portion’s almost always accrued through corruption & incompetence by nominal rulers on behalf of the elites they serve. Even in the UK for example, the most vulnerable in society are mostly paying for bailing out the bankers’ excesses, yet far from being curbed, let alone paying for those deeds, they’re still living lives everyone else can only dream of. (White elephant projects don’t bear close examination either) So where’s the justice &/or morality in this current situation then?

    • Hi Tim you may be interested to know that a few years ago – after reading your book – Life after growth – I wrote to my local MP – Gareth Johnson – and asked him to comment on EROEI. He wrote back and told me he had referred it to the Treasury. He then contacted me to say the Treasury did not know what the acronym EROEI stood for. I wrote back with an explanation but after about a year during which I was informed the Treasury had been chased – I still hadn’t received any official comment on EROEI. I then gave up sending my reminders. I wonder of the Treasury were actually ignorant of the significance of EROEI or perhaps too afraid to answer.

    • ejhr2015

      “Where do you get the idea that debt forgiveness would destroy demand? Not forgiving debt is more likely to destroy demand as debt diminishes aggregate demand to eventually leave no one with spare capacity to spend.The economy would tank if few can afford to spend.”

      Your view is totally mixed up. All money is debt. You are somehow concluding that destroying money would not destroy demand. Impossible. Debt is what drives & brings consumption forward. Even cash is debt. How do you propose that a pension fund would have any value if debts were cleared? How do you capital value without debt?

      “The banks are awash with funds they can’t use productively.$US2.4 Trillion is sitting in bonds in the US fed basically withdrawn from circulation.”

      The money supply is increasingly pushing on a string solution … irrelevant to demand side issues.

      “Steve Keen has proposed a private debt jubilee. Here MS governments buy the debts. They give money to borrowers with the obligation to pay down their debts. To compensate the good guys with no debts, they would receive a cash injection. The economy can then reset.
      PS the government, being MS [monetary sovereign] cannot go broke in its own currency so they can spend whatever it takes.”

      This proposal ignores the advantages of debt in bringing consumption forward – To conclude that we can wipe the debt and unwind this consumption defies logic.
      Regardless of how this is theorised to work, we arent short of money. We are short of abundant energy dense liquid fuel which is energy rich enough to grow a
      energy intensive infrastructure.

    • I think you misunderstand my point. It’s a winding back option, not all or nothing. It’s true we are not short of money but rather short of energy capacity.This is the ultimate arbiter of our civilization. It is by now ordained to collapse, so these discussions centre on what can we do in the interim, a timescale no one knows the limit.

    • If we are living in fantasyland where the world will come together and try to ease down the overshoot path instead of shoot everyone on the path; then I have the a solution to population and empowerment.

      Each and every girl born in the next three generations can only have one child regardless of status in the world of the women. A poor women could sell her right to have a child, financing a different life for her or some relatives life. Empowering women has a tendency to mitigate future issues. In the future having a girl will be more important than a boy to carry on your DNA legacy. I will note DNA legacy is not that important in world with this many people. America will take the lead on this one child policy as under the new Administration the USA is going to outlaw abortion and register every pregnant women and force them to show a baby or prove they did not kill it.

      Somehow I see no middle ground, either we work out an equitable solution or it goes to hell. With the rise in populism and the continued embrace of religion as an opiate instead of education, I do not have much hope for an equitable solution. Unless some of the big guns on the world stage step up and managed reduction plan goes into place. The Davos Class and the Political class have to come together.

    • Greg

      Thanks, and welcome. I can see the sense of what you say, but I have an instinctive aversion to the state telling people how to run their private lives, and dictating how many children a woman can have surely goes into that territory.

      I should perhaps explain that my thinking stems partly from being British. For all our many merits, we have regrettable traits which include moralising, prudery, noseyness and, worst of all, what HE Bates called “the poison of puritanism in the English bloodstream”. The spirit that once banned pubs, folk-dancing and theatres seems to lie in waiting in British society.

      Reacting against that, I believe that people’s private lives are none of the state’s business. I am not (in its modern definition) a “liberal”, but I’m a emphatically a libertarian. I may not agree with something, but I defend the right of others to differ from my view. To Trump supporters, I would say: “if you don’t agree with abortion, do not practice it – but do not infringe the free choices of those who do believe in it”.

      I hope this makes sense? Apologies for the rant!

    • Dr. Morgon,

      Thanks for the reply and I have been told my first impressions are a little short of my intended mark. I too believe that the state should stay out of personal relationships up into the point that one of the “wronged” party files a breach of contract. In America, the process of getting married and divorced requires more exposure of private information than a corporation does when purchasing the property next to my house.

      I think I watered down my original proposal by a snarky comment about the abortion debate in America. The Republican Party is vehement in its opposition to abortion, to the point where there is no discussion about the ultimate outcome of their opposition. I postulated the supposedly absurd concept of “registering” pregnant women, but in the current climate I am not so sure that this concept would not be proposed.

      My snark about abortion arises from my Religious upbringing, Southern Baptist, which in my time taught the Earth was 4,000 years old. Thankfully I went to public schools and studied geology. Those that oppose abortion based on the Bible seem to gloss over that when God gave man dominion, he told man to ensure that all species be “fruitful and multiply”. I see no evidence of the Christian community trying to save “Gods Creation”, they just want to multiply.

      I was looking at your analysis about 3 years ago and it happened to come up yesterday when I plugged in an old hard drive, I googled you and now I have found your current work. Thank you for helping me connect the dots on the relationship between debt and energy consumption.

      As far as “the proposal” is concerned I would never advocate for a forced solution, it was just an idea that would work if everyone provided everyone understood the predicament. I really would like someone to postulate what an economy would look like with a declining population? Sorry about first impressions and again thanks.

    • @ejhr2015 re “Put cash under your mattress is the better option. Once the SHTF moment crashes the grid all bank accounts will be lost, so there will be NO Money.”

      I wouldn’t put too many eggs in that basket just yet. I do think it’s a good idea to have a few month’s worth of cash outside the banking system to hedge against the apocalyptic scenario that’s seems to be becoming ever more popular these days. But a more likely scenario in my opinion is a sawtooth path downwards. While there may be some kind of monetary catastrophe awaiting in our futures, I think any such event, should it occur, will be dealt with reasonably quickly.

      More likely is a steady series of more minor shocks that cause progressive economic retrenchment. It’s pretty clear to me that we will eventually experience radical inflation, perhaps after a serious deflationary episode. The deflation will provoke a money-printing response, driving up public debt. At some point, the government will find that it cannot both service the debt and continue to provide the rest of the services that the public counts on. When this happens, the government may have no alternative than either enduring a severe depression and allowing a thorough housecleaning — the odds of which I put at approximately zero — or outright monetization, in which case a hyper-inflationary episode is just a matter of time. If this scenario plays out, best get that money out of the mattress during the deflationary phase, as it will evaporate if it’s still there when the hyper-inflation hits.

      Or maybe distressed nations will resort to war — civil or otherwise — in which case all of this may be moot.

      I keep coming back to the same thing. Invest in personal resilience. Good land, wood lots, tools of production, skills that will be useful in a retrenchment scenario, and strong communities. No one knows how this is all going to play out, but it’s pretty clear that the days of the status quo are numbered. Resilience and flexibility are the keys during times of change.

  2. Great stuff as usual, Tim. I’ve posed this question before, time and again, but one wonders what it is that will eventually trigger The Great Unravelling? For example, if interest rates were to rise – not even hugely significantly I suppose – presumably defaults would start creeping into the system. Would there then come a time when the default quotient would be sufficiently significant to trigger some sort of positive feedback loop which becomes, by definition, uncontrollable? And what does pandemic, uncontrollable debt default look like all around us if/when it happens? We should be told.

    If not that scenario, then what? A currency collapse somewhere? Surely, the fate of the euro is now starting to look more dodgy than ever. What happens, if say, Le Pen clinches it and starts the process of pulling France out of the euro and the EU? For her even to signal such a seismic course of action would cause mayhem, I assume. Again, would that trigger a wave of debt-related unforeseen consequences?

    It just seems extraordinary to me that there is no obvious end-game in sight here, notwithstanding your observations about the innate madness of the pervasive phoney ‘economic growth’ which you describe – and which must surely represent a plague on all our houses.

    Nurse! Nurse!

    • Thanks, MM. You raise a critical question to which I devote a lot of thinking-time.

      To a certain extent, the unravelling is already happening. Taking the UK just as an example, government puts up NHS spending, but it’s never enough; defence spending rises but again it’s not enough; I take it roads are still the same mess as when I was last there. Wages rise a bit, but the cost of essentials keeps taking a bigger slice of incomes. Energy prices are rising One household in three has financial difficulties. The real value of future pensions diminishes. Debt has risen to £4.9tn, but on top of this there are public sector (£1.4tn) and private sector (£1.0tn) pension deficits, financial sector debt (£3.35tn)……yet we’re told the economy is growing?

      In summary, and worldwide, already things don’t add up – economists and politicians are genuinely baffled. One of my aims here is to make sense of this.

      There is anger, reflected in “Brexit”, Trump, the Italian referendum….. and next, perhaps, in France and Holland. If Le Pen wins and talks about taking France out of the Euro, French bond yields will soar, which France cannot afford. If France actually leaves the Euro, default looks unavoidable. But staying in the Euro locks France into “growth” which, in underlying terms, is already +/- 0%. During 2005-15, Germany borrowed Eur 1.50 for each Eur 1.00 of growth – but France borrowed Eur 13.30 per Eur 1.00, Spain even more, and Italy has negative growth. The whole Euro system is dysfunctional.

      What we need to think here is “interconnection” and “fragility”. Our system is interlocked – so what happens to Germany (and others) if France defaults? Our system is predicted on growth, and capacity utilisation of 90%+. You can’t run a railway or an airline at even 80% capacity, nor a power grid for that matter – central costs become too high on a unit basis. Fragility is evident in power systems, distribution and payment systems. We came within 36 hours of payment system collapse in 2008 – and nothing can function without it.

      So really it’s a domino set up – knock down a single big one and the rest tip over in a cascade.

    • Fascinating if rather scary stuff. Alistair Darling claimed the Uk was ‘3 hours from disaster’ in 2008. I suspect the next event will be an order of magnitude more serious knowing that the fed and BOE are now tapped out.

      http://www.bp.com/en/global/corporate/energy-economics/energy-outlook/oil-supplies-and-abundance.html

      I would be interested to hear Dr Morgan’s view of BP (which I find surprising) – they point to a world of ‘abundance’ of oil supply with high cost producers being ‘crowded out’ to 2050 and beyond… This doesn’t seem to fit in with rising EROEI ?

      http://www.thisismoney.co.uk/money/news/article-2415003/ALISTAIR-DARLING-INTERVIEW-Britain-hours-away-total-social-collapse–Former-Chancellor-crisis-erupted-FIVE-years-ago-week.html

    • Governments and central banks have several plans on their shelves. Introduce the DM again, or the Franc. Backed by gold if necessary. Close borders if necessary. They don’t talk about it too much, that would trigger “events”. Everything is awesome, there’s growth, stocks go up bla bla…

      German government advised its population to have food and water for a a few weeks. Countries repatriate their physical gold holdings. Implementing a new DM would take a few weeks, prepare yourself with some basic stuff for at least a month. He who panics first, panics best. They will print until they can’t.

    • Who ever gave you that news doesn’t understand economics. Mind you..Few do! The mainstream is hopelessly off target and yet politicians and the media carelessly spout their nonsense. First you can’t go back to gold. Most gold today is paper gold [75%] so it’s fiat as well. For physical gold to be worth what the economy produces it would have to be astronomically more expensive. Nixon went off the gold standard because they didn’t have enough to do its backing currency job. Gold is artificially priced. Just as with any currency it can be manipulated by the governments. It’s not a safe investment.
      Put cash under your mattress is the better option. Once the SHTF moment crashes the grid all bank accounts will be lost, so there will be NO Money. It’s only numbers in accounts after all.

    • As soon as things blow up, trillions in paper promises will not be fullfilled. Where does that leave us?
      A physical, local economy is the next step, if we’re lucky. Very lucky.

  3. I am shocked……..
    In an e-mail to my business partners 24 hours ago I asked:
    “Do we have another 6 years and $90 Trillion available?”
    Very close to Tim’s numbers……………
    I say…..we do not……….and hence………we will get what is coming our way- WAR.

    • Let’s just hope that the government sees the error of its way in letting the UK milk producers suffer. The UK lamb producers are worried about EU tariffs affecting their exports when we leave but I think in the very near future we’ll want to keep all our food and will eat carrots potatoes apples whatever their size or shape. I think we’ll look back on the days when supermarkets used to throw fresh food away if it was the wrong shape in amazement.

  4. Can I make plea for order, please could we put replies at the bottom of the whole thread and, if necessary reference the person we’re replying to. I’m getting very confused trying to find new posts. Just a thought!

  5. This means that, aggregated over a trailing ten-year (T10Y) period, $3.81 was borrowed for each $1 of reported growth in GDP.

    Once again, how much was borrowed for each $1 of reported growth in produced assets, land and consumer durables? The stock-to-stock analysis. My guess is that the U.S. borrowed slightly less and China borrowed substantially less than $1.

    Again taking Britain as an example, the cost of household essentials rose by 48% between 2006 and 2016, far outstripping much smaller increases in wages (+21%) and general CPI inflation (+25%).

    Isn’t the Essentials Index torturing the data? Housing is excluded but alcohol and tobacco account for 22% of the compositional weight. The Cleveland Fed did an analysis by income quintile of necessaries/luxuries.

    http://preview.tinyurl.com/gwzngsz

    Thus, in 2000 the United Kingdom had an estimated consumption ECoE of 3.7%.

    I still don’t get ECoE. What are the formulae for the numerator and denominator?

    • Where borrowing is concerned, it is not my contention that most, let alone all, borrowing has been used to fuel consumption. Clearly, however, some of it has.

      My assumptions here err to the conservative. For example, France borrowed EUR 2.25tn over ten years, and I tag just 6% of that as borrowing-fuelled consumption. It may very well have been higher. The number for Holland is 8%. (I’m studying these countries right now because elections loom – I’m not remotely interested in the politics, but it’s a good time to assess their economies). Even those modest proportions, though, are enough to have major implications for growth.

      What I think you may be missing is the sheer scale of borrowing over recent years. Adjusted for inflation, we borrowed $25tn in the seven years preceding the banking crisis – in the seven years after it, we borrowed $65tn. Has some of this huge borrowing fuelled consumption? I’m sure it has.

      Whether you agree that this is relevant is up to you, of course. I think it is. My interpretation is that we were forced into ZIRP by the sheer impossibility of paying realistic rates of interest on debt totalling $181tn (at 2015 values) in 2008. That number is now $246tn, seemingly making escape from ZIRP difficult/impossible. ZIRP itself is proving very damaging. For one thing, it’s hard to operate a capitalist system without returns on capital….

      The Essentials Index is long established and has had a lot of media coverage. The reason why housing is excluded is simply that the positions of renters and mortgage-payers are very different in the UK.

      For ECoE, you need to understand EROEI first. ECoE is an economic rent, as described in the article. The higher ECoE is, the less we have to spend on everything else.

  6. Dear Dr. Tim:
    Once again…THANK YOU very much for your outstanding work and thoughts.
    Once again, I would like to kindly remind everyone that the Communist Block shut down at T10Y of 4:1…….we are currently at 3,81:1…………draw your own conclusions.
    EROI of 9:1 or less means that our world going forward will look very different from the world of the last 50 years……..it already does……if one pays attention.

  7. For ECoE, you need to understand EROEI first.

    Spare me the condescension. I am cognizant that Charlie “Fish Fuck in Rivers” Hall, the EROI King, and Cleveland “Divisia” Cutler, his sidekick, predicted in 1981 that there would be no drilling for oil in the U.S. by 2000-2004.

    What is the ECoE formula? It must be dollars, euros, sterling, not BTUs, joules, million tons oil equivalent like EROI. If so, 2015 U.S. ECoE is lower, not higher, than 2005 U.S. ECoE and slightly higher than 2000 U.S. ECoE. In context, 2016 U.S. ECoE is the 3rd or 4th lowest ECoE in the last 70 years.

    Debt stock-income flows are one of 3 ways of comparing income statements and balance sheets. You focus on one of the ratios. I say, so what.

    Housing is an essential. Ownership may not be an essential. But there are plenty of middle income households that are home owners. What were U.K. rent increases during the relevant period? Let’s see if you compositionally cherry-picked the data.

    • No condescension was intended. But I must ask you to keep your comments polite. I regard Charles Hall as a brilliant thinker, and believe that EROEI is a concept vital to furthering our understanding of the economy. I have a high regard for Mr Cutler as well.

  8. If you read today’s (19.02.2017) Guardian there is an article by Larry Elliott ‘Is the the end of the UK’s retail boom’ In it he references a lot of economic theory about why prices are going to rise and real incomes fall – but nowhere is the rise in the cost of energy mentioned as a factor.

    • Well you could be referring to how hyperinflation help the advance of the Nazi party. However I think a clip from the film Soylent Green would be a more appropriate guide as to where we may end up.

  9. Although I can manage my own finances quite well, the national ones leave me baffled and scratching my head.

    For example, an article in today’s Telegraph – http://www.telegraph.co.uk/business/2017/02/20/strong-growth-eases-pressure-hammond-slash-deficit/ – tells us that ‘Strong growth eases pressure on Hammond to slash deficit’.

    With the 2016/17 deficit expected to be a mere £65 billion, eliminating it and reducing our debt and its servicing costs can now, it seems, be put on the back burner.

    My question – am I drinking the wrong stuff or, if not, where do I get the stuff some of these economists are on?

    • Eddy

      Without quoting Mr Gove, I’d say there is a breakdown in expertise. Political experts didn’t see Brexit or Trump coming, and could be just as wrong about the Dutch and French elections. Economists are baffled and, to their credit, some admit it.

      The growth issue is misleading. Over the ten years 2005-15, the economy grew by £215bn – but debt increased by £1,651bn (both numbers ex-inflation). On top of debt of £4.9tn, Britain has financial sector (inter-bank) debt of £3.35tn, unfunded public sector commitments of about £1.4tn, private sector pension deficits of close to £1tn, PFI, nuclear decommissioning……well, you get the picture. Of £1.87tn GDP, c£125bn is dubious (“imputed rent”, a non-cash “imputation”) and £60bn comes from foreign creditors.

      The more interesting realities are on the ground. Govt increases NHS funding but it’s never enough (likewise defence). Council tax is set to rise by 4.99% across the board, but waste collection and libraries, among other things, face cuts. So the whole thing is a bit like a game of pass-the-parcel.

      The UK isn’t alone in any of this. It’s a story of collective idiocy. Basically, the stages have been these:

      1. Decelerating growth
      2. Financial deregulation & cheap money = debt explosion and unquantifiable risk
      = 3. Banking crisis
      = 4. Zero interest rates (ZIRP) + QE as the response
      = 5. Even quicker rise in debt

      Meanwhile, ZIRP has slashed returns on assets, hence pension fund deficits.

      I’d conclude by saying that you know this, I know it, many others know it, but the powers-that-be are in either ignorance or denial.

    • Tim, there is no such thing as “unfunded liabilities”. While the UK has a damaged [Lisbon treaty effect] monetary sovereignty it can still buy all its debts as they arise.[ It just has the useless chore of issuing bonds to cover any deficit]. No one has to save to cover future expenses.They just get paid ad hoc when the time comes.
      But generally I agree with the thrust of your comment. Incompetence unbounded!

    • The main thing is not to fall for the politicians’ lie that the national budget is like a household budget. It’s nothing like that. A household has to earn or borrow money before it can spend. The national government as long as it is monetary sovereign spends on its debts by issuing new money, sourced from thin air. It never needs to save or borrow its own money. Governments like Greece which gave up sovereignty are not able to do that and in effect are like households. Local and State governments also cannot create money. The UK situation is slightly complicated by adherence to the Lisbon Treaty but it is still basically monetary sovereign. It was a great blessing it retained the Pound.

  10. TIm I saved for the future plus I also got some redundancy money. Do you envisage a run on the banks in the UK when things start to unravel? I don’t think the Government has nearly enough funds to bail them out again and certainly not enough to compensate savers despite their high sounding promises.

  11. Thanks for your reply Tim.

    I’ve often wondered to what extent personal and government debt feeds back into GDP figures and what will happen to our debt servicing costs when interest rates eventually rise.

    Regarding the DT article, one thing that seems to get overlooked (my opinion) is the psychological effect of postponing deficit reduction. I.e., how do you convince people of the need to get our finances in order when at the first opportunity, you backtrack?

  12. Donald (and others)

    First, apologies for my tardiness in replying, but I’m very busy at the moment.

    We all know that, technically, a country controlling its own currency cannot “go bankrupt” in that currency. But, realistically, this is little comfort. The value of a currency can be destroyed by hyperinflation, as in 1920s Germany or modern Zimbabwe. Likewise, the foreign exchange value of a currency can slump, making imports (including essential items) unaffordable.

    Meanwhile, the policy of ZIRP is promoting borrowing. Borrowing amounts to having something today, at the expense of having less in the future. Of course, this is most visible in formal “debt”, on which basis the UK, for example, “owes” £4.9 tn (of which just under £2 tn is public debt, the rest private). But formal debt is not the only kind of futurity. Britain has unfunded public sector pension commitments of about £1.4 tn, and private pension schemes are in deficit of close to £1 tn. Other Western countries are in similar straits. These are not “debts”, but “quasi-debts”. Technically, a state could slash public sector pensions, and stand by and do nothing as private pension schemes collapse. But I doubt if either is “practical politics”.

    So, what do we do? Governments could try to “print” their way out of this, but the risks are FX crash and/or hyperinflation. They could raise pension ages, and might do so, but this would have to be a big (and hugely unpopular) hike to do much good. They could raise interest rates, and thus boost returns on fund assets – but this could crash asset markets, including property, and inflict huge burdens on mortgage payers and others with debts – and could also mean a huge increase in the cost to government of paying interest on its debt.

    However you look at it, boosting “today” at the price of “tomorrow” is damaging, but appeals to political short-termism. When the bill turns up – which it will – the banking system will be in the front line. I don’t know if the 2008 rescues can be repeated without destroying faith in the currency. This is when government faces two temptations. The first is to unleash inflation, destroying the real value of existing debt. Something of this sort looks almost inevitable, because we’re in a “can’t pay, [so] won’t pay” situation. Historically, governments prefer the “soft default” of inflation to the “hard default” of walking away from debts and becoming a pariah. Actually, that pariah status tends to be fairly short-lived (5-10 years). If I were Greece, for instance, I’d default. But bigger countries can’t do that, because of knock-on effects.

    So the second gimmick they might try is “bail-ins” – essentially, taking money from bond holders, and the holders of cash in banks, to bail out borrowers or, in fact, the banks, where debt owed to them is not repayable. Morally, of course, this seems wrong – in my view, those with cash in the bank are creditors, not investors (though many may have invested in savings instruments called bonds without understanding what the term means). But governments have flexible morals when expediency comes to call.

    Either way, cash comes under attack, whether through inflation or bail-ins. Other assets might appeal, but of course their value could slump. Frankly, anyone who is on the positive side of the balance sheet (with cash, and/or other assets, exceeeding debt) is probably going to be plundered to rescue the improvident, not just borrowers, but governments and the banking system too. I see no way of this not happening.

    Finally, right now I’m watching France. Ms Le Pen wants to take France out of the euro. I’m not French, and have no view on French politics. But I’ve tried to work out how France might exit the Euro, and can see no way this can be done without default. Creditors (most obviously Germany) would suffer huge losses, dwarfing anything that might happen if intransigent lenders force Greece into default.

    Grim stuff, I know. But when “debtors” (broadly defined) become incapable of meeting their commitments, “creditors” (meaning anyone with a positive balance sheet) lose out. There seems no other answer – and no place to hide.

    • Thank you for your reply.

      I guess even if I converted my savings into a property for rental purposes and ignored the possible crash in its asset value the Government could just seize it anyway. You’re right there is nowhere to hide.

      Perhaps in a worst case scenario our creditors could employ the chaps from the TV program ‘Can’t pay we’ll take it away’ who will seize all of the UK’s tangible assets.

      I hope there are still a few years left in which I can enjoy my savings now I’m retired before the bill arrives.

    • At the risk of looking foolish..I have a question for Dr Tim.

      If many governments are in debt (the Chinese, the Americans, the British etc) , a)who is lending them this money b)why don’t they stop lending if they know that they are not going to get they’re money back ?. Or are government borrowings somehow created by conjuring up ‘new money’ from a BOE spread sheet?.

      Aside from inflation, bail ins and default mechanisms, have you any thoughts on a debt cancellation option ?

    • Hello Tim
      An option to curb new borrowing due to ZIRP would be to tax it.
      Though it would be very unpopular, it would raise revenue for the government.
      A precedent has already been set with taxes on insurance policies, so I think that once one government does they all will.
      If aimed at consumptive borrowing i.e. credit cards, car loans, hire purchase, and mortgages it may help rebalance the economy away from finance (which feeds of the consumptive economy) and back to industry as returns will be higher there.

      Just a thought.

      Regards Philip

    • Philip, this is what is so hard to understand. Only state and local government needs taxes. The federal, national government does not use tax for revenue because it is monetary sovereign. It spends only newly created money. Tax money is removed from circulation and never again sees the light of day. It’s very counterintuitive as we are assailed daily by this false info about tax revenue, but the government can never go broke in its own currency. It never needs to save or borrow its own currency, and it can actually both cut taxes and spend more on health and welfare etc at the same time.
      Imagine if our pollies understood that!

    • Tim I wonder if the current economic crisis in Venezuela is a taste of things to come. Their people are going hungry and they can’t afford the investment needed to get their huge oil reserves out of the ground.

  13. @TM – At the risk of sounding deeply cynical, (actually it’s hard for an amateur’s artistic paranoia to outdo reality in the age of Trump-in-Wonderland) as the demographic bulge of baby-boomers fade away, the remaining population/voters should change significantly in their susceptibility to manipulation. I am thinking more and more that combined with the grooming of the populace to see autocracy as normality, the more outrageous options to evade unpayable debts may no longer be off the table. You don’t have to stretch your imagination to see how this could work – simply look at real-life examples of where the people are too cowed &/or uneducated to respond, (the Soviet Union and 3rd-world tin-pot regimes respectively) to see what elites do get away with.

    Then at the risk of sounding insane, to survive the collapse of fiat currencies, looting of produce from land and confiscation of property/goods, I can only think of obtaining coinage of measurable precious metal value. Low-domination is preferable, because not only is that all the majority can afford to trade with, but also you don’t want to put all your eggs in one basket and thereby make yourself a target with conventional, current options like gold bars/coins. So, if there’s no easy way of obtaining low-domination options today, what about DIY …..get a cheap 3-D printer and some wholesale silver, then print your own coins; they only have to have the weight marked on them to be useful? (I actually know a silversmith hobbyist and apparently this is quite easily achievable)

  14. Knowing how economics is actually constructed does offer other ways forward. First the national governments cannot “print money”. What they do is buy debt. So they cannot spend unless there is a debt to spend on. The backing of a currency depends entirely on the “full faith and credit ” of the government, the one in charge of the economy. Hyperinflation can only occur when the government loses its full faith and credit worth. Not the other way round.

    The spending limit is that point beyond which inflation becomes uncontrollable. It is when the economy has reached maximum capacity. Today that limit is $Trillions off into the distance. We battle deflation at present, not inflation.
    So when things get shaky the government can smooth a path by paying everyone a UBI-a basic income- and pay for free healthcare and education etc without using any taxes. They could and would wipe taxation out. It has no bearing on the ability to spend. It’s a lot more complex in detail such as needing coupons etc for purchases which I won’t go into here.

    But the real problem is that we have made no plans to manage any crash and so we will be caught with pants down when the big one does arrive.

    • ejhr2015,
      can I pain you to elaborate a bit more, for those of us who do not know how Economics is actually constructed ?
      I always thought that the government spends money by buying things, like they go to BAe and say, “here is a cheque for a trillion pounds, I want one of those trident submarines in your showroom.”
      As for “full faith and credit worthiness”, are you talking about faith and creditworthiness of the government, or faith in the country in general. I mean, would a change in government in Venezuela make the country more creditworthy ?
      How about Greece ? They change govt’s regularly but nothing seems to change.
      Similarly, does a change in the government in the UK change British creditworthiness. At present we have a UKIP government, pulling the strings of the Tories, in a kind of Punch & Judy show.
      Does David Cameron equate 1£ =$1.65 and Theresa May/ukip mean £1 = $1.25 or less going forward ?

      As for “We are battling deflation, not inflation”, I cannot see this. I see rising prices and bars of chocolate getting smaller for the same price.
      Where is this deflation battle going on, or what am I not seeing, or what am I failing to understand ?

      As for your final point, yes I do concur. There is no plan for when the fan gets hit, but the reason for that is that the government refuses to acknowledge the fact that we are up that little river in a canoe with no paddle. Listen to the government and you would think everything is peachy !

    • You are sort of right,Johan. The government [the monetary sovereign ones] don’t actually get money[to spend], they just buy their debts with transfer operations through their central bank, marking up commercial bank reserve accounts with bigger numbers. These banks then transfer those numbers to their high street branches where their customer ‘s account is marked up. At this point the customer gets money and can spend it. Marking up numbers at the reserve bank translates to the money coming from “thin air”. It is not a liability and is a net credit into the economy, to grow it. It also means the government has no money itself. It does hold other people’s money, such as in government debt. but it can deal with government debt without borrowing or saving. Why? because government debt is just a way of saying investor deposits. Governments store the accounts, even pay interest, but never spend the sum. They have zero need for that, which should be obvious now. “Government debt” is a misnomer. Paying it off is simply an accounting transfer back to the investors.
      Just like there is no such think as future liabilities we need to consider. They take care of themselves at the time they fall due. We cannot, need not, save for them.

      As for credit worthiness, obviously it is elastic and Venezuela is not credit worthy like the USA. if its credit worthiness slips further then it could fall into hyperinflation. Venezeula could conceivably just buy its debts,as above, but it depends on whether creditors will accept that. Venezuela has I think, the world’s largest oil reserves, so there should be room to move. Venezuela made the mistake of thinking its reserves would always pay for everything and allowed their home agricultural production to lapse, because they could import instead. Now they can’t grow enough to feed themselves. and cannot import food either. Greece gave up it’s sovereign right to its money and like the rest of us it is a user of currency, so it does have to earn or borrow money. Such a silly choice to drop the Drachma.

      2% inflation is, I did read, the equivalent of being in deflation. Like full employment means 2% unemployment. People see much greater inflation than the massaged statistics show, but economics is often smoke and mirrors when not a downright con. We can thank the mainstream and venal, gullibull, dishonest politicians for this state of affairs. Right now I believe we are in both states at the same time. Deflation will win out.

  15. Thanks, ejhr.
    I will need some time to go over all that and digest it.
    One final question if I may, where does taxation fit into this ?
    or let me be perfectly stupid about this and ask, “why does the government need tax us ?” if it can just make up money as it goes along ?

    • I think for Monetary sovereign governments Tax is a holdover from money metal days. However for non MS states taxation does raise revenue. Any non MS organisation as well as we ourselves have to earn or borrow to finance our spending. Tax has its uses however as it is a control over the money supply by withdrawing excess money from the economy. It also helps equality within society, in theory at least.

      Governments use taxation as a marker of the state of the economy. Annual government budgets are prepared against tax receipts. So If we hear “Budget Surplus” it means the government has spent less into the economy so some tax is not used[it’s a fake argument].
      A budget deficit says the tax take was less than the tax take so more money has remained in the system and gives the economy room to grow. Budget deficits are good and surpluses are bad news, contrary to mainstream rubbish!

  16. Thanks indeed to ejhr for a well reasoned explanation I have been following this discussion with interest.
    So if my understanding is correct, the Uk government sells gilts (or is it bonds?) to foreign investors when it needs to borrow. Occasionally these gilts (or bonds) are bought back by the BOE when there is insufficient investor demand…so in effect the government is buying back it’s own debt?. Which begs another question – why doesn’t the government side step the whole process and just create new money instead…. and not have to pay any interest ?.

    I think I have got a handle on this..then Mrs May at PMQ says that Labour would ‘bankrupt’ the economy by overspending. How can a country that can issue it’s own money and buy back it’s debt ever become bankrupt ?. I can foresee a situation where the value of the pounds spending power is driven down by issuing too much new money….but bankruptcy ?.

    If state pensions ignore the retail price index will they always be affordable as the government can always borrow/create money to pay for them ?. How do we know when too much ‘new money’ has been created putting the pound into a ‘death spiral’ ?.

    If the Dollar, Pound, Yen etc. are all simultaneously de-valued by the issuing of new money to eradicate excessive debts, will the result be nobody is worse off ?

    • Dear Ken, you put your finger on the rampant idiocy that informs politicians today[world wide too]. It’s because they are guilty of treating a Federal government like a household. Households are users of currency. National monetary sovereign governments create the currency the nation needs to work, grow etc.
      You can overspend of course, but it’s not related to any taxation “revenue”. One has to work out what is the productive capacity of the economy at “full” employment. Today it’s a large sum but I only have heard the US in 2012 estimated the fiscal space at $2Trillion. It would be considerably more today. The boundary is marked by not triggering excess inflation. Also issuing money is only done to buy debts. It cannot be stored for some vague future need as it can be issued ad hoc at any time, which is why talk of unfunded liabilities is ridiculous.

      It’s way overdue our pollies got the message!

    • ejhr said: “which is why talk of unfunded liabilities is ridiculous”

      well then – we can pay for unlimited NHS and all enjoy luxurious retirements with no problems. no need for finite resources to intrude.

      the world will supply our needs, thanks to our clever modern monetary theory, with no recourse to reality whatsoever.

      oh! …. do I hear a “but….”

      never mind – we can print money to wipe butts with at least.

    • National “bankruptcy” is usually used in the context of a default on debts to other sovereigns. These defaults are fairly common (Greece and Argentina being fairly recent ones).

      As far as “internal bankruptcy” is concerned what Mrs May seems to be referring to is overspending not a national default as above. Clearly governments need to finance spending and if they run a deficit then they need to borrow, or rather can borrow. If they run large deficits they need to borrow more and have to offer better terms – higher interest rates. At some point it is conceivable that higher interest rates on the national debt will crowd out substantive spending and at this point you could argue that this is some form of “bankruptcy” due to the interest bill being so high that the government cannot meet its legislated liabilities.

      If you print money as opposed to borrowing then at some point inflation will occur which will escalate debt even further and cause a collapse in the external value of the currency, again arguably tantamount to “bankruptcy” as potentially leading to a international default as well as an internal one in terms of the above.

    • Sovereign governments do not need to “finance” spending. And they most certainly don’t need to save or borrow. In the UK the Lisbon Treaty forces the government to sell gilts to match any deficit, but is a stupid paper exercise just to please Brussels. Governments need deficits. If they don’t spend more that they withdraw in taxes, the private sector has to make up the difference and that means less employment etc.

    • ejhr1015

      “Governments need deficits”

      The father of deficit spending, Keynes, accepted the need for deficits during depressions but he believed that they should be balanced by surpluses when the economy had recovered. The idea of permanent deficits, which is what we have now, was not envisaged by him.

    • Yes, I know Keynes said it but only deficits inject money into the economy. Surpluses drain private resources which only works when there is an economic boom..Otherwise surpluses end up causing recessions, even depressions. Very few budget surpluses exist since they are bad news. A surplus says the government taxes more than it spends, thus depriving the non government sector of the money needed to grow the economy. I hope that is clear.

    • ejhr2015

      “Yes, I know Keynes said it but only deficits inject money into the economy.”

      Not actually strictly true. Deficits financed by borrowing from private individuals inject demand but not money; that is why they are preferred; they should not result in inflation as they will not affect the money supply. Aggregate demand goes up when the money is spent and there is effectively a switch between saving and spending.

      “Very few budget surpluses exist since they are bad news.”

      I suspect they are bad news because they take away the punchbowl and yet we should have surpluses during a boom to ensure that the GDP/debt ratio does not become unsustainable over time. They are not bad news per se. After all if we are a boom the excess taxation as you call it is to dampen down aggregate demand which is just what it should do; deficits support a shortage of aggregate demand and surpluses take it away.

    • No, only deficits inject money into the economy, but as net credits, an operation not requiring a corresponding liability. Bank money is always a liability and nets to zero over time.
      Aggregate demand is affected by other factors like taxation and austerity policies.

      Surpluses are bad news because the economy is negatively affected. I would say that is bad news per se. I’m not quite sure what your point is[?]

    • ejhr2015

      “No, only deficits inject money into the economy, but as net credits, an operation not requiring a corresponding liability. ”

      No, you are confusing aggregate demand with the money supply. If deficits are financed by borrowing then they increase aggregate demand but do not affect the money supply. As I said the operation effectively transmutes saving into spending but the money supply in toto is unchanged; dissaving is countered by spending.

      “Surpluses are bad news because the economy is negatively affected”

      Again no, not in the Keynesian sense. If the economy is operating at greater than maximum aggregate demand then the purpose of the surplus is to bring demand back into line with capacity. The theory is that any excess of demand over capacity comes out as inflation ceteris paribus so the economy cannot be negatively affected in the sense that resources are made idle by the surplus; the surplus simply pulls back demand to a sustainable level.

      My point is that surpluses can serve a purpose and are not always, as you suggest, bad news. They are a standard part of the traditional Keynesian framework; the fact that we virtually never have surpluses does not make them bad just inconvenient.

    • This can go back and forth forever. I think you are overcomplicating things [you might be an economist? they love complexity]. I’m not confusing aggregate demand with net crediting operations. They are related but not identical. Also I’m not shying away from budget surpluses being bad, but I did say in boom times the surplus can be useful.

    • I don’t doubt that prophet Morgan’s theory is correct concerning the divergence between the real economy of goods and services and the financial economy of credit and debt. MMT provides a degree of comfort regarding the short term sustainability of this situation although we are firmly in unchartered territory so who knows ?. Instinctively there is something of the logic of ‘pulling yourself up by your own bootstraps’ about zirp, quantitive easing etc.whch troubles me so I’m thankful to our host for his insight.

  17. So ejhr – how much ‘money’ can a MS county ‘create’ before the currency hyperinflates because no one wants their funny money anymore? Is this amount linked to the resources they can actually back it up with? The actual resource pie is finite. Simply creating more claims on that finite pie just reduces the slice that each unit of money can claim.

    It actually IS just the same as a household budget. You can play around with ideas about money all you like – but unless you control the physical resources to back it up… why would anyone (or any other country) give it any value?

    Tim is absolutely right about surplus energy economics.

    The world can’t run much longer on funny money hopium – it nearly stalled in 2008, and MMT was no help, and it is about to stall again. Rather messily.

    I’d love to think that you were right. But our huge NHS crisis, for example, shows that things are well beyond any simple accounting tricks.

    • well, MMT just explains what macroeconomics actually does. It’s definitely not a crystal ball. What it does do is straighten out the economic mess we are in today that has resulted from criminal ignorance by all our politicians and their dangerously damaging actions. [But not counting their dangerously damaging actions due to their head in the sand approach to the future, which is what this blog of Tim’s is about!]

      Unfortunately knowing that a MS government cannot go broke in its own currency lends itself to all the mindless idiocy we see in follow up comments [yes you too!]. It can never go broke, but the government can drive it deliberately into bankruptcy as, being MS it has such a power. However it cannot spend on nothing. it can spend to buy what is for sale. Free education is for sale, if the government so chooses, same for free healthcare and a decent UBI [separate discussion]. Free cars for all is not an option as they are not enough of them. If it’s not for sale its not purchased. So yes, as you say, we have to have the resources available to buy. There’s no getting away from that!.

      So MMT is extremely important in the context of current economic and political policy. It tells us that Taxation is no measure of the value or wealth of an economy, that one can spend productively regardless of tax, [deficit spend] up to the excess inflation limit, and achieve equanimity and healthier lifestyles during the time we have left. Probably till about 2030 IMO.

      So don’t make stupid comments about hyperinflation and such. It only reflects, badly, on the teller of such tales.

    • @ejhr

      a couple of points..

      “the government can never go broke in its own currency”

      so why can’t we fund the NHS? why are we cutting benefits? why are we in debt? why are we running an increasing deficit?

      might it be because we are not a closed system? other countries will not trade with us unless they have faith that we can pay genuine claims on real wealth (food, energy, materials).

      you are not the sole proponent of MMT – and the idea is not new. give me one example of a country successfully running such a program.

      “stupid comments about hyperinflation”

      your sophistry about what constitutes ‘printing money’ aside, name me one example of a country creating money in excess of its credible material resources that has not ended badly; our current multiple bubbles are clearly not acceptable as a paradigm.

      the world is in a bit of a tight spot right now ejhr, and – unless your ideas are a buddhalike enlightenment unavailable to the rest of humankind – those ideas have surely been considered… and discarded.

      MMT just explains what its proponents would like to imagine that macroeconomics actually does.

      I’ve lived long enough to know that if you think the answers are that easy, you haven’t really understood the problem.

    • That is quite a muddle you have created here. Have you actually studied MMT?
      It would cure you of some of this mess, because it is basically simple but counterintuitive. contrary to your assertion.[You’d have to be an economist to believe it must be complicated] Comprehension is certainly hard but that’s partly due to having to unlearn mainstream falsehoods first. The best way to answer your thoughts is to direct you to source. Probably as good as any is Warren Mosler’s “Seven Deadly Innocent Flaws of Economic Policy”;

      http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

      See how you go with this.

    • @ejhr

      I didn’t create the muddle – these are real world issues that we are facing.

      I note that you are unable to find a real world example of mm theory working in practice.

    • No, there are no working examples of MMT. You didn’t know that? The really stupid thing is that we already all live in an MMT world. It’s right under our noses but no politician or vested interest wants it recognised as it would spoil their party.
      Don’t forget to read Mosler!

    • @ejhr

      “The really stupid thing is that we already all live in an MMT world”

      Actually we live in a world some aspects of which can be modelled by MMT – which is merely one of many such models. You must avoid the category error of mistaking the map for the territory, ejhr.

      “No, there are no working examples of MMT”

      I rest my case.

    • “I rest my case” You’ve made a case? What is your case? I see no such thing, just a mish mash of addled assumptions. At least MMT is a coherent description of macroeconomic reality. I’ve pointed out a source for you to study, but I see no sign you have read it. Does that mean you are already decided on your position and have no interest in getting a better understanding? Take the preamble that headlined your last effort. If you have to ask about hyperinflation, you haven’t understood the literature. MMT never says there are no limits, but that it is the productive capacity of the economy, and not what usually is used, tax revenue. Asking how far one can spend simply says you haven’t understood MMT. So what is your case again???

  18. Still trying..and struggling to keep up with this discussion!. Good to hear more views.

    ejhr – ‘During the time we have left’ ..Probably till about 2030.’

    I presume at that point real growth in the economy will have lagged so far behind levels of debt that money itself will have lost it’s value.

    Or perhaps governments will inadvertently trigger excess inflation….and then not be able to unwind this as the lever of high interest rates is unavailable…. as this would make debts even more unaffordable.

    • From various website which are alive to the current dangers the consensus seems to be between 2018 and 2022 in terms of World financial collapse which will be bigger than 2007 / 8

    • Oooof 2030 was an optimistic prediction …that would have given us plenty of time to prepare a bunker!

      Ejhr/ Dr Morgan – so are there any lessons we can take from Surplus energy economics and MMT to protect our wealth when the collision with reality occurs ?.

      Presumably the stock market is going to take a beating after the dust settles …energy stocks at the moment seem attractive in a world of rising consumption and EROEI .. but in a downturn demand is going to fall sharply…

      I have my doubts that gold, an essentially useless decorative metal will be trade able for petrol or food should the worst happen?.

      I guess that leaves cash under the mattress or in the bank – neither seem particularly attractive options…

      Not looking for free investment advice of course – just general ideas..

    • One reason I suggested 2030 is because Sheik Yamani said some years ago that any oil Still in the ground in 2030 will be left there. Make of that what you will.

    • @ken moore

      investment advice:

      do you have a garden? get some veg growing and some chickens to run around turning insects and kitchen scraps and whatever else they can find into eggs.

      make sure you have a means to cook your dinner and light your room when there’s a power cut.

      buy some decent hand tools and have a go at fixing or even trying to make things.

      get your teeth fixed while you can, and buy a good bicycle.

      get good at brewing your own beer and / or wine-making.

      once you’ve got some veg and eggs and beer and wine – give some away to your neighbours. help them try to fix their things too.

      the world is unlikely to go tits up in a day, so just start working out how to to get by with less dependence on ‘the system’.

      these are good ideas whatever happens.

  19. @ejhr

    UBI as in Universal Basic Income?

    We may have some common ground!

    All I would like to add to that is a FLIT:

    A Flat Rate Income Tax.

    And you’re right again – let’s save that discussion til later 🙂

    • Thanks, I like the idea but I haven’t seen the Math. Warren Mosler, who I just quoted to your earlier comment seems to believe it wouldn’t work, and I guess the math is important in deciding. There would be no tax on this UBI. Another term for it is a Citizen’s Dividend. MMT says tax is never for federal revenue [it has other uses – but not as revenue] The government spends new money into circulation every time it buys its debts.

  20. Thank you default those are good common sense ideas. It seems sensible to plan for the worst, hoping for the best. It’s got to be a good thing to try to be as self sufficient as possible.

    I have just been reading about how the value of the financial derivatives market stands at 7 times the value of the entire global economy.
    This could be the mother and father of all bubbles….and the US is raising interest rates just like they did prior to 2008 and the dot com crash…and it would be so so convenient for the elites to pin all of this on Trump and Brexit. just as the bubble goes pop..
    Maybe I will buy a few packets of seeds tomorrow and a tin hat – got to start somewhere..

    • Deutsche Bank is in serious trouble as it’s been hiding bad loans in swaps which has created dangerous amounts of exposure to other European banks. If it goes down it really will create a domino effect.

      How on Earth the authorities allowed the bank to do this after the 2008 crisis is anyone’s guess.

  21. Similarly in the US the banks that were ‘too big to fail’ back in 2007 are now even bigger and massively exposed to ‘financial derivatives’ linked to interest rates that are poised to rise.

    How is it that the human race can create parts for a jet engine grown from a single crystal..or a computer the size of a matchhead but allow this sort of stupidity to go unchecked?. How do we get the right people in charge that can distinguish between factually and politically correct truth?.

  22. @ejhr2015,
    I have been thinking about what you are saying about how an economy really works, but I am having difficulty in getting my head around this.
    I must confess, I do find Quantum Mechanics much easier to understand.
    I was reading at the weekend there, as to how Germany has just had its largest budget surplus since re-unification, ( 23.7 Billion Euro), their economy is booming, unemployment is low and the State has low debt.
    Why is it that things seem to be so much better in Germany than in the UK ?
    Britain is leading the world in a debt binge, which according to your criteria is the right thing to do, yet Germany seems to be better off ?
    I am getting quite frustrated here in my lack of understanding.
    What is it that I am missing, that others can see quite clearly ?

    • Don’t worry Johan, you are not alone in finding understanding difficult. One day it will all suddenly fall into place. Right now you are confusing Monetary Sovereign governments, which create their money [as per their Constitution] with non sovereign governments, which have to use already created money. Greece, which was sovereign and had the Drachma, gave it up to join the Euro zone [a big mistake as they now see] so they have to earn or borrow Euros to do business and pay debts.
      Similar with Germany, except the Eurozone suits them. Their surplus is good news [for them] as they can spend it without worrying about debts. The UK is still monetary sovereign [not 100% because they signed up to the Lisbon treaty] but they can still create money to pay debts as all MS nations do. All governments rely on their reputation to back their currency. Zimbabwe stuffed that up so hyperinflation ensued.
      In the end the limit to spending is the total worth of the national economy at full employment. The difference between that and the current situation is called the Output Gap. In the USA in 2012 that was reckoned on being nearly $2 trillion, so the difference today is very much able to absorb spending on welfare and education and infrastructure. Only political will stands in the way because it’s deliberate but supported by outmoded understanding of economics.

    • Germany has a structurally undervalued exchange rate within the Euro. This gives its very important export industries a permanent boost; the exchange rate cannot appreciate in order to eliminate these surpluses. They are BTW illegal under EU rules.

      Germany has a large manufacturing sector which can capture larger gains in productivity than the service sector (the UK and the US have much smaller manufacturing sectors).

      The Germans also implemented the Hartz reforms early this century which has boosted German productivity.

    • The euro has been a “home run” for Germany – but the price might yet prove costly.

      Essentially, the EUR isn’t as strong a currency as the DM would have been, and this has boosted German exports. But there is more to it than this.

      First, the Euro system lacks automatic stabilisers. Imagine northern England had a recession, whilst the south was prospering. In the south, more would be collected in tax, and less spent in benefits – whereas the tax take from the north would fall, and benefits would increase. So money would flow from a prospering area to a struggling area automatically, without government needing to take any action.

      If there were automatic stabilisers in the Eurozone, money would flow from, for example, Germany to Greece. But no such stabilisers exist.

      Second, a struggling economy can cushion itself through gradual devaluation – imported goods cost more (making people poorer), but a weakening currency protects jobs. Prior to joining the Euro, Italy had been doing this for decades.

      If a country needs conventional (forex) devaluation, but is denied it, what has to happen instead is internal devaluation. Greek or Italian labour costs cannot become cheaper, relative to Germany, by devaluation – so wages, or some other form of worker income or benefits, have to go downwards to restore competitiveness. This internal devaluation is more commonly called “austerity”.

      So, Germany borrows only E1.50 per E1.00 of growth over ten years, whereas even the French ratio is over 13:1, whilst Italy and Greece have no 10-year growth to measure.

      But what happens to Germany even if little Greece defaults? And what on earth happens if France defaults (which is by no means inconceivable)?

      To paraphrase the Good Book, “store up not your treasure in Euros….”

  23. Thanks ejhr2015.
    I am sorry to try your patience with this but I want to understand what you are saying. As you have pointed out, some of what your points are counter-intuitive, so maybe this is the hurdle I need to get over.
    Dr. Morgan has laid out SEE, and I buy into the concept that an Economy is fundamentally an “Energy Equation”- this makes perfect sense to me. Now, we introduce the concept of “Government” into the mix, and we move from real science and reality, into the realm of dismal sciences and ideologies.
    Jim Rickards has explained that Gold is money, and that there is enough Gold above ground to have a gold backed currency, it just means re-valuing Gold to the right level. ( yes, astronomically higher than where it is today ).
    That makes sense to me too, so I do feel that I understand what “Money” is.
    Getting back to what you said about Governments not printing money, but instead they buy debt.
    What is debt ? I am starting to loose grasp of what such basic things actually mean. You said earlier that “Government debt” is a misnomer, and that it has no unfunded future liabilities, as these are just paid off when they are due. If a government has made promises to pay pensions to public sector workers when they retire, then surely that must be seen as a future liability, and that the government must meet these liabilities ? Why do countries like Norway for example, have such a thing as a Sovereign Wealth Fund if not to pay for future liabilities ? Is the UK government simply assuming that the world will have the same confidence in the UK economy in say 2037 as it does in 2017, and that other nations will continue to pour money into the UK so as to pay for our squanderous lifestyles here.
    What I cannot get my head around is how the real economy is relevant in what you are saying.
    I know I am not understanding what you are trying to get though to me, so feel free to slap me about the head a bit – I did that with my students too. Didn’t do any good but it made me feel better. What I take out from what you have explained so far, is that we could basically all be public servants working for the government, and that the real economy, ie making widgets, drilling for oil and catching fish, is the pursuit of madmen. Why am I wrong in this.
    As for saving for the SHTF moment with cash under your mattress, I still think that a few gold coins will be better insurance than cash, as gold will see wider acceptance abroad, after the SHTF, I believe that UK banknotes will have only parochial appeal.

    • Replying is on a different screen page from your question, so I may miss some details. Rickards is a gold bug, but he is wrong. Money is a legal construct and like all laws they come from out of the blue given life through the Constitution. Gold is as easily manipulated as cash.It all depends on government’s Full Faith and reputation it holds in the world. Trust affects metal money just as much as fiat money. Money exists to pay for debts, no debt no money as far as the national government is concerned. National monetary sovereign governments spend 100% new money into the economy.They do not recycle it. so Tax just takes money out of circulation, virtually destroying it. The rest of us need income to work and outside the MS environment taxes are reused. I mentioned that earlier.
      The issue with future liabilities is that its wrongheaded to say we have to save or borrow now in order to afford them later. MS governments simply pay as they go. Also MS governments cannot save money. there has to be a current debt requiring payment and that’s when the cheque is sent or an electronic equivalent transaction.
      Treasury controls this and the Central Bank follows the instruction. There is actually no money in Treasury for them to spend. The central bank only has other people’s -investors money and reserve bank account – money, none of its own.
      Norway’s sovereign wealth fund is not fundamentallly important. They are saving a trade surplus from oil exports. But it has no effect on the governments duty to buy its debts with new money. It is part of its trade balance, which does figure in the sectoral balances. I won’t go into that now.
      What Tim is doing is going beyond what politicians and many others are thinking about the economy and saying to us that the economy must not be considered as a train with an infinite track laid out before it, that it has a terminus. We need to do something about that which we ought to be aware of, but refuse to accept. This portends chaos. With no forward plans that is the inevitable outcome. Renewable energy cannot be part of such a plan, its window dressing.

  24. I’ve been speaking to some people I know and the general consensus is that we’re all (especially offspring) are going to have to accept far less over the coming decades.

    With regards alternative energy sources PV Solar and biofuels come out pretty low on the EROEI ratio and are best avoided.

    As scientist Brian Cox has pointed out – the only real get out of jail card is Nuclear fusion – but I feel that it is always 20 years away so have marked as another non starter.

    Perhaps in 20 years time we’ll all be sat shivering in our own homes waiting for the daily delivery of cabbage soup from the local Government with a small portion of meat being provided on Christmas day.

    I see that a new version of Soylent Green is in pre-production – obviously someone had decided to tap into current fears. Perhaps Sol Roth had the right idea.

    • Thanks. I’m with you on this.

      As you probably know, I track EROEI and ECoE by fuel and country, preferring ECoE because it is easier to use with economic data. Taken together with economic analysis – especially the relationship between borrowing and growth – I now see no alternative to the kind of future you sketch.

      If we adjust for debt-fuelled consumption, underlying growth is now around 1.5% – still positive, but rising ECoE pares that growth back to 0.8%, and we still have a growing population. Of course, these are global averages, and some countries – most notably in the developed West – are in worse-than-average situations.

      At first, rising ECoEs do not reduce output in aggregate – but force us to spend more of it on supporting energy and energy-related systems. Obviously, knock-on effects will come later.

      For individuals, this shows up in the cost of essentials rising more than either incomes or broad inflation. For governments, it means getting “less bang for the buck”, as we can see, most obviously, in health care and education.

      We are now in societies that are getting poorer even when statistics say we’re getting (slightly) richer. Conventional economics doesn’t understand this. Neither do politicians.

      The general public, though, does get it, albeit intuitively – hence the rolling repudiation of the elites. Levels of inequality tolerable when “we’re all feeling richer” cease to be tolerable when “we’re all getting poorer”. We need to recalibrate the scale on which we measure the social acceptability of inequality. Some of the ultra-wealthy get this – again, intuitively – but most don’t get it.

      PV solar can’t reverse this, biofuels (on a sufficient scale) would cause famine, and fusion can’t be afforded now, even if it would work (which I doubt).

      So yes, we have to live with less – and we’re going to have to share that “less” more equitably.

    • Thanks for informative reply. As a footnote I’ve just read that Trump wants to spend an extra $54bn on the military. Just imagine if that increase was spent on energy research.

    • Re: “Perhaps in 20 years time we’ll all be sat shivering in our own homes waiting for the daily delivery of cabbage soup from the local Government…”
      I see other alternatives, the most important being the home economy. As in “my home”. I have no intention of either shivering or waiting. If I’m fortunate4 enough to be here at all, I’ll be basking in the warmth of a wood stove and will hopefully have planned well enough to have ample food which I grew last summer in the pantry.
      It’s doubtless true that not everyone will be in a position to do this. Nevertheless, it’s an alternative that I think a lot more people will be adopting as time goes on. So, yes, “economic” activity (as presently measured by “GDP” and it variants may indeed decline as demographics and energy constraints begin to bite. But many activities that have been “commoditized” will once again revert to the “household economy”, which doesn’t show up in GDP measurements. And perhaps the obesity epidemic will have proven to be a blip rather than a trend.

    • I have no intention either and will be moving to a far more energy efficient home in the not too distance future. If things get really bad you’ll have consider that your food might be stolen,

    • Re: “If things get really bad you’ll have consider that your food might be stolen,”

      This is true and I do spend considerable time thinking about that. My conclusion is that strong community ties will be paramount if such a condition should arise.

      That and a good supply of ammo. I’ve tended to both, although I hope to never have to use the ammo for that purpose.

  25. This report was recently distributed by HSBC to clients:

    Brace for the oil, food and financial crash of 2018

    80% of the world’s oil has peaked, and the resulting oil crunch will flatten the economy

    New scientific research suggests that the world faces an imminent oil crunch, which will trigger another financial crisis.

    A report by HSBC shows that contrary to the commonplace narrative in the industry, even amidst the glut of unconventional oil and gas, the vast bulk of the world’s oil production has already peaked and is now in decline; while European government scientists show that the value of energy produced by oil has declined by half within just the first 15 years of the 21st century.

    Last September, a few outlets were reporting the counterintuitive findings of a new HSBC research report on global oil supply. Unfortunately, the true implications of the HSBC report were largely misunderstood.

    The HSBC research note — prepared for clients of the global bank — found that contrary to concerns about too much oil supply and insufficient demand, the situation was opposite: global oil supply will in coming years be insufficient to sustain rising demand.
    Yet the full, striking import of the report, concerning the world’s permanent entry into a new age of global oil decline, was never really explained.

    The report didn’t just go against the grain that the most urgent concern is ‘peak demand’: it vindicated what is routinely lambasted by oil majors as a myth: peak oil — the concurrent peak and decline of global oil production.

    The HSBC report you need to read, now

    INSURGE intelligence obtained a copy of the report in December 2016, and for the first time we are exclusively publishing the entire report in the public interest.

    Read and/or download the full HSBC report by clicking below:

    Headquarted in London, UK, HSBC is the world’s sixth largest bank, holding assets of $2.67 trillion. So when they produce a research report for their clients, it would be wise to pay attention, and see what we can learn.

    Among the report’s most shocking findings is that “81% of the world’s total liquids production is already in decline.”

    Between 2016 and 2020, non-OPEC production will be flat due to declines in conventional oil production, even though OPEC will continue to increase production modestly. This means that by 2017, deliverable spare capacity could be as little as 1% of global oil demand.

    This heightens the risk of a major global oil supply shock around 2018 which could “significantly affect oil prices.”

    The report flatly asserts that peak demand (the idea that demand will stop growing leaving the world awash in too much supply), while certainly a relevant issue due to climate change agreements and disruptive trends in alternative technologies, is not the most imminent challenge:

    “Even in a world of slower oil demand growth, we think the biggest long-term challenge is to offset declines in production from mature fields. The scale of this issue is such that in our view rather there could well be a global supply squeeze some time before we are realistically looking at global demand peaking.”

    Under the current supply glut driven by rising unconventional production, falling oil prices have damaged industry profitability and led to dramatic cut backs in new investments in production. This, HSBC says, will exacerbate the likelihood of a global oil supply crunch from 2018 onwards.

    Four Saudi Arabias, anyone?

    The HSBC report examines two main datasets from the International Energy Agency and the University of Uppsala’s Global Energy Systems Programme in Sweden.

    The latter, it should be noted, has consistently advocated a global peak oil scenario for many years — the HSBC report confirms the accuracy of this scenario, and shows that the IEA’s data supports it.

    The rate and nature of new oil discoveries has declined dramatically over the last few decades, reaching almost negligible levels on a global scale, the report finds. Compare this to the report’s warning that just to keep production flat against increasing decline rates, the world will need to add four Saudi Arabia’s worth of production by 2040. North American production, despite remaining the most promising in terms of potential, will simply not be able to fill this gap.

    Business Insider, the Telegraph and other outlets which covered the report last year acknowledged the supply gap, but failed to properly clarify that HSBC’s devastating findings basically forecast the longterm scarcity of cheap oil due to global peak oil, from 2018 to 2040.

    The report revises the way it approaches the concept of peak oil — rather than forecasting it as a single global event, the report uses a disaggregated approach focusing on specific regions and producers. Under this analysis, 81% of the world’s oil supply has peaked in production and so now “is post-peak”.

    Using a more restrictive definition puts the quantity of global oil that has peaked at 64%. But either way, well over half the world’s global oil supply consists of mature and declining fields whose production is inexorably and irreversibly decreasing:

    “If we assumed a decline rate of 5%pa [per year] on global post-peak supply of 74mbd — which is by no means aggressive in our view — it would imply a fall in post-peak supply of c.38mbd by 2030 and c.52mbd out to 2040. In other words, the world would need to find over four times the size of Saudi Arabia just to keep supply flat, before demand growth is taken into account.”

    What’s worse is that when demand growth is taken into account — and the report notes that even the most conservative projections forecast a rise in global oil demand by 2040 of more than 8mbd above that of 2015 — then even more oil would be needed to fill the coming supply gap.

    But with new discoveries at an all time low and continuing to diminish, the implication is that oil can simply never fill this gap.

    More https://medium.com/insurge-intelligence/brace-for-the-financial-crash-of-2018-b2f81f85686b#.z9uwvj2gd

    Full report to clients : https://drive.google.com/file/d/0B9wSgViWVAfzUEgzMlBfR3UxNDg/view

  26. On the BBC news website this morning experts are saying that 25m homes in the UK need to be properly insulated and that it will take until the year 2050 to be fully implemented.

    This should have been started when the UK came out of recession in around 1992/3 when oil was relatively cheap and plentiful. Instead we just had one big party until the crash of 2008.

    It’s basically too late now as the materials may longer be available when the energy crunch strikes.

    I think what with the HSBC report which Fast Eddy posted this morning certain – sections of society are just beginning to wake up to how serious the impending situation is.

    • Here in Oz, Kevin Rudd’s Labor government went on a spending spree to keep us out of recession. It worked a treat. Spending depends on there being shovel ready projects like the National Parks in 1934 for the New Deal. We managed somehow with a home insulation scheme that improved over 1,000,000 houses. There was also a BERS building education facilities spend. It was a moment of good economics, such a rare moment!

  27. I’ve also notice that with at least one firm certain supplies of freeze dried food (25 year shelf life) are currently out of stock. In one product 11 days worth of food (6 tins) costs £219 excluding VAT.

  28. @ejhr2015,
    after some very serious thinking sessions, I have had a moment of enlightenment.
    The problem I realise, has not been my lack of understanding of what you were saying, the problem was that I do not believe that what you are saying is right. I have sadly come to the conclusion that your ideas are fundamentally flawed. I was hoping for a Epiphany, so I am disappointed.
    Of course Monetary Sovereign nations cannot go bankrupt, they themselves are the bank after all. The problem is, that MS is just a snapshot in time, it is not a full explanation of what is really going on. It is like capturing a snap-shot of a ski-jumper in mid jump, and then deducing that he can fly. Now whether it is the Government or the banks or the central banks who prints the money, or buys the debt or transfers one book-keeping entry from one side of the balance sheet to the other, is all absolutely irrelevant. The fact is that the government is producing and spending money, ex nihilo, and in this universe there is no such thing as a free lunch !
    MS nations are not creating any wealth in any shape manner or form.
    There is a distinct difference between money and wealth.
    With what you are saying, Governments can just buy everything that they want. After all they are MS, so they can produce as much money as they want. They can end world poverty. They can build up a Military like the USA, or a health service like the UK. They’ve got the money to do it.
    Who pays for it ? Who is it that provides the resources for a MS government to squander as it sees fit. Who is it, that has such faith and confidence in these tricksters ?
    Well it is the people who buy these countries debt, that’s who, and then that beggars the question, Why would eg. the Chinese buy US debt, just so that the USA can build up its military to then threaten China and potentially blow it off the map ? It does not make sense.
    Yes, you did say that your rational was counter-intuitive, but I think that that is just another way of saying it is fundamentally wrong. You need to have religious faith to believe in this stuff. This economic theory may look good as a mind game, but with so many unknowns and uncontrolled parameters in the equation, it simply cannot produce any kind of relevant results in the real world.
    Yes, the theory may hold up for a very brief span of time, under certain conditions, so that it may appear to be working. Just like a stopped clock being right, twice a day.
    Not every government in the world can be MS at the same time, because if they were, the world economy would consist of nothing more than government iou’s, and nobody would need to work.
    The big problem that I was having with your theory was one of Wealth Creation,- it is absent from your arguments. Despite government claims of increased “growth” our economies are actually shrinking.
    Whether this economic theory is your own or borrowed from elsewhere, it does not address the issue of wealth creation. Who is catching the fish, who is ploughing the fields, who is drilling for oil and who is making the widgets ? Yes, your theory does involve a lot of big words and terminology, and dodgy balance sheets and opaque institutions, probably a few puffs of smoke and a mirror or two, but I do not see it as being based in reality.
    The fact is, it has been the blind following of charlatan economists and monetarist astrologers that has lead us to where we are now:- a few months or maybe some few years away from the “Big Bang”, and nobody will be laughing when we get re-set back to a barter economy.
    Well I suppose things will be much simpler then, if that is anything to look forward to.
    As for Jim Rickards, he may be a Gold bug, but I do believe that he is more right, than he is wrong. Gold is a store of value and it is a medium of exchange, more so than any fiat currency.
    I am a believer in SEE, not a religious believer, but I will believe until such a time that is stops making sense. At present it makes a lot of sense.
    Unfortunately, the ” dismal science” of Economics which has lead us all down this forlorn path that we are on, does not make sense. To much of it is wrapped up in ideology, and it takes no account of human traits like generosity or avarice, egotism and stupidity. We have reached a point in the world economy today, where it is more prudent to invest in fresh water, full barrels of diesel, wind generators and tins of beans, than to have your wealth tied up in a pension fund. That tells you a lot.
    So when we are lining the bankers up against the wall, I think we need to include a few economists too.

  29. Johan, I think you just decided to take the red pill! Welcome to the real world where real wealth is what you can see and hold on to.

  30. Johan, nearly all your conclusions are answered already in other replies, so i have no intention of repeating myself. Suffice it to say I obviously didn’t do a good enough job to convince you that MMT is macroeconomic reality, for which my apologies. You are right to criticise the mainstream economics theories [yes-theories!]

    Macroecononic reality means we already do many of these things MMT lists. But the fly in the ointment is the Mainstream economics in academia. MMT is a theory in the sense gravity is a theory. It’s not a hypothesis. That’s your big mistake. You are saying it doesn’t work. By definition that cannot be true, as it is reality. I think it’s time you read sources:
    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

    PLease read up on these and other MMT blogs. Defray replying till after you have red these and other relevant blogs

    • @ejhr2015,
      Thanks, I appreciate that. I will look into it over the coming weeks and do more research into it. Looking at the screen-shot of what you have just posted ( I have not opened it yet ), the slide on the wall behind the speaker asks the question: “What backs up our Money”.
      Well Jim Rickards already answered that question. He said, “Men with Guns !”

      I have enjoyed reading your posts as they have made me think about things in a new perspective, and although I remain unconvinced and still confused by your arguments, I feel that I am now confused at a higher level, and about more important things !

      ( PS. Gravity is real – try dropping a brick on your foot. What you probably mean is “Quantum Gravity” – that theory is still open to discussion 🙂 )

    • Ok, good luck. I can tell you are trying but your previous response was all over the shop.
      Yes, MMT is the brick on your foot reality. That’s what I am saying. Its REAL!

    • @ejhr

      MMT is merely a theory (the clue is in the name: Modern Monetary Theory) that can be used to model some aspects of the world. You continue in the logical fallacy of confusing the map with the territory.

      That aside, you seem terminally confused about the difference between money and wealth. Fiddling with the claims on real, hold in your hand wealth doesn’t make the slightest difference to that wealth.

      You cannot fix a resource crisis by imaginative accounting.

    • O dear!. you refuse to accept reality, not good when the brick on the foot was your idea of reality. Gravity is a theory , relativity is a theory. they are accepted. Your dissing of MMT is a cop out, pure and simple.

    • @ejhr

      On Feb 25 11.07 ejhr said:

      “No, there are no working examples of MMT. You didn’t know that? “

  31. Rejoice the World is saved as we are about to witness a new chapter in American greatness. Trump has made a fantastic address to Congress. Soon vast new easily recoverable oil fields will be discovered – Israelis will be hugging Palestinians – Putin will become a leader in World peace – inner cities will be regenerated and all roads will be gleaming and actually paved with gold.

    I now feel there there is no longer any need for these depressing blogs as am now going to take a walk into an American led paradise.

    • Interesting. Too much to digest in a brief read. It seems to take money creation [debt free] away from national governments and given over to banks. For starters the national constitutions would have to be changed, highly unlikely in most cases. Even worse, considering the miserable state of public understanding of economics, which is on display even in an erudite blog as this one, the ideas become impossible to transfer to nearly everyone.
      MMT has been battling this ignorance roughly since WW2. Yet only now is the concept getting recognition more broadly outside the economics sphere.

      MMT has concepts which while they describe actual transactional operations, battle common misunderstandings. the word “money” is particularly difficult to parse. There are the MO,M1,M2,3,4 types. Bank created money does not exist. only government created money [a hard one to accept] Money as cash and money as numbers in accounts [97% of it] which are all really beyond the scope of Tim’s blog and need another outlet.

      I do what I can to correct misunderstandings but it is difficult when our whole society lives with a deliberate misinformation regime controlling finance and economic understanding.

    • @ejhr

      hmm..

      ” [you might be an economist? they love complexity]”

      “the word “money” is particularly difficult to parse. There are the MO,M1,M2,3,4 types.”

      Then lets try to get to the meaning of “money” at its most basic and most commonly encountered form: a claim on real wealth (food, clothes, shelter). Money as a token that is exchangeable for the kind of things that you exchange your labour for.

      All else is simply rearranging deckchairs on the Titanic.

  32. MMT and Surplus Energy Economics

    Diverting though this discussion has been, I fail to see what MMT has to do with the premise of this blog: that our economy is fundamentally and increasingly constrained by the diminishing amount of surplus energy available.

    Either there is enough increase in surplus energy to support continued growth or there isn’t.

    This is a resource crisis – not a result of the ‘seven deadly innocent frauds of economic policy’.

    So how, exactly, would MMT overcome the problem of diminishing surplus energy?

  33. MMT seems to have some fundamental inconsistencies in its own right, though it seeks to cloud these in an ‘Emperor’s New Clothes’ pronouncement that ‘ in economics, one should never compromise principles, no matter how much trouble other people have in understanding them.’ (Forward to Mosler, referencing Mosler’s predilection for Lerner’s Law.)

    So far as ‘public debt [not being] a burden on the future’ (from the forward to Mosler’s book), the Anglo-American Loan Agreement of 15 July 1946, for example, seems to have imposed a burden on the future of some $3.75 billion ($57 billion in 2015 USD) at an interest rate of 2% – which we only managed to finish paying in 2006.

    Given that even MMT recognises that we can’t ‘have more spending than we have goods available’ (Mosler again), and thus confirms its constraint by actual resources, unless some rampant rehypothecation of those resources has occurred – the loan repayments entailed a considerable burden of forgone resources on the future.

    @ejhr

    The ‘brick on the foot’ was Johan’s analogy, not mine.

    The theories of Gravity and Relativity are still irreconcilable – the search for a Theory of Everything continues.

    • It is well worth pointing out here that difference between the amount loaned in 1946 USD ($3.75 billion) and its equivalence in 2015 USD ($57 billion).

      This horrendous devaluation of the dollar is due entirely to creating claims on real wealth in excess of that real wealth.

      The more slices you cut from the resource pie – the smaller each slice must be.

      No amount of fiddling with economic theories while Rome burns can change that.

    • The resource pie grows, so each slice may not be smaller. This is the obsession with growth that we are not addressing[as a nation].

    • Yes, I did confuse the two posts. Sorry. Any detectable inconsistencies in MMT are errors of comprehension, not errors of commission, [because it describes reality and some may see that differently]. The 1946 loan agreement was about trade. Imports-exports have their own dynamic. but imports are benefits and exports are costs, no different in wartime. When the US sold supplies to England they insisted on repayments being in gold. England benefited though. They didn’t lose the war, [but lost power and eventually their empire] Another topic.

    • @ejhr

      Oh I *love* this one:

      “When the US sold supplies to England they insisted on repayments being in gold.”

      And gold is not money?

      I’ve also noticed that as soon as the US has been in a position to do so they have loaded the gold held by Iraq, Libya and the Ukraine into an aeroplane and flown it home for ‘safekeeping’.

      “Errors of comprehension” and realities: I’m not sure that I have made my position clear, ejhr. I’m not interested in ‘dissing’ MMT. I’m simply questioning its relevance to our resource crisis.

      I’m quite happy to accept that it offers a take on the realities of economics as accurate as the concept of banks creating money with a click or two on a keyboard – but I don’t think that it can do much more to solve our resource crisis than invent another way to kick the can down the road.

    • I accept you are not dissing MMT, but there is no economic system that factors in resource depletion. You can do it yourself using the knowledge MMT gives you, OK?

    • “The resource pie grows, so each slice may not be smaller. This is the obsession with growth that we are not addressing[as a nation].”

      But the premise of this blog is that the surplus energy pie is shrinking.

      Do you *really* think its still growing?

      Even if this were to be the case – which it most definitely was in my example of the Anglo-American Loan – how do you explain that massive and ongoing devaluation of the dollar?

    • @ejhr

      and since then the dollar has lost a massive percentage of its purchasing power. perhaps this is why the first thing the occupying power does is grab the gold.

      there’s no ‘whoops’ needed. and this is, I thought, a discussion rather than some point scoring exercise.

      If you are too emotionally invested in this discussion I’ll back off for a while – we’re nearly due a new post from Tim anyway.

    • How do you think I’m ‘trapping’ myself? You have clearly failed to understand or even engage with my position if you imagine that saying ‘gold was money’ does anything other than affirm the points that I have put to you.

    • “Venezuela’s financial report for 2016 stated that roughly $7.7 billion of the remaining $10.5 billion in foreign reserves had been preserved in gold. Last year, in order to fulfill debt obligations, Caracas began shipping gold to Switzerland.”

      So am I dreaming? Or, when it comes to the crunch, is gold money?

      It seems that Switzerland (I’m referring to the quote above) still thinks that gold is real money. And wants the debt repaid in real money.

      “you are dreaming, which is why there’s no point in carrying on our exchange.”

      Quite the contrary, ejhr. Its quite clear that you have a rather limited understanding of elementary logic, let alone the false premises and internal contradictions inherent in MMT.

      Your assertion that MMT describes reality and therefore IS REAL would benefit from a brief consideration of Ptolemaic astrology.

      The theory describes reality perfectly. It just fails on the premise that the earth is the centre around which all else revolves.

      I realise that you have fallen into the trap of confirmation bias and, when confronted with an alternative viewpoint, are unable to engage with it – but there is hope for you yet; though I am still waiting for a cogent explanation from you as to what MMT can actually do about our current resource crisis.

    • Here you go again. Gold is not money, Gold is bullion and is tradeable at its current value. Venezuela has gold, so it sells it at market price. You know. import/export trade, like corn or bananas.
      All your criticisms are just hot air. As for confirmation bias, you should recognise it in yourself, it’s so clearly on display.
      As to reasons for raising MMT here I have explained that and more . All you have to do is understand, which I sense is wilfully misunderstanding in your case. I’m not going to keep feeding your desires for confrontation.

    • Missclick on the predictive text sorry. I meant to say Ptolemaic astronomy.

    • “Gold is not money, Gold … is tradeable at its current value.”

      And fiat currency is also traded at its current value all the time – like corn or bananas. Exchange rates and interest rates demonstrate the price of money.

  34. Meanwhile, here in the real world, some of us are wondering why an essentially simple concept – economics – needs to be so complicated.

    My limited understanding of the 2007/07 financial crash is that it was caused in part by financial wizardry beyond the understanding of many, including some in the financial sector.

    Although ignorance is bliss, I feel that concepts understandable to the man and woman in the street would be useful in spreading the word about the state of our current and future finances and preparing us for what lies ahead.

    Whatever happened to simplicity?

    • When interviewed back in around 2008 a bank’s CEO wasn’t able to get past a couple of lines in describing how a complex financial instrument worked. He look bewildered.

      If you haven’t watched it already – I recommend ‘Enron – The smartest guys in the room’ Although pre 2008 crash it showed how greed exacerbated the financial crisis.

    • Here I have two bits of news for you.

      First, SEEDS (Surplus Energy Economics Data System). This has taken years to develop, has become a powerful tool, but is used only in articles here. I’m now planning to make much of it available. There are likely to be two versions – summaries, freely downloadable, and more detailed versions for professionals.

      Second, I’m in discussions with my publishers on a new book. One aim will be to make things simpler.

    • Tim – if you refer to an earlier post I made – simplicity must be the key word because my MP informed me that the Treasury (who he referred my letter onto) didn’t know what EROEI stood for and then didn’t produce a response when I sent over the full definition.

      I wonder if they were just feigning ignorance to hide the truth.

      Today’s Guardian is pointing out that living standard are set to fall further – so basically we’re on the downward slope now.

    • Thanks Donald.

      =========

      Thanks Tim.

      Being of simple mind, I tend to steer clear of the ‘why use two when you can manage with four’ philosophy which seems to prevail nowadays.

    • Donald

      The question of EROEI was raised in the Lords by a peer who had read one of my reports. The government reply was that they would look into it.

    • Goodness me – of course I don’t know how long ago that was – but I have yet to see any firm action

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