#100: Defining times


Reaching the 100th article in the series seems a good time to provide an overall “wrap” of the economic situation, as seen through the prism of Surplus Energy Economics. The conclusions may not be particularly cheering, but they should at least have the merit of clarity.

We can now be pretty sure of at least three things.

First, the long rise in world prosperity is over. Real economic output does continue to increase, but only very gradually, and is now being matched by the rate at which the population is expanding.

Second, prosperity will carry on rebalancing towards the emerging economies. Citizens of China and India, for instance, continue to enjoy increasing prosperity, though not at rates as high as reported levels of growth in per capita GDP. By contrast, and with very few exceptions, prosperity in the Western developed economies has passed its peak, and is now declining, albeit at rates which vary markedly between countries.

Third, the financial crash of 2008 is unfinished business. Essentially, the burden of debt forced central banks into policies of ultra-cheap money, and these have had precisely the effect that could (and should) have been anticipated – indebtedness continues to rise, provision for the future has been sabotaged, and bubbles are emerging across a broad range of asset classes. As well as adding huge amounts of debt, we are pillaging futurity, because of policies which cripple returns on pension and other provision.

We cannot yet know when the sequel to the global financial crisis (GFC) will occur. It is in the nature of the system that seemingly-unsustainable conditions can last for a lot longer than seems logically possible. Equally, however, a crash can occur with very little prior warning, and in ways that may not be predictable.

We may, though, be inching towards greater visibility about how and where the catalyst is likely to emerge. It’s becoming increasingly apparent that the United Kingdom is much the most vulnerable domino in the series. If you’re looking for a single lead indicator for the next crunch, the value of Sterling may be the one to watch.

Overview – the two economies

If you understand the surplus energy approach, you’ll appreciate that we need to think in terms of two economies. The first is the real economy of goods and services, and is an energy system, not a monetary one. The cost at which energy can be accessed determines the level of prosperity that we can achieve.

In tandem with this is the financial economy of money and credit. Obviously, money has no intrinsic worth. It commands value only as a “claim” on the output of the real economy. Creating money doesn’t add prosperity – it merely dilutes existing claims on that prosperity. Expanding the sum of credit simply creates claims on a future economy that will not be able to honour them. This establishes an inevitability of claims destruction – in other words, a crash.

The following chart illustrates the energy situation. What the chart shows is the ECoE – the energy cost of energy – for petroleum, renewables and the overall energy mix. If 20 units of energy are accessed, but one unit is consumed in the access process, then the ECoE is 1/20, or 5%. What this means for prosperity will be addressed shortly.

#100 01 ECoEjpg_Page1

ECoEs move in ultra-long-term trends, almost wholly unrelated to the market price of energy at any given time.

Prices are subject to both short- and long-term cyclicality.

Cost, on the other hand, is driven by a combination of depletion and technology. Depletion pushes cost upwards, because we exploit the highest-quality, lowest-cost sources of energy first, only moving on to costlier sources once the cheaper ones have been exhausted.

Technology operates to reduce costs, but it does so within the envelope set by depletion. New techniques can improve how we operate within the laws of physics, but cannot overcome those laws. Thus, hydraulic fracturing enables us to extract oil from shales far more cheaply than we could have extracted those same resources in the past. Technology does not turn a marginal resource like shale oil into the equivalent of a giant, simple field in the sands of Arabia. That is simply not possible.

Overall ECoEs seem to have been rising since the mid-1960s. Back in 1965, the average ECoE was probably only about 1%, meaning that we consumed a single unit of energy in accessing 100 units. Those days of abundance are long gone. For oil alone, ECoE is estimated to have risen from 2% in 1980 to 8.8% by 2010, and could hit 15% by 2020. Oil is a premium fuel, and is therefore worth using even when it is costlier than some other sources.

The cost of renewables has fallen sharply, making the best renewables cost-competitive with fossil fuels. But renewables still account for only 3% of world energy consumption. This proportion is set to go on rising markedly, but there are locations and applications which will remain extremely challenging. Similarly, technological progress will continue, but it would be a mistake to extrapolate forward a rate of progress that has been achieved from a very low base.

The nature of energy cost

As the preceding chart illustrates, the overall ECoE cost of energy is rising pretty exponentially. But, because the world economy is a closed system – after all, we’re not trading with Mars – this cost doesn’t leave the system. So it isn’t directly analogous to the “cost” of running a home or a business.

Rather, it is an economic rent, which means that it restricts choice. Prosperity is the residual between economic output and the required level of investment in energy supply. (This is “required”, of course, because without energy there wouldn’t be an economy). If, out of each $100 of output, we had to spend $2 on energy, we would be left with $98 to use as we wish. If the energy cost rose to $10, we’d still have our $100, but could exercise choice over only $90 of it.

In the same way, someone can become poorer if the cost of essentials (such as food, water and energy) rises more rapidly than his or her income. This is why prosperity is not the same thing as per capita GDP. This analogy is a good one, because the cost of energy plays a big role in the supply of essentials. The energy content in the food or water that we must have is higher than in things that we don’t need, but simply want. From this, it follows that the cost of essentials is a major transmission mechanism between ECoE and prosperity as we experience it.

The financial economy

From this, you might think that we can measure prosperity simply by deducting ECoE from GDP. Alas, it isn’t quite that simple, because the financial economy (recorded by GDP) isn’t the same as the real economy of goods and services.

The existence of the financial system enables us to time-phase activities in a way that wouldn’t be possible in a hand-to-mouth economy based on barter. We don’t just live in the present, but inherit from the past, and must provide for the future.

This time element is a great virtue of finance but, in the wrong hands, it is equally capable of becoming a serious vice.

It has now been in the wrong hands for a dangerously long time.

Beyond immediate consumption, an economy perpetually undertakes futurity activities. These include investment (which should increase future productivity) and the related concept of saving, which we need to do, not just to tide us over hard times, but also to prepare us for old age. On the other hand, we can borrow (or otherwise incur future obligations) if it seems beneficial for us to do so.

To work effectively, all of these ‘futurity’ activities need both long-term thinking and a properly functioning market.

Unfortunately, the powers that be have, over two decades and more, evolved a system in which neither of these predicates applies.

First, planning for the future has been weakened by an ideology of short-termism.

Second, a functioning market in futurity has been undermined – indeed, virtually destroyed – by monetary policies geared solely to the management of existing debt. Obviously, manipulated interest rates block the signals that the market is supposed to transmit. This leads us into making faulty decisions.

“Triple D” – plundering the future

It’s important to note that debt isn’t the only (or even the most important) component of our relationship with futurity. Taking the United Kingdom as an example (albeit rather an extreme one), the factor that poses the greater economic threat could be unfunded forward pension (and other) commitments well in excess of £2.5 trillion, rather than aggregate debt of £4.9 trillion.

Debt can be inflated away, if you don’t mind the costs of inflation – and if your creditors don’t take umbrage over being bilked through “soft default”. But you can’t inflate away futurity deficits like pensions in the same way, because they are effectively index-linked.

As well as encouraging borrowing by making it cheap, slashing interest rates – in Britain, from 5.75% ten years ago to just 0.25% now – has destroyed the ability of pension funds (for example) to make the sort of returns required to match current contributions to future needs.

The whole theory of pension provision is that, having invested X amount now, returns on this investment give us a lot more than X in the future. If, during his or her working life, someone had to put aside exactly the amount that they would need in retirement, the process simply wouldn’t work. The demands made on us in our working years would just not be affordable.

Artificially low rates, therefore, destroy the equilibrium between the present and the future. (They also block the essential process of “creative destruction”, miss-price risk, and manufacture bubbles).

Moreover, artificially low rates mean that our provision for the future deteriorates at exactly the same time as our future obligations to repay debts increase. If you add to this a third ingredient – an inability to organise the provision of care for an ageing population – the result is a potentially lethal cocktail.

We can call this toxic mix “triple D” – debt, deficits and demographics.

The great self-delusion

Obviously, mortgaging the future (by plundering our futurity reserve) boosts the present at the expense of the future. This means that recorded GDP figures are inflated by this process.

This is analogous to the way in which banks behaved in the years preceding 2008. By selling toxic instruments to themselves via off-balance-sheet SPVs (special purpose vehicles), banks created “profits” (and hence bonuses) at the expense of their own balance sheets.

Entire economies are now replicating this practice.

To work out what is really happening to the economy behind the smokescreen of plundered futurity, we need to calculate the extent to which recorded GDP has been flattered by the cannibalization of the collective balance sheet. What we are looking for is the proportion of GDP that would remain if the credit taps were turned off. That’s the underlying, “organic” or sustainable level of output.

The SEEDS system has an algorithm for measuring this. Its results are very probably conservative, because they conclude that, over the last decade, only about 19% ($18 trillion) of global borrowing ($98 trillion) has been used to inflate consumption at the expense of futurity.

Even so, this is enough to suggest that world GDP (in PPP dollars) was only $88 trillion last year, 25% below the reported $117 trillion. It also means, of course, that aggregate debt as a percentage of underlying GDP is probably nearer 300% than the reported 220%. In any case, measurement of debt isn’t by any means the same thing as measuring futurity.

Prosperity and the coming denouement

Having adjusted GDP for the plundering of futurity, we can deduct the economic rent of ECoE to measure prosperity. “Prosperity” is defined for the individual as ‘income, after essentials, that the person can choose how to use’. For the economy as a whole, prosperity is sustainable (borrowing-adjusted) GDP, less the economic rent of ECoE.

Globally, and in inflation-adjusted dollars, prosperity per capita was almost 4% higher in 2016 than it had been in 2006, but this rate of improvement has been decelerating towards zero. Aggregate world prosperity is still growing, but now only at a trend rate of around 1% annually, which is roughly the same rate at which the global population is expanding. So individual prosperity, on a worldwide basis, has stopped growing.

The next chart illustrates this, setting out – in per capita terms – three measures of economic output. The first, in blue, is the financial economy as recorded by GDP. The black line adjusts this for the estimated impact of “plundering futurity”, with the accompanying trend in debt shown by the yellow columns. Finally, the economic rent of ECoE is deducted to arrive at prosperity, shown in red.

#100 02 per capitajpg_Page1


These, of course, are aggregate measures, covering wide disparities of experience. At the positive end of the spectrum, citizens of China and India became, respectively, 58% and 48% more prosperous between 2006 and 2016. Prosperity in these countries is continuing to grow, albeit at rates a lot lower than in the not-too-distant past.

At the other extreme, individual prosperity in the United Kingdom declined by 13% between 2006 and 2016. British prosperity can now be seen to have peaked as long ago as 2000, since when the total decline has been 17%. Over the last decade, prosperity has also fallen by 9% in Italy and Spain, by 8% in the Netherlands, and by 7% in both the United States and France.

Some of these national circumstances repay investigation. Spanish prosperity fell sharply because the country was more exposed than most to the ravages of debt-fuelled expansion in the years before 2008, but has now returned to stability. The Italian economy has suffered from decades of declining competitiveness, something which – before Italy joined the Euro – was customarily cushioned by gradual devaluation of the lire. Membership of the single currency effectively forced Italy into painful internal devaluation (a.k.a. “austerity”) instead.

The outlook for France will hinge on the as-yet unclear direction of policy under President Macron. The risk here is that M. Macron will opt for the wage-depressing policies that pass for “reform” in the neoliberal lexicon. In other words, he might follow Britain in trying to create a low-wage economy. Doing this necessarily undermines demand, impairs productivity and increases household dependency on credit.

The continuing decline in American prosperity means that Mr Trump simply cannot deliver on his commitment to improve the lot of the average household. Mr Trump is an outsider, but this does not guarantee that he will not pursue the same policies that have failed in the past.

The most significant (and worsening) decline in prosperity, however, is that of the United Kingdom. For at least two decades, the British economy has been managed with remarkable incompetence. The UK just about dodged a bullet in 2008, but may not manage to do the same next time – and that next bullet could now be pretty close. Exactly why Britain is quite so vulnerable will have to be left to another article, but there are plenty of reasons to question the sustainability of the British economy.


As we have seen, the world has ceased becoming more prosperous, because increasing ECoEs (experienced in the rising cost of essentials) have dragged down growth in the real economy to a rate matched by population expansion. Within this, countries like China and India continue to become more prosperous whilst, in much of the West, people will keep getting poorer.

We’ve been trying to buck this trend by plundering futurity, spending borrowed money whilst running policies which cripple returns on pension and other provision for the future. This has been an exercise in futility, and must in due course lead to a sharp correction in the form of claims destruction.

Nowhere is this more evident than in Britain, so anyone seeking a single lead-indicator for the next crash could do a lot worse than watch the value of Sterling.



72 thoughts on “#100: Defining times

  1. Thank you for this. One question. What should I compare the value of sterling against? Surely other currencies also fluctuate, and gold prices are manipulated we are told.

  2. “The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated. Growing the debt in the economy significantly faster than the economy itself grows seems to have developed into a way of life in Canada.”

    Canadian total (household, business, and all levels of government) debt numbers as of the end of March, 2017


  3. I’d like to congratulate Dr Morgan on his 100th article. Thank you for presenting economics in such an engaging way I always look forward to reading your next article.
    It will be interesting to see if the currently low price of oil and uranium ore is just a short term trend The world is still seems to be awash with cheap oil despite rising Ecoe and population. Could technology be stretching the envelope of depletion more than anyone could have imagined ?

    • Thank you. Energy prices are cyclical. We’ve had a long period of high oil prices, essentially 2001-14. Way back, I did some research – published by OPEC – suggesting a cycle of roughly 13 years, so this seems to fit.

      The high prices of 2001-14 produced huge investment, resulting in over-supply. Moreover,a weak economy depresses demand. What happens now is underinvestment, resulting eventually in a supply shortage and a price spike. But ECoE isn’t affected by immediate prices – it’s an ultra-long-term trend. Also, shale in the US could peak pretty soon.

  4. Another great insight, Tim; thanks.

    I note over at The Telegraph (http://tinyurl.com/y8rkksbd) that Jeremy Warner has declared, ‘the world economy has entered a synchronised growth phase. All three of the world’s regional economic powerhouses – North America, Europe and China – are growing in unison …’. So, that’s alright then. The thrust of Warner’s article, however, is to point out that as soon as anybody decides to push interest rates back up to ‘normal levels’ in response, all hell will break loose. Too right. Talk about being on the horns of a dilemma, eh?

    As I type, Mrs Moraymint is sat next to me here in my Study trying to figure where to invest some surplus cash. She’s looking at fixed-rate accounts and bonds etc and asked me, ‘What do I think interest rates will do over the next 2 or 3 years?’ If I knew the answer to that I’d be liquidating my net worth and investing accordingly. Since nobody knows the answer, Mrs Moraymint and I will be sitting tight – whilst keeping our gold holding (numismatic gold, that is) at an appropriate level, perhaps higher than might otherwise be recommended.

    As you’ve said before, Tim; the crash is already happening to some extent. Note the enormous strain on public services as the UK Government struggles in vain to fund the unfundable. Whilst I believe that, on balance, there will be another cliff-edge type of financial crash, in the meantime we’re already living through what John Michael Greer calls ‘catabolic collapse’, explained in his excellent book, The Long Descent.

    I’ve always subscribed to the American economist Professor Herbert Stein’s maxim: ‘If something cannot go on forever, it will stop.’ Deliciously simple and true. What is so frightening is that so many of our economic and political ‘elites’ (ha!) seem utterly oblivious to the writing on the wall. Either that, or they know that to declare an understanding of what lies ahead or, worse, to forecast it would be career suicide.

    All the best, Tim. See you down the pub …


    • Thanks, MM – some really great comments.

      About JW and growth, given the sheer extent to which we’ve been borrowing, and unwinding our provision for the future, the only surprise is that “growth” hasn’t looked much bigger than it does, and much earlier than this! He’s right about rates, of course – leaving them low is doing enormous damage, but raising them would do damage of a different sort. It is indeed a dilemma.

      Another point is the low level at which higher rates could create chaos. If the UK (for instance) pushed rates up by 1.5%, the result could be horrible to contemplate – yet that would still mean rates of 1.75%, compared with 5.75% a decade earlier – and rates would still be heavily negative in real terms.

      We simply could not cope with a return to normality!

  5. Tim, congratulations on the 100th article and my word it was well worth waiting for! A superb assessment of the situation that ‘nails it’. Our system is built on forever increasing growth and the mainstream political-economic class along with most of the national commentariat are simply unable to comprehend that it’s over. Politicians are by nature optimists, but there is a world of difference between well-founded optimism and outright delusion. I venture to suggest that large sections of the British political class have descended into delusion. One might even say that they are consumed by a set of 3Ds: denial, delusion and determination. I hesitate to say this but the combination of these 3Ds makes them exceedingly dangerous and is highly likely to lead to a Fourth D – disaster. Tim, whatever you do, keep writing and posting great articles!

    • Thank you, Kevin, much appreciated.

      I try to take a global view here, but what is happening in the UK is fascinating, albeit morbidly so.

  6. You seem to have ignored MMT, Tim. That’s not wise. The mainstream clouds judgment since it’s phoney. MMT simply shows how the economy actually is.
    So when I saw the remark ” The greater economic threat could be unfunded forward pension commitments” I knew you were still in denial. MMT says that there are zero forward savings necessary. The Federal government simply pays the pensions,[etc] ad hoc, simply writing up the numbers in the peoples accounts. A net credit operation!
    I say you need to adjust your theories about macroeconomics. It’s presently skewing your research, which is valuable but sometimes in error.

    • Well, I don’t think my approach is exactly “mainstream”!

      The fundamental point is that the surplus energy approach isn’t monetary at all, in any shape or form. The real economy is an energy system. Money is secondary, helping us to manage the real economy when used wisely, but damaging when used badly.

    • Not the MMT sideshow again.

      ejhr2015. As has been pointed out many times, the UK is not the world government; the sterling is not the world currency. So UNLESS the UK has a corresponding increase in its energy stocks, running your magic money tree MMT govt deficits actually represents a UK sterling currency devaluation. So you run head first into a currency crisis. There is no magic MMT money tree.

      Thanks for the article Tim.

    • Sorry, you just show you have little if any understanding of modern macro economics. Don’t be proud of being ignorant. It’s not a good look. What you have said is straight out nonsense. There is no need for a ‘money tree’. A monetary sovereign government deficit spends with money created out of thin air. Commercial banks do the same when giving out loans. However their loans are liabilities which means having to be paid back, at which point the loan disappears.
      Federal deficit spending is a permanent addition to the money supply and is not a liability. It is a net credit operation. To regulate this money the government levies taxes, but taxes for the federal governments are never used as revenue, because they come after spending. They cannot logically be levied before money is spent into the economy.
      A currency crisis comes from government buying excessively and using up the fiscal space called the Output Gap. There is zero threat of that right now as Austerity rather threatens a depression or at least a recession.
      Please do yourself a favour and study up so that you don’t mouth off half cocked.

    • So now i am confused. Is there a Magic Money Tree or isn’t there? This “modern” stuff is confusing. You seem to say there is a tree but there is no need for one?
      You said it yourself though … “federal deficit spending is a permanent addition to the money supply” .. ie obviously it devalues its value as an energy token unless there is a corresponding increase in energy stock? Sounds like its a slippery road to people losing faith in a currency to me.
      BTW, there is no defining definition of what constitutes a currency crisis, but your definition re output gap is …completely half cocked.

    • Your confusion is pretty obvious, not to mention useless commenting on. Re-read again what I wrote. It follows logically. The fact you read Tim’s blog says something but enlightenment is remote.
      There is so much misinformation and downright deliberately done that the true situation with currency seems crazy. It isn’t, but comprehension is a sort of penny drop moment. Just saying what you said about the output gap shows you don’t even understand that, let alone where money comes from. Stop thinking money is a commodity. That all changed in 1971. It’s just a symbol now like numbers, like the points in a football game. Where do they come from? Where do laws come from? They are not anywhere like in a box waiting to be used. They are nowhere until needed.

    • Why do people entertain ejhr2015? If MMT was a cure-all why isn’t Venezuela living the good life?

      Thanks for the article Tim.

    • It doesn’t yet fit the Overton Window, Luke. The mainstream still resonates across the world as it’s evil flaws suit the PTB and so Venezuela is left to sink. Yes MMT has the answers, but you have to use it, not ignore it as you obviously choose.

    • So MMT cannot be applied to a struggling nation such as Venezuela? Instead a nation must first await deliverance from the mainstream narrative? To where should its people bow? How much will this ‘benevolence’ cost the people?

      And all those times you called people a ‘moron’. I think an apology is due…

      If a solution cannot be applied in the only instances that it is required then it isn’t a solution. No ifs, no buts, no nothing.

      Anyway, I realise I’m now guilty of feeding the monster so I’ll stop.

    • Good idea to stop before you dig an even deeper hole shovelling ignorance everywhere. I don’t recall using the moron word [tempting though!] Since MMT is only slowly gaining acceptance then your remark is pretty amazing in the conclusion that it’s to blame for Venezuela’s problems. Do you blame it for Zimbabwe and Weimar Germany too.? You can certainly blame the mainstream;

      Are you interested in learning? Here’s one of many episodes about it, and you can explore from there.

    • Luke

      I’m happy to see as many and as varied comments as possible. If everyone agreed with everyone else, we’d learn far less!


    • Hi Tim,

      It’s your blog so fair enough.

      The issue that I have with ejhr is that he/she doesn’t understand the theory that they are cheerleading and then accuses those who do not believe in its magic as ignorant. Anyone who actually understands MMT will tell you that the Achilles heel to a nation which implements it is not a ‘mainstream conspiracy’ or the ‘Overton Window’ but it is actually the foreign exchange. MMT only ‘works’ when the debt that you owe is denominated in a currency that you can print, (i.e. your own). MMT stops ‘working’ when you owe debts de-nominated in a foreign currency (i.e. one you can’t print). The idea that the mainstream is to blame for Venezuela’s woes is just ridiculous. Venezuela owes north of $64 billion in foreign currency denominated debt (as of 2016). So MMT will not fix Venezuela’s problems or whichever other nation runs foul of the foreign exchange. As such, Ejhr simply does not understand MMT (and should probably watch through the videos he/she keeps posting again).


      Note; I’m guessing that pretty soon European countries such as Greece, Spain, Italy and Portugal will face a similar problem (as they did in 2009) as, under MMT, it would be the ECB’s job to print the currency in exchange for bonds and not the national governments of said nation states.

      The main purpose of MMT is to ensure that employment is maximised. All that this means is that we hit our resource depletion wall at a higher speed. I’m not sure how that qualifies as a good idea.

      All the best,

    • MMT doesn’t agree with you that you should make your debts in a currency that is not yours. Where did you see that? In fact as you point out it is a very bad idea, but promoted by the mainstream as applied to neo colonialism. Why is Africa poor? It has a great supply of resources yet the people live as paupers there, apart from a few elite. It is because of deliberate policies by colonial powers to asset strip Africa [and elsewhere] by fostering development loans in Dollars and then using the failures to take possession of the assets. No one would be worrying about the Middle East if there was no oil. What Venezuela has done is demonstrated the power of incompetence and corruption in government. Here it is with a giant petroleum reserve but misusing the resource has seen it collapse. Your blaming it on MMT is like blaming an accident on not knowing it beforehand.

    • Ejhr,

      This conversation can go on forever as you aren’t actually addressing my counter points, I’m not even sure that you’re digesting what I am saying. For example;

      “MMT doesn’t agree with you that you should make your debts in a currency that is not yours.”

      Not what I said. Here is what I actually said; Venezuela has debts denominated in foreign currency. The Achilles heel of MMT is the foreign exchange. Therefore MMT will not aid Venezuela.

      Here is what you said is the problem;

      “It doesn’t yet fit the Overton Window, Luke. The mainstream still resonates across the world as it’s evil flaws suit the PTB and so Venezuela is left to sink. Yes MMT has the answers, but you have to use it, not ignore it as you obviously choose.”

      You clearly do not understand what MMT is capable of doing. Nor what stage of the game we’re at. And with that I’m done.

    • Good news, for you are no less guilty about your thoughts. You just show you cannot see past the foreign exchange problem. It is a biggie but MMT can show a way forward. It would take a book to explain probably, but rest assured, I am well ahead of you by looking forward, whereas you are bogged down. You only skim what I have written. So your comments are facile and unresolved.

  7. Hi Tim

    Let me congratulate you on your 100th article detailing a heterodox view of the economy and a necessary counterblast to the pathetic MSM who merely trot out the anodyne and irrelevant and say this is “expertise”.

    Although, as you imply, there are many reasons to be pessimistic I do detect a change in the mood music in the last few months. Both the elections here and the shenanigan’s of Trump in the US seem to have set things off on a different track. The MSM is increasingly discredited and people are beginning to realize that they’ve been sold a bill of goods and that things are far from right. Whether this will lead to anything positive and whether we have politicians with sufficiently clear vision to see a way forward I have no idea but at least the scales are beginning to fall from people’s eyes.

    • Thanks Bob

      I hope you may be right about the public waking up to this situation. Where the UK specifically is concerned, things seem to be moving so rapidly to a point of crisis that there may no longer be any way out. I hope I’m wrong.

      I applauded the election of Mr Trump as a rebuff to the political elite, but I see little in his policies that is encouraging.

      Both Britain and America have been following the same drastically mistaken policies for many years. America, with her greater resilience, may survive this. The UK, I suspect, might not.

  8. Tim, thanks for this excellent exposition of the situation. I think your response to Wally’s comment, as to why this isn’t obvious, is that the powers that be don’t have systemic / futures thinking underpinning their mental schema’s of what’s going on, combined with Kohr’s “law of diminishing sensitivity”… I tried to capture some of that last year in this post: http://bit.ly/ns_brexit

    • Thank you, and for the link to an interesting article which I will read more thoroughly later.

      What will be interesting will be the preparedness (or not) of the powers that be to re-think when the first really big blow falls.

    • Donald:

      I don’t understand why you cannot post a long comment – others do! There’s no limit set here, not by me anyway.


  9. Hi I don’t understand either – so I’ve switched from my Chromebook to my PC. I think this means I’ll be posting as ewaf88 and not Donald

    So World bank forecasting oil at $80 pb by 2030

    Does this mean they haven’t factored in the increased future costs of extraction? Or not taken into account some of the oil companies borrowing which is hiding the true costs?

    • Trying to forecast oil prices that far ahead can never be more than guess-work. According to some research I did a long time ago, and was published by OPEC, the long cycle in oil is around 13 years. So 2030 may be a full cycle away from here.

      What we can do is look at just some of the moving parts. For oil, ECoE – the ratio of access cost of access to energy accessed – is moving upwards. Shale should be well into decline by then (and note that the US seems to see an undiminished need to secure its tanker routes from the Gulf). Renewables use will have expanded markedly, though we can expect the cost reduction curve to have flattened out by the mid 2020s.

      Then there’s demand. I don’t (at present) model the debt/GDP ratio out beyond 2022, because well before then it is unsustainable on its current trajectory. But the likelihood of surviving without GFC2 to 2030 seems extremely remote. Even now, we’re probably only waiting for a catalyst. (My money is on an FX collapse in GBP). So, by 2030, the likelihood has to be a major reset, toppling some at least of the dominos.

      Nearer term, investment in oil access has crashed since 2014. That ought to give us a supply shortage by, say, 2020 (Saudi seems to think quite a lot sooner). Oil prices might then spike – but what if this prices energy out of consumers’ reach?

  10. Thanks for kind reply – I feel as though we’re having one last knees up – drinking – popping balloons – boasting about buying a bigger car and smoking cigars – when suddenly – all the lights go out.

  11. I wanted to add that trading is a misunderstood benefit/drag in an economy. Imports are a benefit and exports are a cost. In the USA’s case all China’s surplus from trade with the USA sits in accounts at the Reserve and China has to find buyers for it to shift it. In Venezuela’s case the government simply assumed it had unlimited oil trades to fuel its economy so they didn’t care about dollars. Unfortunately the price crash has left it seriously indebted and with no safety net. MMT cannot help with that except it should be adopted now to give the population the benefits that are still available. Venezuela is still monetary sovereign, but since it let its agriculture and other infrastructure lapse it’s facing a major problem. This is where poor governance tells.

    Mr Luke, you are still missing understanding of MMT. Note what my first post here says, “MMT simply shows how the economy actually is” . MMT is not a theory so much as an explanation of economic reality. I’m not sure why you are missing out but you should understand That at least.
    Applying MMT could at least destroy neo-liberal policies whereby the wealthy get more and the poor get less. These are political choices based on phoney economics. Not doing something about inequality is a recipe for disaster. MMT is a godsend here, without doubt.


    • Hi the BBC article look spot on – especially not being able to afford the upkeep of our complex needs.

  12. Dr. Tim,
    congratulations on your 100th Article on your site here.
    As always, you open up new avenues of thought for me, and this article has not failed to do the same.
    I have been pondering over what the real world actually does look like ( outside the matrix ), and also what it is going to revert back to, once this experiment started in 1970’s comes to its ultimate end.
    Life will go on, of that there is no doubt, but what will the impact be on everyday life for Mr & Mrs Average ?
    Rest assured, that the angels of the Magic Money Tree will not descend upon us with a miracle cure, so praying to that tree will not put bread on the table.
    How will the 70 Million or so UK population survive when the benefits train comes off the rails ?
    What will the army of Estate agents, lawyers and Surveyors live off when the property market grinds to a permanent halt ?
    When the Public Sector is culled by 50%, what are these people going to do for a living, when their skills in paper-pushing or key-stroking have no further value ?
    Some of us with even modest wealth in Bitcoin, physical gold/silver or some other currency less impacted than the US$ or £-sterling, ( CHF, RUB, CNY ??? ) will be able to continue with a modest lifestyle, but what of those with no savings and no skills ?

    I do not believe that our politico’s cannot see the position that the UK is in. Some of the brighter ones, OK there are precious few of them, they will appreciate their dilemma.
    It really is a case of A). Tell the truth- explain to the British people the exact situation that the country finds itself in,- and thereby spawn riots in the streeets today,
    or B). Let it all come crashing down and have riots in the streets tomorrow.
    I see no future for the UK that does not involve riots, social disorder and the ultimate establishment of a Police State. Am I too pessimistic ?

    So, thanks again for your Blogging Tim.
    Articles of this quality do not appear out of no where, between the lines I can see the preparatory work that you must be putting in in the background with your research and deliberations, so I just wanted to say that it is respected and greatly appreciated.
    Happy 100th !

    • A frightening scenario –

      Perhaps :

      Immediate restrictions to family size – maximum 2 children
      Try to become self sufficient in food production
      A national policy of insulating each home to the best standards possible
      Awards for becoming an energy conservation hero
      Small local power stations
      Full adjustment of economy to needs over wants
      Conservation of North sea oil – only electrical cars allowed
      Return of family values – including care for older members
      Make alcohol and cigarettes prohibitively expensive
      Charges for A&E for certain admissions (drunkenness for example)
      Switch to well built long lasting goods.

      The above will never happen.

    • Johan

      Thank you, much appreciated. You’re right that I do a lot of preparatory work first. Mainly, of course, I make use of SEEDS.

      Personally, I can’t see how the UK gets out of this now. Things have gone too far. After the recent election, business organizations said their members’ confidence had “crashed”. If they think this, why would overseas investors think differently, and put money into the UK, or keep it there? My guess is that they won’t, and for good reasons.

      If capital flows out, GBP is likely to crash. With so much debt, the UK can’t afford to fight this with rate rises – and it’s likely this wouldn’t work anyway. The result would be market panic, and much higher sovereign debt yields forcing rates up. Inflation would rise sharply. Property prices might crash, too, putting the banking system at risk.

      The economy now has very little to offer. It’s dominated by simply moving money around, and it’s hard to see where much value is added. The decline in real wages, plus the maxing out of household credit, mean weak demand – not good, if you’re investing in a business where your sales depend on customers’ incomes.

      Economic management has been appallingly weak. Next might be Jeremy Corbyn, not an appealing idea, but could he really do any worse than the current and recent lot?

      If it were me, I’d be opening a foreign currency account at a high street bank, and putting any spare money into it, probably in euros rather than dollars.

    • Tim, it really turns on what this “Debt” is. As you know, Government Debt” is just investor savings stored at the BoE. so that means it’s actually wealth. Investors have plenty of money to spare so they take advantage of bond sales by the Government.The government sells these bonds, or gilts, because Lisbon mandates it. The government does never needs this money and so it is never spent. Repayment, and interest, is just a book keeping operation.
      Private debt is another matter. Here the government is guilty because it encouraged asset inflation and the apparent boost to the wealth effect and the pound. That has to come to an end.

    • Donald

      I’m not sure if your suggestions would work – and I’m pretty sure they won’t be attempted!

      The real problem, as I see it, has been a fanatical adherence to a form of capitalism which isn’t “real” (Smith-style) capitalism anyway, but “crony capitalism”. Rolling this back would involve many things, few of them palatable to the establishment. You’d have to stop privatization, and reverse some of it. You’d have to re-commit to the mixed economy. You’d have to tilt the balance back from speculation to wealth-generation – so tax capital gains more (including gains from rising property prices), tax incomes less, and cut taxes for small business. You’d have to break up over-concentrated sectors, where I’d start with telecomms. You’d have to defy the NIMBYs and institute a big programme of building public-owned homes for rent.

      I just can’t see any of this happening. It’s probably too late anyway.

    • Well thanks for reply Tim – It seems we all face an uncertain future. I knew none of my ideas would ever be attempted.

      The Guardian had this article today


      There are also reports about defaults on car finance deals and credit card debt floating around.
      I think house prices will continue to trickle down – perhaps accelerating.

      I have been moving funds out of Nationwide.

    • Hi Johan, in my opinion the UK is far too interconnected in the ‘core’, that a real crisis would quickly spell over to the EU/US. With a few months delay at most.

      The question should be: is degrowth manageable?

      As i said earlier, the UK will join the € as soon as the shit hits the fan. The importance of our beloved fiat currency system will prove its ability to extend & prevent again, in the way we have seen many times before.

      A solution however, it is not.

    • Thanks Houtskool,
      The interconnection of Euro -$ -Sterling is very relevant and you are right in that some kind of contagion is inevitable.
      Your question on de-growth being managable ?
      Well yes, I believe it would be at an economic level, but it would be utterly rejected at a social level.
      As Dr. Morgan continually points out in his articles, our Economy is an Energy Equation. So we can work out the realities of life down to the nearst BTU, but how do we relate that to real life, how does it affect our society, how do people react ?
      In one of Tim’s earlier works, I think ” Life after Growth”, he illustrates how in the UK population there has been a growing sense of “Entitlement”. Overcoming this, and indeed unwinding it, is going to be very, very painful indeed.
      There will be fighting in the streets.
      The top 1% will be away from here, but those who cannot run, they will suffer the wrath of the mob.
      In the UK, this is going to end very badly indeed, and I hope to be far away from it when it goes off.
      I am 50% Physical gold/silver, 10% sterling, 25% euro, 5% each -Bitcoin -Dollar and -Ruble. ( although of late Bitcoin has done very well indeed – my son wants a new car )
      I keep my old Honda 50 fully tanked and warmed up in my garage, ready to go at a moments notice. When the SHTF, I reckon I can make Dublin in 3 days, and civilisation about 3 days after that, ( depending on how the Guiness is ).

      -Donald, Trinitron Colour TV in 1983 ? – Luxury !
      All I had was a 12″ bw no-name portable with snow picture !

    • Hi Johan – I’ve often considered moving to Norway or Sweden. I like the idea of you Honda 50 ready for action. I have an electric bike.

      Actually I bought the 14″ Trinitron in 1981 for around £399 – a huge sum for those days -comparable with high end ultra HD sets now. Unfortunately (and surprisingly) I’ve been unable to find a picture of one on Google with which to gloat further 🙂

      Snow pictures was a horrible disease which thankfully has been cured.

    • The long term fossil energy free carrying capacity of the UK is about 20 million (4 people per hectare of arable land.) We needed to have stabilised and then decreased our population size starting 50 years ago. The age of solutions is long gone. We are now in the age of consequences. I cannot see a painless way to get from 65 million to 20 million people. The best I can hope for, as a 55 year old with no children, is the continued pursuit of our current “extend and pretend” policy that our politicians are following which might give me a decade or two more of living the high life.

      My advise is to move to a small market town with good arable land and a good network of friends as I have done. Enjoy life now, the apex of the oil age.

  13. One more thing – in my early 20’s I lived in a bedsit (1980 – 1983) The only things I owned were my clothes – a Sony Trinitron colour TV my LP’s and a fridge. Perhaps that’s where we’re headed in terms of personal wealth in the future.

  14. An oil price of 80 dollars per barrel will destroy demand and bring world economy into a negative circle unless green energy can compensate. With all respect, Jim, you have to verify your very optimistic view on renewables – hopefully soon. On which figures do you base your assumptions?

    • Renewable energy provides about 2kWh per day per person in the UK. Our current energy consumption (food, heating, transport, electricity, making stuff, etc) is about 200kWh per day per person.

  15. Hi Johan, thanks for debunking mmt. There’s no financial solution, period. Social acceptance maybe forces you to exchange your Honda for a good bicycle. Beat the rush.

    Oh, and buy full copper moonshine equipment.

    • You can’t debunk MMT, it is the existing economics world we live in. It’s the “mainstream” that denies reality what with its endless models and unrealistic precepts, a 100% failure rate.

    • If MMT is the basis of our existing world, then maybe that is why our financial world is collapsing around our ears.
      What many people “do not understand”, to use terminology frequently heard here, is that Economics is not science, ( SEEDS is science because it is based on factual data), but in general terms Economics is more akin to religion.
      Just like we have mainstream religions and numerous sects, we also have a whole host of lone Guru’s wandering the globe preaching their version of enlightenment and redemption. This is also true of the world of economics.
      MMT has all the trappings of a Sect. It’s devotees must make a leap of faith against rational and logic.
      They shape the real world to fit their religion, unlike in true sciences, where new evidence changes the model.
      But the bottom line of all religions is; what if there is no God ?
      What if all religions are baloney ?
      What if economics is all baloney too ? After all, where in Economics do you ever hear about human nature ? About averice, greed, subterfuge, or kindness generosity and philanthropy ?
      In the MMT world, who decides on who gets the top job – the guy who writes his own paycheck ?
      The guy who has control over where the Fairy Dust is sprinkled ?
      Is He the magnanimous servant of humanity pure of heart and untouchable ?
      .. or will he line his own pockets and those of his chums ? Will he pour money into militarisation and the protection of foreign states that He sees as deserving ?
      or will he be the kind father holding each of his children equally dear.

      If we live in an MMT world, then I want that top job, -and I will kill to get it.
      Because if we live in an MMT world, then we do not live in a Meritocracy !

    • A fine delusion, Johan. Did you wet yourself?
      We live in an MMT world but the reality, as with you here, is not recognised. Really simple, but I must say it’s unfortunate that “Theory” is used in the title, so misleading. Instead of theory used as applied to the theory of gravity, which is not any more a hypothesis. Using theory for MMT is looked at as an hypothesis, whereas the Reserve Bank of Chicago had it better with Modern Monetary Mechanics. It produced a booklet explaining it in 1963, and the “theory” goes back a lot earlier. Unlike the Mainstream, based on models, MMT is based on laws, on mechanics.

      Of course if you are not interested in understanding nothing here will work, but you need to see it as a lot of mischief, evil even, is done in the names of the mainstream, like Monetarism, Austerity, Neo- liberalism. MMT shows up the lies politicians spout when they say the government is going broke, and so they must cut education, welfare and health costs to “balance” the budget. It’s all lies.

  16. Hi Tim, you are on record in wanting to increase wealth tax and to decrease income tax. Wouldn’t reducing the inheritance tax threshold to, say, £50,000 be the best way to do this? eg. your estate would be taxed at your marginal tax on amounts above this threshold.

    Advantages would be that everyone would be born into a level playing field and would eliminate intergenerational hoarding of money (which in my view is a major problem in our money created from debt system – a topic for me to post about in future, perhaps)

    • Hi Ed

      Two things:

      1. Let’s start by noting that the cost of money – interest rates – determines the relationship between asset values and earnings. So, ultra-low rates have inflated asset values whilst depressing earnings. Cheap money policies therefore benefit the “haves” against the “have-nots”, and the old against the young.

      Simple justice, as well as practicality, favours using the tax system to redress this imbalance. Tax assets more, then, in order to tax income less.

      2. In some countries, taxes on capital gains are lower than taxes on earnings. This is crazy – we need to encourage innovation and effort, not speculation.

      Generally, vested interests tend to demonise the very idea of a wealth tax. Actually, a wealth tax needn’t be too onerous – say first £1m exempt, 1% tax on wealth £1m to £2m, 2% on wealth over £2m

  17. Infrastructure spending in America and Trump’s wall.

    I’ve read that Trump’s wall could cost $70bn to construct and yet Trump has reigned back on much needed infrastructure spending.

    Hardest hit could be the NY subway systems and the the building of a new train tunnel plus vital maintenance to existing ones running under the Hudson.

    What is his thinking? Apart from building the wall – it will cost money to run and maintain it – although he’ll no doubt try and foster these costs onto Mexico. It might stop a few thousand illegals getting access to the US – but apart from that it appears to have no economic benefit.

    Meanwhile the transit systems in and around NY are in a perilous state. The railways depend on box bridges built and designed 100 years ago – some areas down to single track running – overhead wires are in some cases as old as the bridges.

    Is an economic truth being hidden here – that the US can no longer afford to maintain existing infrastructure?

    • The state of the US economy, and its prospects, are something of a conundrum. It’s something I’m going to look at in a future article.

      Janet Yellen has made it clear that, although interest rates may rise a bit further, they’re not going to return to pre-crash levels, but will remain far lower. Ultimately, what this means is that the economy isn’t strong enough to cope with ‘normal’ rates, which we can define as rates at least 2% above inflation. So the life-support system of negative real interest rates is going to continue to be needed for the forseeable future.

      Negative real rates are a medicine with significant side-effects. These include an excessive propensity to borrow, and a stymying of ‘creative destruction’. When looking at US data, note that 15% of GDP is accounted for by “imputations”, which are non-cash amounts that can be described as imaginary. The purchasing power of ‘middle America’ is continuing to deteriorate, and the US seems to have lost the ability to ensure competition by breaking up cartels and monopolies. So two of the historic engines of growth in the American economy – spreading prosperity, and an effectively competitive market reinforced by “trust-busting” – are not working to best effect. The likelihood is that growth will continue to depend on credit infusions.

      To improve the outlook, the US needs policy changes, but these are unlikely to happen under Mr Trump.

    • Thanks for the reply Tim – I’ll look forward to your future post. Regarding ‘creative destruction’ it seems like China are becoming rather good at it.

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