#104. Why Mr Trump can’t raise American prosperity

 

THE US ECONOMY – A SEEDS APPRAISAL

With SEEDS – the Surplus Energy Economics Data System – nearing public release, this article has two purposes. It assesses the outlook for the American economy, and uses this investigation to demonstrate how SEEDS is applied to economic interpretation.

It concludes that American prosperity is in decline, and has been falling ever since it ‘peaked’ way back in 1999. This doesn’t make America unique – prosperity has long been falling across much of the developed West. But it does mean that the central economic task of President Trump, which is to make the average American more prosperous, simply is not possible.

Two main factors are driving the deterioration in prosperity. First, the underlying economy has been deteriorating, a trend disguised by the spending of borrowed money.

Second, in America as elsewhere, the trend cost of energy continues to increase markedly, even while market prices are trapped in a cyclical low. This cost acts as an “economic rent”, and translates into individual experience primarily through the cost of essentials, which are energy-intensive.

Essentially, two things are happening to the average American. First, his or her income is rising less rapidly than the cost of essentials, squeezing the “discretionary” income which is the real definition of prosperity. Second, increases in income are being far exceeded by increases in debt, and also by growing shortfalls in pension provision. So the citizen feels both less prosperous and less secure.

As SEEDS measures it, per capita prosperity was 10% lower in 2016 than it was back in 2000. Neither is this trend likely to reverse – by 2025, the average American is likely to have seen his or her prosperity decline by a further 8% in comparison with 2016. At the same time, per capita debt has increased by almost $54,000, in real terms, since 2000, a problem now being compounded by a rapidly-growing systemic shortfall in pension provision.

‘Conventional’ economics cannot capture any of this. A perspective which ignores both “borrowed consumption” and the trend cost of energy is baffled by popular discontent, in America and elsewhere. Moreover, ‘conventional’ analysis tends to be misled by the apparently-buoyant values of stocks, bonds and property. These values are misleading, because they cannot be monetized – the only buyers for homes, for example, are the same people to whom they already belong.

For as long as these issues are overlooked, popular anger is likely to go on taking ‘the experts’ by surprise.

Context – the politics of waning prosperity

There were two main factors which combined to put Donald Trump in the Oval Office last year. The first was widespread popular contempt for the political process, something which Mr Trump addressed with his promise to “drain the swamp”. The second was the economic hardship being experienced by millions of Americans in a system which they increasingly perceive as benefiting only a wealthy minority.

On this second point, the challenge for Mr Trump is crystal-clear – to be successful, he must improve the material well-being of the average American. But this analysis concludes that there is no possibility of Mr Trump – or, for that matter, of anyone else – increasing per capita prosperity in the United States.

Mr Trump could, of course, try to offset this by redistribution, but there is no indication whatsoever that he will even contemplate doing this. The danger is that, if he decides against ‘taking from the rich to give to the rest’, voters may opt for somebody else who will.

Economic conditions are only one input to political decisions, of course, but their role can often be decisive. If this analysis is correct in concluding that the decline in the prosperity of ‘Middle America’ cannot be reversed, Mr Trump is going to struggle to be re-elected. Though a challenge might be mounted by the self-same establishment that he defeated in 2016, a likelier scenario might be a leftward tilt in the centre of gravity of American politics.

The economy – an energy dynamic, not a financial one

The basis of the surplus energy approach is recognition that the economy is an energy dynamic, not a monetary one. This much should be obvious, because money has no intrinsic worth – it commands value only to the extent that it can be exchanged for goods and services. Energy is central to the supply of all these goods and services.

The value that the economy generates, therefore, is a function of how much energy we can access. But, whenever we access energy, some of that energy is consumed in the access process. The term ‘surplus energy’ describes the difference between the gross quantity of energy available, and the cost of accessing it. That difference or ‘surplus’ is the foundation of prosperity.

The concept of prosperity needs to be understood clearly. Prosperity is not simply the size of someone’s income. Rather, it is the sum left over after essentials have been paid for. This means that prosperity equates to “discretionary” income, which is the sum that he or she can choose how to spend.

The fundamentally energy-based nature of all output creates a natural distinction between “two economies” – the real economy of goods and services, and the financial economy of money and credit. Used properly, the financial system can deliver many benefits. Equally, though, it can be harmful, if it diverges too far from the real economy.

The potential for harm is simple. Money functions only as a “claim” on goods and services, which really makes it a claim on surplus energy. Likewise, since credit is a claim on future money, it is really a claim on future energy.

Financial “claims” – money and credit – can be manufactured out of thin air, and we can create as many of these claims as we like. But, if we create claims that exceed what the real economy can deliver, the excess cannot be honoured. Therefore, it must be destroyed. Inflation is one way of doing this, though default is another.

Energy in America

The consumption of primary energy in the United States has been in gentle decline for a number of years. In 2016, Americans consumed 2.28 bntoe (billion tonnes of oil-equivalent), 2% less than in 2006. Over that period, the population increased by 8%, so energy consumption per person is in a somewhat steeper decline. This is often assumed to indicate greater efficiency. But the alternative possibility – that it may simply reflect deteriorating prosperity – seems disturbingly consistent with the facts.

The supply of indigenous energy increased by 24% over the decade to 2016, and much of this increase has been supplied by unconventional oil and gas, extracted from shale formations using hydraulic fracturing. Reflecting this, the US imported only 11% of its energy needs in 2016, compared with 30% in 2006.

The dramatic increase in unconventional hydrocarbons production has created much hype, tending to disguise a rather more prosaic reality. Shales are costly to produce, not so much in operating expenses but, rather, in capital costs, which are themselves a function of depletion.

The output from shale wells declines far more quickly than conventional production, creating a constant need to drill new wells simply to sustain output, let alone increase it. This puts operators on a “drilling treadmill”, something evident both in huge capital expenditures, and in the inability of the industry to cover its capital costs from operating cash flow.

Moreover, a peak in shale output now looms, and this peak is assumed here to occur in 2021. If some of the more sanguine claims for shale were true, the United States would be scaling back its ability to ensure safe delivery of petroleum from the Middle East. It is clear that the Pentagon has no such intention, and the US remains as interested as ever in political developments in the oil-rich Persian Gulf.

What really matters, where the economy is concerned, isn’t the aggregate amount of energy available, but the cost of accessing it. This is cost expressed in energy terms, not financially. SEEDS estimates the ECoE – the Energy Cost of Energy – of the American demand mix in 2016 as 7.9%, which rises to 9.2% after adjustment for net energy trade. This latter number has been on a rising trend – it was 7.2% in 2006, and only 4.2% in 1996 – and is projected to reach 13.5% by 2026.

The 2016 number is higher than the global average (8.2%), but better than those of competitors including Britain (10.5%), France (11%), China (14.3%) and Germany (15%). So America does enjoy a significant energy advantage over some of its principal competitors, even if that advantage is not as great as is sometimes claimed.

The financial economy

American GDP in 2016 was $18.6 trillion, a real-terms increase of 33% since 2000. Over that period, however, the population has increased by 15%, so the gain in per capita terms has been rather more modest, at 16%. Theoretically, this should have made most Americans markedly more prosperous, but there is a big snag involved in accepting GDP numbers at face value.

Comparing 2016 with 2000, and using constant 2016 values throughout, American GDP increased by $4.6tn. But, and again at constant values, aggregate debt grew by $21trn over the same period. This means that each dollar of recorded growth was accompanied by $4.60 of new debt.

This issue is often overlooked, by economists and policymakers alike. But its relevance should be obvious because, if America goes on adding $4.60 of debt for every $1 of growth, a point must be reached, eventually, at which further growth becomes impossible, because debt has reached a practical maximum.

Another way to look at this is that a significant proportion of reported growth has really amounted to nothing more than the spending of borrowed money. If the ability to keep “borrowing to spend” was to be curtailed, this borrowed element would fall away, resulting in a sharp fall in GDP.

The scale of this problem is evidenced by the way in which America, like other countries, has effectively been forced into a policy of ultra-cheap money by the sheer impossibility of paying a ‘normal’ rate of interest on debts of this size.

ZIRP – meaning zero interest rate policy – has hefty economic costs. Just one of these is that it stymies the essential process of “creative destruction”, by keeping afloat weak players who, in a ‘normal’ interest rate environment, would have gone under, freeing up capital and market share for new, more innovative competitors. Cheap money also incentivizes speculative over innovative activities, as well as deterring saving, and encouraging borrowing.

Another consequence of cheap money is that it destroys the ability to provide for the future. Saving becomes pointless when interest earned is less than inflation. This has particular relevance for pensions. According to a recent report, the deficiency in American pension provision stood at $27.8tn in 2015, and is growing at a rate of $3tn per year.

To put this in context, it is about 5x what America spends on defence. In 2016, the US economy expanded by $0.3tn, a number obviously dwarfed by the deepening pension chasm, as well as by a net increase of $1.4tn in debt. When income is growing by $0.3tn annually, but liabilities are increasing by $4.4tn, something is clearly very wrong indeed.

The underlying economy

Since the “borrowing to spend” issue obviously cannot be ignored, SEEDS uses an algorithm to calculate how much economic output is accounted for by the simple spending of borrowed money. Of the $21tn borrowed since 2000, $4.0tn is deemed to be “borrowing for consumption”. This is only 19% of the total borrowed, so might be a conservative estimate. Even so, it has dramatic implications for underlying (borrowing-free) GDP.

According to SEEDS, American underlying GDP in 2016 was only $14.5tn, a number which is 22% below the reported $18.6tn. This underlying number is an estimate of where GDP would be if Americans ceased “borrowing to spend”. It represents an increase of only 7% (rather than the recorded 33%) since 2000. Moreover, it equates to a fall (of 6%) in underlying output per capita.

This analysis goes some way towards explaining a big political (as well as economic) conundrum – the reason why the average American feels poorer is that he or she really is poorer. This deterioration in underlying income, then, is extremely indicative. It becomes even more so when we consider the role of energy, which plays a critical part in determining prosperity.

The real economy

Thus far, we have looked at two measures of American economic output. One of these is recorded GDP, and the other is a borrowing-adjusted calculation of underlying GDP. The third stage in this process is to factor-in energy costs, described earlier as ECoE. This calculation is critical if we are to identify trends in prosperity, rather than simply in income.

The trend cost of energy is quite different from the market price at any given time. Whilst prices are cyclical, cost is a long-term trend, determined by the interplay between depletion and technology. Moreover, cost needs to be considered, not initially in monetary terms, but as the proportion of accessed energy that is consumed in the access process.

The term “cost” can be misleading, because it is not directly analogous to the costs incurred running a home or a business. Those costs leave the home or business but, globally, the energy economy is a closed system, so the cost of energy does not leave it.

Rather, energy cost is an “economic rent” – it is not a sum deducted from income, but an amount that we are forced to use in a particular way. This means that it reduces the amount that can be spent as we choose, and this “discretionary” income is what determines prosperity.

Where America is concerned, SEEDS estimates the 2016 ECoE of the United States at 9.2%, up from 5.5% back in 2000. The main impact of this energy cost “drag” on prosperity is experienced through escalation in the cost of essentials.

In per capita terms, this trend has paralleled the deterioration in underlying GDP. Stripped of borrowed spending, this underlying measure of income declined by 6% between 2000 and 2016. Adding the ECoE component into the mix indicates that per capita prosperity has declined at roughly the same rate. In the future, though, a continuing rise in ECoE is set to exacerbate the erosion of prosperity.

The future

In America, as elsewhere across much of the Western world, organic growth in economic output petered out around 2000. Since then, and again like many other countries, America has been ‘faking’ economic growth by spending borrowed money.

As a result, debt has grown much more rapidly than GDP. In the years between 2000 and the global financial crisis (GFC) in 2008, each $1 of reported growth was accompanied by a $5.20 rise in debt.

Since then, this ratio has improved, averaging $3.85 of borrowing for each growth dollar between 2008 and 2016. Unfortunately, though, this has been compounded by two other trends. First, the ratio of debt-to-GDP is higher now (251%) than it was at the end of 2008 (234%).

Worse still, the policy of ultra-cheap money has created huge and growing shortfalls in pension provision, a structural shortfall now standing at over $29tn, or 157% of GDP, and increasing by $3tn annually.

When we balance out trends in income with trends in debt and other forms of liability, the picture which emerges is one of steadily deteriorating prosperity. As trend ECoE continues to rise, the squeeze on prosperity will tighten further.

America is by no means unique in experiencing downwards pressure on prosperity – the same is happening in many other countries, often more severely than in the United States.

The problems posed for America are twofold. First, the deterioration in prosperity makes it impossible for the President to improve the material prosperity of the average American – in attempting to do so, he is about as powerless as was King Canute when he tried to turn back the tide.

Second, the use of cheap money to ‘manufacture’ nominal economic growth is already creating an escalating level of forward risk. Just as Americans are getting less prosperous, they are also becoming ever more indebted, and face ever greater insecurity as provision for pensions deteriorates.

The time cannot be too far off, for America as for the world more generally, where the future (represented by the collective balance sheet) overwhelms the present.

 

 

36 thoughts on “#104. Why Mr Trump can’t raise American prosperity

  1. Thanks Tim – as usual a well thought out analysis. I wonder what would happen if it was presented to Trump. Well of course he’d probably have tantrum and fire off his usual round of ill advised tweets.

    I know that you managed to get a member of parliament interested in your concerns – did anything ever come of it?

    You’ve made it clear that something is going to happen – perhaps our politicians current economic behaviour is like the kids game of daring how much you can blow up a balloon before it goes bang. However they have no idea that the balloon is going to go bang.

    • Thanks.

      I’ve no idea how Mr Trump would react, but the general point is that “flat earth thinking” – that the economy is money, not energy – still rules the roost. My hunch is that Mr T might be more open to new ideas than many others.

      A question was asked in the Lords – with no tangible result.

      This situation cannot continue indefinitely – so, by definition, has to end – and there is almost nil chance of it ending happily……

  2. The Reasoning here about Fake growth that is predicated upon borrowed money is slightly confusing in that Almost all Money is Borrowed, That some money is spent on Production or Investment for future consumption and some is spent on Current Consumption is a distinction I can follow both for Money ( Debt Based Money) but would also hold true for Energy Based Metrics, That is if we are spending or investing energy budgets we can Spend available energy on investment or on Current consumption.

    If one did a Stocktake of all potential production with existing energy resources, how would that Look? Prosperity for a Single Income minimum Wage Single Parent in Detroit looks a lot different to An Upper Middle-Class Graduate from Connecticut? If Money is reinvented around Energy Realities rather than the realities of Debt Based Money where would we choose to head, and whose measure of prosperity would we adopt?

    If we look at The Petro Dollar and its problems based on the old Free lunch ( exorbitant privilege paradigm) Mr. Trump or any US president is faced with the same problems, On EROI measures if Energy is invested on Infrastructure both Transport and Energy surely there is a way out of the current quagmire?
    On a business as usual scenario, War seems to be the present Answer from those stuck in the Old Paradigm, and president Trump seems to have been co-opted into that course of action. Should President trump manage to free himself from the PENAC ( Project for a new American Century) Crowd What is the realistic view for an energy based economy?
    I thought this Roger Pelke Talk was very good, It would be disastrous to see a marginalisation and Polarisation of the Energy Based Economy debate, in the same way as the Climate Question became so poisoned.
    Climate Politics as Manichean Paranoia – Roger Pielke Jr @ The GWPF, July 2017

    David Korten is an economist, author, and former Professor of the Harvard Business School. His political activism has made him a prominent critic of corporate globalization. His 2006 book “The Great Turning: From Empire to Earth Community” argues that the development of empires about 5,000 years ago initiated unequal distribution of power and social benefits to a small portion of the population.

    I think And Energy Based View from a Main Street and not Wall Street Perspective could see the #MAGA project gain traction, the Hawkish view which seems to have prevailed will see a great deal of Energy Wasted in all senses of the word Energy.

    http://letthemconfectsweeterlies.blogspot.se/2017/09/the-american-dream-main-street-versus.html

    • Thanks. You raise a large number of issues, some of which I’ll need to follow up before I can comment.

      Yes, money is ‘loaned into existence’. But, however created, it is still a “claim” on real economic output. If that claim can’t be met then, by definition, it has to be destroyed. This makes its owner – or the creditor to whom it belongs – poorer.

      Part of the problem is that money is accepted as a “store of value” – so, if someone owes me $1, I count that as an asset. If he cannot pay me, then I’m $1 ‘poorer’. No-one has yet demonstrated how we can ‘let off’ debtors without leaving creditors short-changed – and these creditors are often debtors to others.

      Some engineering solutions might be possible – but we seem unable to find them. For instance, the WEF report on pension shortfalls couldn’t suggest much more than higher savings ratios, which aren’t practicable, as they would need to be far too high to be affordable. Getting returns on investment higher would “solve” the problem, but only by raising interest rates. And so on……..

    • Hello Tim, Thanks for the reply.
      If we are talking about the existing System the problem is one of Assymetric Risk and lack of moral hazard, Taleb has fully examined these questions and This Interview of his I found very useful.
      http://www.econtalk.org/archives/2013/09/taleb_on_skin_i.html#.VaZCuLFowo4.blogger
      http://letthemconfectsweeterlies.blogspot.se/2015/07/so-how-much-skin-do-troika-have-in-game.html
      http://letthemconfectsweeterlies.blogspot.se/2015/07/on-skin-in-game-interestinf-question.html
      I was looking at your Seeds report for Greece earlier and the Curves certainly do not point to the huge disaster that has unfolded there in the last 7 years Which is more properly expressed by the curves in this blog http://letthemconfectsweeterlies.blogspot.se/2015/07/bricks-without-straw-pharoh-merkel.html

      The Stock taking point I make is a serious question that needs addressing Both in terms of the existing system but any proposed energy based alternative. Energy Investment Decisions I would argue are better made in local scale up to regional scale levels and not from Supra National down to national levels.It really boils down to a question of Scale and Democracy.

      Whether it is Energy Based Exchange Tokens or debt based debt tokens the political question remains the basic one of what is the balance between Subsidiarity and Centralisation a Balance the EU and ECB has badly wrong and which the Fed and US Federal Government have badly wrong and which has also been got badly wrong in the UK,
      I live in Sweden where subsidiarity in Local Government is very real it is also true that subsidiarity remains at the core of the Success of Germany. This Interview with Prof Richard Werner is very good on the lessons from the German Model.
      https://vid.me/fEw7t
      https://www.rt.com/shows/renegade-inc/379579-uk-finance-curse-suffer/

    • Roger:

      Thanks. I’m glad you mentioned that download for Greece, as I really need to replace these with new ones. Point taken, though.

      You’re right, too, about local decision-making. One implication of renewables is that they change the economics, taking away the economies of scale that have hitherto favoured small numbers of large generating sites. This has been called “utility death syndrome”, and has been discussed here before – and it certainly favours localism.

      The UK is extremely centralised, as I know becaise I was a local councillor for quite a few years before I emigrated. British energy policy has been inept, putting off nuclear replacement decisions for far too long, ending up with the hugely expensive Hinkley Point(less) project, and spending vast sums subsidising wind.

  3. As much as I appreciate your financial analyses, it’s good to see you back on the fundamentals, being the title of the site.
    Will you soon be providing a parallel view of the UK (especially re energy), or is that too close to home?(!)
    (Sorry if you did and I missed it).

    • Thanks. The surplus energy economy is certainly my main interest, but, alongside this real economy of energy, there is a financial economy as well – and I’ve been aiming to chronicle the grotesque mismanagement of this system, and the appalling damage being done by policies of ultra-cheap money.

      I can certainly cover the UK again – most recently, I examined the risk of a sterling crisis, but I can subject the UK to the same kind of analysis presented here for the US. I had been planning something on China, but I can be flexible. I also need to look at how the next crash is likely to happen, but that can be brief.

  4. Hi Tim

    Thanks for another insightful analysis into our problems.

    The ultimate difficulty is that, as you say, it is “impossible” for Trump (or anyone else) to improve economic prosperity for the average American. This means that there are no easy solutions to hand (or even moderately difficult ones) in which case the politicians are only going to be interested in kicking the can down the road for as far as it will go. In a way it’s not the source of the difficulty that matters (a deteriorating energy equation) it’s the fact (deteriorating prosperity).

    As I see it many economic issues are based on technology and science and the “real” world; money does tend to confuse matters and is, as you imply, somewhat irrelevant. I see the deus ex machina in the form of technology, specifically AI and robotics which will provide us with the next wave of inventions. However, the widespread use of this technology is likely to create as many problems as it solves and an easy transition from the position you outline to one that might be more sustainable with the use of this means will not be easy.

    • With some honourable exceptions, politicians do have a tendency to avoid unpleasant choices. After the GFC, for instance, they largely abdicated from economics, handing the mess over, “lock, stock and barrel” to central bankers, who, of course, are unelected worthies. Oddly, I think Mr Trump may be braver than most when it comes to difficult decisions.

      I take the point about AI and robotics, but in a fundamental way there is a contradiction here. Using robotics means replacing human energy (which we have in abundance) with inputs of energy (far likelier to be in short supply). If workers are replaced, what happens to demand? And to whom do the proceeds accrue – to the owners of the robots?

      A dystopian view might be that all the revenues go to the owners of the robots, essentially the big corporates, who then – via taxation – dole out a minimum to the millions of people no longer employed. This looks like a recipe for mass unrest.

      In any case, I’ve often wondered why machines are used to replace people in some situations. Near where I used to live, a car park attendant was replaced with a pay-and-display machine – but at a huge cost, which would take umpteen years to recoup from the wages saved. Moreover, you still have to inspect tickets, presumably – and a machine can’t keep an eye out for crime. In short, this made absolutely no sense whasoever as far as I could see.

  5. Hi Tim

    Another nice clear post. From the comments it obviously remains very difficult for people to separate money from wealth. As you clearly demonstrate with SEEDS all economic activity requires exchanges of energy. Productivity per capita has been a function of energy leverage. As the energy per capita declines we enter an energy deleveraging situation. This basically makes it impossible to pay back debt. What can’t be paid back won’t. At some point very soon the system will crack under it’s own weight.

    It seems in the last few years to paper over the crisis all surplus value has been tapped to perpetuate the present system. There was really no choice. So values have been stripped from retirement systems. The bond market is turning negative. Consumer debt has skyrocketed. Corporations have borrowed to buy back their own stock. It’s all evidence of capitulation. The oil majors are in liquidation.

    All the while we see the top 1% bursting in “wealth”. But really what else can be done? Without real economic growth working because energy is shrinking per capita the printed capital is stranded in equity valuations. Is has to go somewhere. PEs are now completely ridiculous. Zombie companies are all over the planet. The biggest losers like Tesla, Amazon and Uber have the biggest valuations. Strangely people think this is a new normal.

    Sadly there is no way out. Particularly for the industrialized economies, particularly as their demographics are aging and the youth have been snared by educational debt. This will lead to a crash as there are no future buyers for investors to sell to. The ECB and Fed as well as all central banks have done a fantastic job of papering over this reality by becoming the buyers of last resort. This will eventually end in a currency crises.

    • Hi JT a good post. Cheap energy led to a massive increase in population growth along with the technology to help people live longer which we may longer be able to support.

      We are now entering very dangerous territory. I did send my MP a link to this site – but although the email was acknowledged – I never recieved a reply despite putting ‘The danger we’re in’ as the title.

      Amongst all the Government’s economists and those who write for publications like ‘The Economist’ surely some of them must be aware of the crisis we face. However it seems like they’re not.

  6. Donald

    Thanks

    I think a major problem is classical economics which has been doctrine in advanced education has eviscerated thinking ability. Tim’s posts are a breath of fresh air. But his reasoning doesn’t compute with mainstream.

  7. Unfortunately Tim lacks the appropriate institutional membership [which They grant], therefore he cannot possibly know what he’s talking about.

    What I truly appreciate about Tim and certain others is how their thinking operates from first principles, because either they have no training in classical economics, or they do but are also lateral thinkers.

    The people Up There certainly know that access to inexpensive energy is paramount, otherwise the U.S. and others would not have done so much harm in their pursuit of oil over the last hundred years, under various pretexts.

    Besides, some of those people do not have their heads in the sand – they read and understand science – and they know the ideas here must be excluded from the mainstream. If the writing on here and similar sites were mainstream, most people would be far less accepting of existing political doctrines, the most critical being devotion to Growth At Any Cost.

    Hence the light continues to shine on classical economics.

    Some of us are waiting for it to crash head-on with the laws of physics.

    I don’t think physics will suffer much, but the collateral damage could affect a few billion humans.

    • Your so right Martyn

      What is also missing is the fundamental understanding of how capital creation serves as the financial arm of government. So the government has a natural bias against revealing how it’s current accounting works Historically government funding has always struggled to finance it’s operating costs. With the creation of a central bank it became easy to float the cost. Here in the US the tide turned in 1863 with the National Bank Act.

      So I guess it’s in the governments best interest to protect and propetuate the existing system.

      The very thought of limits to energy terrifies government.

    • I think I need to point out that, even where conventional economics does supply the answers, there’s an unwillingness to act on them.

      Here are two examples.

      First, we know that a low-wage economy is a bad idea. It undermines demand, as well as promoting borrowing and undercutting taxation. But little is done about it.

      Second, we know – have known ever since Adam Smith – that competition is the key to progress, innovation and growth. Yet America, once the home of trust-busting, doesn’t break up over-dominant players, in a whole string of industries, including air travel, cellphones, utilities and, perhaps above all, tech.

  8. Poor Trump, he only told it like it is for ordinary Americans: decaying, crumbling infrastructure, jobs lost to Asia and having to watch a select few lining their pockets like crazy. Unforgiveable. Unspeakable. Deplorable!

    As regards the unorthodoxy of the views expressed here, it’s worth nothing that the ‘radical’ Left in Europe also promises its voters growth, only with radical redistributive policies and jobs for life instead of wicked capitalist insecurity.

    Marx and i-phones. Oh,and wind turbines. Growth is, conceptually, the only game in town.

    Also interesting to note that a majority of young people in Europe claim to be in favour of ‘revolution’: As if that could possibly solve the great energy predicament. Clueless. In Britain, the revolution will probably be Corbyn.

    As a footnote, Tim, Spain does indeed look superficially ‘better’, ie the headline figures rising employment, GDP growth, etc, but the reality for the young is simply dire. If there are more jobs, many of them are 800 euros a month, or less, even in the ‘wealthy’ provinces. In one such, in 2008 5,000 workers aged 16-24 were employed in construction: today….. 0. Some of those will have got bar and hotel jobs. many went abroad to work in the UK, like the brave Basque man who died at London Bridge protecting a woman. Purchasing power has fallen about 20% since 2008, but food deflation has been helpful in that respect, and families do help one another more – in fact, it’s enshrined in law that you must do so. Students hang on and on at university, putting off the day of having to find work.

    • Very true. I’m always careful not to join in the ‘chattering classes” condemnation of Mr Trump. He hasn’t yet had time to do very much, and we should respect the voters’ choice.

      I agree with you on all that you say here. In the UK, it’s likely that the “revolution” will indeed be Mr Corbyn. To become electable, Labour needed to repudiate its recent past – and that what he’s done. I expect centre-left parties elsewhere to do the same.

      Spain certainly has its problems. But it has a far stronger society than, say, Britain. That’s one reason why I live in Spain – society is healthier, more supportive, and less ‘selfish/greedy/aggressive’ than the ‘neoliberal’ economies.

      As outlined in these pages before, I think the extreme, “laissez-faire” ideology of recent times has been an economic disaster, but it has also been socially corrosive as well.

  9. I think Corbyn has won the argument among the naive young.

    A friend of mine went to great expense to put his children through public school (having been denied university himself due to lack of funds and the need to earn to support his widowed mother – later rising to some distinction in his profession) only to find his sons indoctrinated with Left-wing prejudices at school -ardent Corbyn supporters and call poor old dad who is the nicest chap in the world a ‘facist’!

    The Conservatives are now ideologically bankrupt and can offer only repellent or inefffective figures – Corbyn almost seems imbued with romance and charm in comparison.

    May I ask which province you live in?

    As a Spaniard in England, I do not trust my compatriots one bit -although you have the advantage of being outside the vicious political hatreds which seeth and boil in Spain. As a ‘guiri’, however, you will be seen as irrelevant, and only have to keep your head down.

    My grandfather was almost assassinated in the Civil War. His brother was effecttively murdered in his place.

    Spain is superficially cohesive and warm until….the knives come out. A cruel people, far more so than the English, who are merely -at their worst – brutal:the Berber and Iberian blood makes the difference!

    I also think it has the last vestige of the old, callous, middle-class of the Victorian age, which truly hates the workers and treats them with contempt. The lack of decent ethics in the professional classes is also a serious problem – but that erosion has occurred everywhere. The rule of law is also very weak.

    A cousin of mine is very well-connected indeed, and he says that if you knew how the elite of the Right speak at private dinners, ‘you would reach for your passport!’ He has to mix with these awful people for business reasons, and entertain a lot.

    • Let me deal with the British situation first, Spain later. (In answer to your question, Ciutadella).

      I’m a Conservative by instinct, and indeed have done a lot of work for a leading Conservative think-tank. But I am “a social Conservative” and “an economic pragmatist”.

      In recent times, much of the party high command has been taken over by extreme “laissez-faire” economics. But pragmatism makes me believe in the “mixed economy” – the best of private and public sectors, together – and in redistribution, from the rich to the poor. I don’t believe “anything goes, so long as it makes a profit”. We need to be more pragmatic than this, and much more ethical.

      This extremism has done enormous economic damage – in fact, my private view now is that the UK economy is heading for a catastrophe which can no longer be prevented. It’s also done huge social damage. Even more tragically, no alternative was available after “new” Labour adopted the same economic extremism.

      The young have been screwed, on everything from education and jobs to homes. I’m not saying they should vote for Mr Corbyn. But I can see no reason at all why they would vote Conservative – and I’m pretty sure they won’t. Obviously, if the Conservatives make a disaster out of “Brexit”, things will get worse even more rapidly.

      If I’m right that the UK economy faces disintegration, of course, all political assumptions will change.

    • I understand your comments about Spain, and there is certainly a lot of scope for improvement. But Spain, in my experience, has a much stronger society. Perhaps as a result, I much prefer Spanish people. It’s also a very much freer society. Although I’m not a Roman Catholic myself, I respect and admire the Catholic influence on society.

      Of course, I’m not unaware of problems. Perhaps the most obvious is the movement for independence for Catalunya, and, in a sense, Balears is part of “greater Catalunya”. I do not have a view on the independence issue (even though Barcelona is my favourite City anywhere).

      More help is certainly needed for young people.

      Another big issue is tourism. Here, properties cannot be let to tourists without a licence, which really means that only detatched villas in their own grounds, or self-contained town-houses, can be licensed. The penalty for infringement is E 30.000. This system has worked well.

      But the problem now is the so-called “sharing” economy. Barcelona wants to take a very tough line, and I agree with 100% with this, hoping Madrid will agree. Licensed properties do not deprive local people of homes, because few would want or could afford detatched villas or large town-houses anyway. But “sharing” certainly does – and the anger over this, believe me, is very evidently increasing.

  10. The currency game is over. The £ is just another asset that belongs to the croupier.

    Casino’s on fire. Get out.

  11. Many of the commenters (and readers, surely) already have realistic assessments of the current global economies. My question now is: What will arise from the ashes of the current debt-based economies which ignore the energetic realities?

    I think this is an important question to ask as we have recognised the inevitable end of the current system (which could range from next few years to decades, in my own guesstimate). A realistic foundation of future economies needs to be laid down ASAP or we face a a risk of regressing back to a more savage and primitive society. We could already observe signs of the regressions in multiple localities in the world.

    Currently, the only viable movement I see is the “Simpler Way” initiative espoused by Ted Trainer (http://www.resilience.org/stories/2016-07-02/sustainability-the-simpler-way-perspective/). What are your thoughts on our future options?

    • The situation now is that we’re in the deeply uncharted territory of monetary manipulation, seemingly with no way out.

      In the US, I see little prospect of rates moving upwards towards normalization, despite Mrs Yellen’s good intentions. Britain won’t raise rates unless GBP falls very much further. The ECB may be nearer to ‘tapering’ QE, but is nowhere near the next stage, which is raising rates. So the madness – and its collateral damage – goes on.

      Logically, what happens next isn’t a banking crash, but a loss of trust in currencies – a ‘run on money’ rather than a ‘bank run’. That’s the ball that the policymakers aren’t watching. The currency at greatest risk is GBP. So, as the UK predicament keeps deteriorating, there’s likely to be a ‘Lehman moment’ for sterling.

      The collateral damage is likely to be huge. That will plunge us into a “flight to quality”, and big defaults as the local value of weaker countries’ foreign-denominated debts becomes unsustainable.

      That’s where politics comes in. Monetary adventurism has been deeply divisive. The general public will reject the incumbent establishment, hopefully through the ballot box, though unrest cannot be ruled out.

    • @Ronny,
      Your question is one which I spend much time deliberating over. I see the crash coming and I want to try to predict what life will look like once it happens.
      Fore warned is fore armed and all that.
      Commenters to previous article here on Dr. Tim’s blog have suggested this “simpler-way” approach, and I also feel that this is the way forward.
      However, with a UK population of 65 Mio , this becomes impossible. We cannot all be subsistance farmers on this small island. It has been suggested that the UK can support 20Mio, but that would entail culling 2/3 of the present day population. War is the only way of doing that, and a bloody big war too !
      I am more fearful for the lives of my sons, my nephews and nieces than I am for myself. I think I can see myself through the next 240 Months or so, although my later years may well be spent in a prison cell as Europe and the UK morph into police states under Martial Law. I have never been taught how to be PC.
      The is no plan in place for the future because our politicians can see no further than the next election. This means that “Muddle Through” will be the course of choice, and that means going from one knee-jerk reaction to another. The British have got no competent leaders, because competence in any job is no longer a pre-reqisite. All you need these days is to “Look the Part”- we live in the “Age of the Image” after all. That is why there is this adulation of Celebrity in the UK, it’s all show and no substance.
      As a net energy importer and also a net food importer, the UK will not have much going for it, once the financial industry is crippled and the property market crashes. The UK will be forced to ‘cut its coat to suit its cloth’, so a massive reduction of population must be on the cards.

      I recently re-read Orwell’s “1984”.
      I think that life after the crash will be very much like that.

    • Johan

      I think you kid yourself: there is no way to predict how things will turn out or come up with a sensible plan for survival in the event of the sort of collapse you indicate.

      The fact is that we are not used to the sort of disorder that can be seen on every page of a history book; we are used to peace and some degree of prosperity and that dulls the senses and makes us less able to survive the type of hardship that we might have to endure. People here did endure during WW11 but if we had a replay could we (myself included) endure it now? I have my doubts.

      This is not an issue of technique or “How to survive and prosper with ten pieces of string and an empty baked beans can” it is an issue of psychology and temperament and most people haven’t got what it takes and why should they; this is not a criticism?

      I have visited countries which are somewhat “edgier” than Western Europe; I have visited six of the countries in the ME for instance and these places give off a different atmosphere, despite being at peace, and the type of collapse we are talking about here would be many times worse than just “edgy”.

    • Speaking only about the economy, the outlook for the UK looks very much worse than for most comparable countries. According to SEEDS, the 17% deterioration in prosperity since 2000 is now accelerating, with a further 19% fall likely by 2026.

      Even those who look only at conventional economic measures should be able to see this by now. Here are just some ‘conventional’ indicators:

      – Real average wages have been falling since 2009, and the rate of decline is increasing because of forex-induced inflation.
      – The fall in GBP hasn’t boosted either trade or GDP.
      – Growth is now flat at best, with both production and services trending down
      – Debt continues to increase.
      – The only growth engine, consumer spending, is poised to stall, now that the BoE has had to put the brakes on consumer credit expansion
      – So a ‘one-trick pony’ is becoming a ‘no-trick pony’

      One can readily see that this will have political implications. Looking ahead, the next twist in the tale might well be a further fall in GBP. At that point, raising rates might become inescapable. If that happens, the implications for property markets are obvious. Finally, all of this is compounded by the pitfalls of (a) “Brexit” negotiations, and (b) a hung Parliament.

      A reader here has suggested a US-style SEEDS assessment of the UK. I might do it. But it will not be pleasant reading.

    • @drtimmorgan
      1) I completely agree that the ongoing monetary experiments will not end well. The declining rate of returns on investment reflects a system that is struggling with ever-increasing economic rent, as per your ECoE concept. The pristine frontiers and cheap energy which enable the past decades’ high returns are in declining supplies. The fact is: The 1970-1990s rates of returns is an exceptional case and cannot be assumed sustained indefinitely. It will end, and along with it, all the promised pensions as you mentioned in your essay. In short, there is no way interest rate could be increased due to the extreme difficulty of getting high returns in reality (related to limits to growth) AND the increasing stock of consumption-debt + declining income.

      You mentioned “seemingly with no way out.”, and I agree. Back in 2008/2009 crisis, at least China with their command economy was propping up the demands for resources. Otherwise, economic activity would have flat-lined in many countries (e.g. Australia).

      2) I would like to understand why you think GBP is the currency with the ‘greatest risk’. My idea of a ‘run on money’ is due to a total loss of productive capacity of a nation and the inability to import basic goods and services into the country. Are you saying that the gap between UK’s real productive capacity and current GDP figure is that huge?

      3) I guess my issue with the current political system is that the public themselves are holding on the the ‘growth’ mindset, plus is there a viable party working on all these fundamental issues out there? Will the public want to hear what you are discussing?

    • I’ve just read through all the comments – a bit depressing but realistic. I remember reading an article around the time of the last crash which said that children in the future will look back with envy at what previous generations enjoyed. Cars – flights to exoctic destinations – decent health schools and social services.

      Personally I’m sick and tired of some sections of the press with their hysterical headlines boasting of our 0.3% growth beating expectations so we were right to leave the EU after all (There we are we told you so you pathetic remoaners!)

      Of course there are far worse headlines – focusing on footballers and their wives for example. As a test I left a comment in the Daily Mail supporting us remaining in the the single market – I received what amounted to hate mail replies. Unfortunately certain factions of the DM readership appear now to be posting comments in the Guardian.

      To me our predicament – thanks to the clear writing of Tim and others – seems perfectly clear but not to our politicians who must be stuck with extremely rigid thinking. What is so difficult in understanding the fundamentals that if you have to put in more energy to extract oil – the less there is for everything else?

      However I’m still hopeful of further breakthroughs in technology that will help stop the decline – but we’re all going to have to make do with less in the coming decades.

      Question – does buying a new car make you feel happy?

    • @BobJ,
      thank you for your comments, although I do think you may have mis-read my meaning.
      I would like to point out that I am NOT kidding myself in any way !
      My eyes and ears are wide open and are scouring for new information at all times. I have no hard and fast plan, this is a work in progress, for me and for all of us. We all see the danger, but none of us can see how it is going to play out.
      What I said was that I think about these things, I did not say that I had any answers to them. I merely suggested that we might all be a lot poorer economically, and that the states’ control over us will be considerably greater.
      I am not offering anybody a survival guide for 1984.

      I take your point that we are unlikely to have any experience of what is likely to lie ahead. The society of the generation that survived WWII, is not the same society that we have today. For one, we no longer have the same social cohesion. Political correctness prevents us from speaking our minds freely, but that does not remove the resentment that some people still feel. There are many factors that we all need to take into account in our preparations. I may not even be able to protect myself or my loved ones from what is to come, but I will not go down without at least trying.

    • @Johan and Bob

      “Commenters to previous article here on Dr. Tim’s blog have suggested this “simpler-way” approach, and I also feel that this is the way forward.
      However, with a UK population of 65 Mio , this becomes impossible. We cannot all be subsistance farmers on this small island.”

      I don’t believe that we can all be subsistance farmers either! But keeping chickens that have enough room to find their own food; establishing a good plot of calorie dense root veg; and relearning how to ‘make do and mend’ – these are simple, positive steps that make sense whatever happens.

      ‘This is not an issue of technique or “How to survive and prosper with ten pieces of string and an empty baked beans can” it is an issue of psychology and temperament ‘

      Exactly. My grandfather kept his family in better food and health through and after the war by having the psychology and temperament to keep chickens and grow as many calorie dense root crops as he could.

      Sure, it won’t solve much – but food is food. It’s better than nothing!

    • @Johan & Default Options

      First of all Johan apologies if I came across a bit strong on this; I don’t mean to and am certainly not patronising on this subject.

      Firstly and perhaps most importantly we are now much more urbanised than we we were even fifty years ago so any solutions via subsistence will require state direction as we had in WW11 and, even then, it may simply not be possible.

      In some ways Default Options you’ve made my point for me. Your grandfather was in a way used to this more primitive (but probably better) way of living so a change for him would be relatively easy. The problem we have is not merely that we have become so much more reliant on technology but we have lost the temperament and psychology of co-operation and sacrifice. As Dr Tim rightly says we have become a much more selfish society living on a knife edge and this is exactly what we don’t want in an emergency that is likely to require much more co-operation and resilience.

      What I find somewhat depressing is that with a refusal of many to consider issues like climate change or the decline of the energy surplus, which, as Dr Tim says, is not new or demographics or AI we seem to be adopting a head in the sands approach which adds up to the accidental extinction of the human race not “mere” short term survival. If you think this is fanciful someone has calculated that Japan will “disappear” as a nation at a date they have calculated (It is August 16 3766) due to its demographic problems?

    • Thank you, BobJ.
      Everybody who has or has had teenage children, knows the frustration that we all feel. Trying to get through to them on matters which are of significant importance to their own future, is like headbutting a wall. The problem is though, that they just live for the day, they are not really interested in the Big Picture !
      They think that they are immortal and will live forever, and every day will be the same as today.
      That is also why our politicians get away with being so incompetent, its because nobody really cares. Our modern financial system with an unlimited supply of credit, enables us all to live far above our means. So there are no restraints holding us preventing back from doing as we please, and consuming more than we need.
      In the Bad Old Days, prudent husbands would control their fickle and spendthrift wives by simply saying, ” We don’t have the money ! We cannot afford it !”
      Today, that is all gone, it’s ” I want it, and I want it now ! and I want that, and that, and that too !”
      So in many ways, it is today’s financial recklessness which has allowed our society to decay into the selfish it’s-all-about-me Ensemble that we now have.
      It is no longer a society, there is no community, there are no interpersonal synergies anymore, we don’t really need each other, it’s- Live and let Die.
      The Inconvenient Truths that are out there, the fact that energy is getting more and more expensive is ignored. The fact that our planet can only sustain a finite number of people is ignored. The effect that throw-away consumerism has on our environment is ignored.
      In the absence of any constraints, people will not make inconvenient choices.

      In the UK, the day of reckoning is getting close, when, as Dr. Tim predicts and I agree with his rational on the subject, the currency will collapse.
      I cannot see an event like this being contained. It must and will have international consequences. GBP is what, the 3rd or 4th most traded currency on worldmarkets ? The fall out from a GBP collapse will be immense !
      But that aside, the UK, ( if it manages to stay together as a UK ) is going to be a much changed place. With very little real money left in the economy, all those Sky TV subscriptions and weekly visits to the hairdresser, will be things of the past.
      Real unemployment will be sky-high, as the public sector is culled and the service sector implodes on itself.
      However, I do see an increase in one indicator : Emmigration !

  12. Many thanks for your replies, Tim.

    I fear you are correct about Britain,and the young will be deeply disillusioned when they realise that Corbyn cannot cure all ills. Too far along the wrong path, nor is he a man of any great calibre. Really, the vistas of British politics are lamentably depressing.

    Since the destruction of intelligent feudalism, as exemplified by the best of the landed families -the Howards of the 18th century for instance – profit has gone long before social cohesion and decency. An honouable exception, of course, for the great philanthropic industrialists.

    Margaret Thatcher, a very great figure, released the energies of the British, but alas they were misdirected.

    With respect to Spain, of course you can, as someone who doesn’t belong, float above the vicious internal quarrels and deeply-rooted corruption. What Spaniards most like to hear from foreigners is the usual admiring spiel of ‘Great traditions, warm, lovely, people, such history, how tragic the Civil War was(nicely non-committal)!’ etc.

    Alas, as a native I would have to choose sides. In fact, and this is what makes life in Spain intolerable to intelligent and dispassionate people, the side would be chosen for me, and if I were to choose otherwise I would be a traitor, no more nor less.

    Most preoccupying though – and for a foreign resident too – is the recent quite dramatic erosion of civil liberties in Spain, and the immense enhancement of the powers of an already more-or-less lawless police force, which has never ceased to torture.

    This has disturbed many intelligent Spaniards, and it is shameful that the EU has allowed this blatant deterioration in basic civil liberties.

    • Interesting, thanks.

      Reflecting on this, I remembered how two of my Spanish friends have widely differing attitudes. One, who is older, barely hides a regret that the era of Franco ever ended. Another, younger, seems to thinks that era never really ended at all.

      They cannot both be right!

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