#130: Grand Bargains, dangerous choices?


One of the most ill-informed critiques of China says that, as a one-party Communist state, the government need take no notice of public opinion. The reality is quite different. It is that a ‘grand bargain’ exists between the state and the public. For their part, citizens accept the denial of certain rights which are taken for granted in many Western countries. In return, the government delivers steady improvements in prosperity.

There’s a striking parallel to this in the United States, because the presidency of Donald Trump is founded on a very similar ‘grand bargain’. Voters disaffected with a self-serving establishment have trusted Mr Trump to restore prosperity. Just like Beijing, he has to deliver.

It’s a measure of America’s political disconnect that, right from the start of his campaign, self-styled ‘experts’ dismissed Mr Trump as a “joke candidate” with no chance whatsoever of making it to the White House. This mis-reading of Mr Trump – and the consequent shock of his victory – was more than just wishful thinking. It was based on a misunderstanding of the central issue at stake.

This issue was, and is, prosperity. Whatever conventional economic statistics may say, Americans have been getting poorer over an extended period. This, plus anger at the perceived enrichment of a tiny minority, was the driver behind the Trump victory. It helped, of course, that his opponent seemed to many symbolic of an entrenched and privileged elite. Ultimately, though, “make America great again” translates as ‘make Americans prosperous again’.

In the same box

This interpretation puts America and China in the same box. Both are regimes whose imperative is the delivery of prosperity for the average citizen. In America, SEEDS analysis indicates that Mr Trump cannot deliver (and, in fairness, neither could anybody else), because trends that have made the average American 7.5% poorer since 2005 look irreversible. For China, average prosperity has increased – by 41% over the last ten years – but continuing to deliver has already become very hard indeed, and isn’t going to get any easier.

The parallel goes at least two stages further, the operative terms being energy and debt. Chinese energy consumption has increased by 46% over a decade (and it’s far from coincidental that prosperity has expanded by a similar 41% over the same period). But sustaining this critical growth-driver is looking distinctly problematic. Whilst China will seek out every oil supply deal it can get its hands on – helped, perhaps, by the mutual hostility between Washington and Tehran –  switching towards coal seems the favoured strategy. America, too, may re-emphasise coal. In neither instance, though, is coal likely to be an effective fix.

Thus far, America has benefited enormously from the dramatic expansion in shale oil output. In this, the United States can be grateful for the irrationality of investors, who have been prepared to pour enormous quantities of capital into a sector which is, by definition, a cash-burner, never having covered its capital costs from operating cash flows even when oil prices were well above $100/b. Tolerance of cash-burning is, of course, a direct corollary of ultra-cheap money.

The fundamental problem with shales is the ultra-rapid rate at which production from individual wells declines. This puts operators on a ‘drilling treadmill’ which requires ever more drilling just to sustain output, never mind increasing it.

It helps shales, of course, that investor generosity looks almost limitless. Anyone who can ignore the mismatch between record equity values and deteriorating prosperity – and who can meanwhile buy in to the issuance of perhaps $1 trillion of debt for no better reason than stripping equity out of corporate capital structures – isn’t likely to baulk quickly at cash-burning by shale companies. Even so, there must be limits to how quite much more capital shale drillers will be allowed to burn their way through.

Fortunately or not – and from what we can judge from their actions – America’s military leaders seem more realistic, certainly where shales are concerned. Service chiefs, it seems, have never bought in to the “Saudi America” narrative of energy independence. The Navy’s carrier groups, costly assets whose main functions include both power projection and the defence of seaborne energy supplies, have not been sent to the scrap-yards. Neither has America de-emphasised the policy importance of the Middle East.

Fundamentally, both Beijing and the Trump administration need to deliver prosperity – and energy is the greatest single threat to their ability to do so. The real issue here isn’t just the maintenance of supplies, but cost. The relentless rise in ECoEs is felt first in the cost of essentials, not just energy itself but utility bills and all the other non-discretionary outlays which drive a wedge between income and prosperity. ECoE is the big problem, for Mr Trump as much as for Beijing.

Debt and self-deception

If energy is one problem facing both America and China, another is debt. More specifically, it’s dependency on a continuing process of credit creation, a dependency which lies at the heart of the “monetary adventurism” which has characterised the economic landscape since the 2008 global economic crisis (‘GFC I’).

Here, time-sequencing has differed between China and the United States. Between 2000 and 2007, America (and most other Western economies) went on a debt binge. In the US, and stated at constant 2017 values, debt grew by $12 trillion over a period in which GDP expanded by only $2.6tn. This – helped, of course, by acquiescence in increasingly dangerous practices – led straight to GFC I.

Prior to 2008, Chinese policy on debt had been fairly conservative. What we’ve witnessed since has been a truly breath-taking change. Stated at 2017 values, Chinese GDP and debt in 2007 were, respectively, RMB 37 trillion and RMB 60tn. Today, those numbers are RMB 81tn (a 120% rise in GDP) and RMB 251tn (a 320% leap in debt). Whilst GDP has expanded by RMB 44tn, debt has soared by RMB 191tn.

Even more strikingly, the rate at which China has been borrowing over the last decade has averaged RMB 19tn annually. GDP has averaged RMB 60tn over the same period. So, on average, China borrows close to 32% of GDP each year.

Nobody else comes anywhere near. America typically borrows 5.8% of GDP annually. That’s more than twice the rate of the most optimistic interpretation of growth, so it’s not sustainable, and highlights how much “growth” has been nothing more than the simple spending of borrowed money. But it’s nowhere near the 31.8% of GDP borrowed annually by China since 2007. The global equivalent is 9%, but that, of course, is heavily skewed by China.

It has been suggested that China is throttling back on its propensity to pile up debt. There’s limited truth in this, in that China borrowed “only” 30% of GDP last year, compared with 38% in 2016 and 35% in 2015. But the numbers continue to look bizarre, unsustainable, and – potentially – lethal.

The United States, meanwhile, looks increasingly likely to revert to pre-2008 borrowing patterns. The budget outlook is for much higher levels of annual borrowing by government, whilst there seems to be no end in sight to the irrationality of converting corporate capital from equity into debt, not to mention the continued willingness of investors to finance cash-burners.

(In fairness to investors, it should be recognised that ultra-cheap monetary policy has presented them with ‘no good choices’, only bad ones or worse ones).

Both public and private borrowing – and especially the latter – keep injecting yet more leverage into a system already awash with risk.

China – the why?

As we’ve seen, the sheer rate at which China borrows looks reckless in the extreme. But ‘reckless’ isn’t an adjective that many would apply to the government in Beijing. Why, then, has China seemingly turned into a debt-junkie?

The answer lies in the prosperity imperative of the ‘grand bargain’. For the average Chinese citizen, prosperity has three main meanings – employment, wages and household expenses (which include housing itself). Of these, employment predominates. What this means for the government is that employment must continue to grow. It must grow at rates which not only exceed the rate at which population numbers are expanding, but must also increase at least as quickly as workers migrate from the countryside to the cities.

In stark contrast to Western profit orientation, this makes China a volume-seeker. If employment is the overriding objective, profit matters less. For businesses heavily influenced by state objectives, expanding employment (and hence growing output volumes) is an imperative, almost irrespective of profitability. An enterprise succeeds by this criterion if it grows employment, even if this achieved at a loss.

This shows up in the figures, where business has accounted for most (68%) of all of the RMB 191tn borrowed over the last ten years. Essentially, business has borrowed for the twin purposes of financing losses and expanding capacity. The latter, of course, has the by-product of depressing margins, often pushing returns on assets to levels well below the cost of capital. China is therefore in something of a vortex, where new capacity requires borrowing whilst simultaneously undermining the ability to service existing debt. An apparent effort to convert debt into equity failed pretty spectacularly, when it came close to crashing Chinese equity markets.

In one sense, this use of debt to sustain and grow volumes has a direct corollary in the West, where “zombie” companies have been kept alive both by ultra-low interest rates and by the willingness of banks to roll over (by adding interest to capital) debts which would otherwise have had to be recognised to be non-performing.

In another way, using debt to finance capital investment may seem very different from the West’s use of credit to bolster consumption. The difference narrows, though, when it is recognised that the Chinese version, too, uses debt to underpin the incomes of working people.

Moreover, the priority placed on volumes over profits has implications for trade, where Washington, at least, isn’t prepared to accept the continued influx of products seemingly produced ‘at a loss’.

Any way out of the box?

As we’ve seen, America and China are in the same box, both having an imperative need to deliver prosperity at a time when this is becoming ever harder to achieve. In both instances, debt is simply a time-buying expedient, creating apparent prosperity in the short term, but at severe expense and risk to the collective balance sheet.

These debt-based responses are not just unsustainable but are highly risky, too. According to SEEDS, the sheer scale of indebtedness – and the truly shocking rate of ongoing credit dependency – puts China in the highest-risk category, along with Ireland, Britain and Canada. America’s level of risk isn’t quite so elevated, and it’s no coincidence at all that the energy challenge, too, is less acute for the United States (for now, anyway) than it is for China. Another big difference is that China’s ills are the product of circumstances, whereas much of the escalation in American risk is self-inflicted.

It’s interesting to speculate on quite how far the parallel risks of America and China are recognised at the level of policy. From the Chinese side, we can be very confident that the energy challenge is recognised, and we can assume, too, that Beijing is well aware of the debt problem. Here, it cannot be emphasised too strongly that the issue isn’t simply the absolute quantum of debt but the extent of dependency on the supply of credit continuing at quite extraordinary levels. (This is why SEEDS measures these two risks independently).

The combination of risk and sheer size must put China near the top of the watch-list for those monitoring the likeliest epicentre for the start of GFC II. Whilst we cannot rule out, for instance, market slumps in the United States, a property price crash in Canada, debt problems and instability in the Euro Area, and further rapid economic deterioration in Britain, the combination of energy and debt risk in China dwarfs these threats, serious though they are.

It is sometimes observed that China’s banks are, in effect, under state control, as though this makes a potential rescue a simple and painless matter. In reality, the difference between the Chinese and Western positions is far less than it appears. Western governments, no less than Beijing, would have to stand behind their banks in the event of a wave of cascading defaults. It’s pretty easy to envisage a Western government having to nationalise (by whatever name) a bank whose equity value has disappeared.

The obvious solution might appear to be for the Chinese government to simply take bank debt onto the public balance sheet. The snag is that this involves issuing RMB to the extent of the banks’ uncovered liabilities. This reminds us of the observation that, in the end, the world’s debt problem is going to turn into a currency credibility problem.

The claim that money creation through QE ‘isn’t inflationary’ rests on a narrow definition of inflation. If your definition of inflation includes only CPI, this assertion may be true. But, if it is recognised that asset price inflation matters at least as much as retail prices, QE has already been extremely inflationary. Using monetary issuance to tackle stratospheric debt levels and bloated banking systems cannot be undertaken without severe currency risk.

What we are left with is that, on a worldwide basis, we have compounded “credit adventurism” with “monetary adventurism” in trying to square the circle of deteriorating prosperity. The snag is that neither credit nor money can resolve a problem which has its roots in energy.

Ultimately, rising ECoE is making us poorer, and is doing so in ways that may not be acceptable politically, but which cannot, without grave and compounding risk, be wished or manipulated away with monetary tinkering.

= = = = =

SEEDS 2.19 China 030718


264 thoughts on “#130: Grand Bargains, dangerous choices?

  1. Don Stewart demonstrates his lack of perceptiveness
    After thinking just a little more about the refugees versus the children in the cave. I now realize it is a classic case of what Daniel Kahneman called ‘heuristics’. All of us, seeing starving or suffering children feel unpleasant. We would like to relieve the unpleasantness. But as individuals, we don’t perceive that there is much of anything we can do about war-torn areas or governments which are doing evil things for their own purposes. And so, Kahneman suggests, we solve some related problem. In some cases it will be to go and work in soup kitchen one day a week….doing what you can and not getting bogged down in what you can’t.

    But going to work in a soup kitchen can become a drag, and it quickly becomes apparent to many volunteers that the needy are numberless and no real ‘progress’ is being made.

    So the next step is to watch on television as some heroic people (not us) do their thing and rescue some real children. The TV makes us feel like we are part of the solution…although we really aren’t doing anything but spectating. Same with spectator sports.

    Perhaps the same logic is behind the fact that super-hero movies are the ones making money. Jack Nicholson in Five Easy Pieces, never at ease in his situation and hurting the people around him, reflected a unique time when pop culture was willing to look at itself. That lasted a few years, and then Jaws and similar summer spectacles became dominant and that was the end of the navel gazing. Spectating is a heuristic which replaces actually doing something.

    Don Stewart

  2. It’s a complex World with Trump berating Germany for getting 60 – 70% of their energy supplies from Russia (not sure where else they can get them from – the US with its Ponzi fracking scheme certainly can’t export any – at least at a price which makes any sense)..

    Participating nations being criticized for not spending enough on NATO but as mentioned in a previous post – where’s the energy going to come from for continued arms growth – only Russia – in terms of our enemies – will have the energy resources.

    So Russia sells energy to Germany which it knows can be used by the later to help with their NATO commitments which is an enemy of Russia.

    It is a mad World which I find difficult to understand –

  3. Thomas Frank provokes some thought
    Full disclosure: I grew up in the same environment as Thomas Frank, only I am about 40 years older than he is. We both fondly remember ‘Midwestern Progressivism’, except I was a lot closer in time to the ‘cross of gold’ than he is.

    Thomas Frank has written Rendezvous with Oblivion, which is a collection of his essays on the general rottenness of American political and social and business practices. In one of the essays, he visits 3 presidential libraries, both of the Bush libraries and the Bill Clinton library. He characterizes the libraries as ‘hundreds of millions of dollars has been spent to cast, literally in stone, a given individual’s personal war with reality.’

    Above, I reiterated Daniel Kahneman’s theory of ‘heuristics’. After reading Frank’s essay this morning, it occurs to me that using heuristics is the path of least resistance for the powerless. If I don’t like Wall Street, I at least subconsciously, realize that there is nothing I can do about the power of Wall Street. If I think that my fellow citizens are making poor choices, what can I actually do about that?

    But a President is cut out of different cloth and is actually in a different situation. A person probably never gets elected to be President if they feel powerless. And once they make it to the oval office or the Executive Suite, they find that, indeed, there is a lot they can do simply by issuing orders. Now many, or most, of the orders they issue turn out to be disastrous, and Frank takes the presidential libraries to task for using all of the Disney Techniques to try to turn the disasters into victories.

    So I would now amend my theoretical structure to distinguish between the mass of people who realize that there is really nothing they can do about our most vexing problems, and the very few who rise to Executive positions who can actually issue orders which have consequences. I have no theory of how to get orders which are more rational to come from the Executive suites.

    Don Stewart

    • Interest piece. All I can do then is accept what is going on as it’s unlikely I’ll ever become the PM.

      Hey ho.

  4. Further indications of UK basic infrastructure disintegration in a Guardian article about the loss of bus services across the country – those subsidised by Councils who simply can’t do it any more. Short and easy journeys become impossible.

    I’ve had some awful experiences on the trains recently, part of the notorious new timetable screw-up, with even the platform notice boards giving inaccurate information; and on Saturday we had to abandon a short trip to Ely due to the total mess. So bad that it felt that even if one eventually reached the destination, return would be a most uncertain matter. As the stationmaster said : ‘Life’s full of little surprises.’ He’s had several months of this.

    ‘Great Power Delusion’? Exactly! If rationing is ever needed, I suspect the Brits would starve. I hope the Army are getting plenty of riot training.

    PS I recommend ‘Almogavar’ brewed in Catalonia. A cousin sent me a case and it was excellent.

    • Arriva have been cutting local lifelines in parts of Kent because they say the bus services are not profitable enough.

      The new train timetable was deceitful as many trains now stop at more stations.

      In 2000 the most trains journey time to London was 34 minutes – now it’s gone up to 48 minutes in many cases – slower than the slowest train at the turn of the century

      Hopefully locals who can afford cars will offer help to those who can’t in the future.

      Almogavar sounds nice.

  5. Extract form the D Telegraph

    A union has called a strike at Fiat Chrysler’s Melfi plant in Italy to protest against the huge sums of money spent by Juventus soccer club to sign up Cristiano Ronaldo – Euro 100m

    Exor, the investment holding of Italy’s Agnelli family, owns nearly 30 percent of Fiat Chrysler (FCA) and 64 percent of Juventus.

    Not setting a good example really.

    And by the way – yes England did get knocked out but Croatia looked faster and fitter in the 2nd half. No complaints – just sadness.

  6. The Ship of Fools found itself off a rather large island, and the Chief Scout Fool went ashore to see what was what.

    He returned rather hurriedly, saying: ‘Anchors away! Let’s get out of here, that place is so full of Fools that if they see the ship they’ll try to board as of right and sink us!’

    Safely out at sea again, the Captain Fool asked him what had happened on the island?

    ‘Well, I ascertained that – despite the surface buzz of activity and ceaseless industry – the inhabitants of that place were utterly careless of the fact (daily reported in the media) that their agricultural land is exhausted after decades of abuse, forestry for timber neglected, the air poisoned and killing tens of thousands each year, the ecosystem in general in collapse, basic necessities and technology crucial to the functioning of,well, everything, coming from thousands of miles away via fragile lines of supply, and that they haven’t a hope of feeding even half the population in an emergency. They are getting demonstrably poorer and less secure by the day, and have recently thrown the clueless young into impossible debt in return for an education of -in most instances – dubious value. I could go on, but it’s too awful to contemplate quite this level of Foolishness!’

    ‘Yes, yes, awful I see: but what do they talk about? They must have distractions to account for this?’ asked the Captain.

    ‘ On the whole, they do: football and fashion. But the serious Thinker Fools and Leader Fools do, of course, turn their thoughts to reality, and so they discuss how much wealth they have ‘locked up’ in housing; how the vast debt isn’t a real problem in the light of that; how this ‘asset wealth’ can be raided at any time through taxation to make everything good again; how they are a ‘leading model’, a Beacon, for the free world and have an ‘important global role’ to play as champions of Free Trade and democracy; how the world is in fact their oyster and dying to do business with them and invest; how borrowing at such low interest rates is only good sense and how ‘ every £1 borrowed makes £10 of GDP’; how their pitiful armed forces, despite having been effectively beaten everywhere in recent small wars with people who could actually shoot back, are ‘highly respected’; how they need to learn to be more like the Germans or Chinese, or Americans to become even greater; and how no one should ever, ever, mistake them for the Greeks, Portuguese, Spanish and other such feckless and imprudent fools who borrow what they cannot repay and live in a world of delusion. Total Folly!’

    The Captain laughed, then corrected himself and frowning said: ‘Quite right, we don’t need that level of blind Folly around here – we’d be out of a job ourselves!’

    And so they sailed off far far away from the – so obviously – doomed islanders.

    • The Bellman’s Speech
      The Bellman himself they all praised to the skies—
      Such a carriage, such ease and such grace!
      Such solemnity, too! One could see he was wise,
      The moment one looked in his face!
      He had bought a large map representing the sea,
      Without the least vestige of land:
      And the crew were much pleased when they found it to be
      A map they could all understand.
      “What’s the good of Mercator’s North Poles and Equators,
      Tropics, Zones, and Meridian Lines?”
      So the Bellman would cry: and the crew would reply
      “They are merely conventional signs!
      “Other maps are such shapes, with their islands and capes!
      But we’ve got our brave Captain to thank:
      (So the crew would protest) “that he’s bought us the best—
      A perfect and absolute blank!”

    • xabier, wonderful! It reads in the style of a fairy tale or fable, yet it is absolutely a true and fair account of the United Kingdom.

    • You might enjoy the song ‘They’re not here, they’re not coming’ by Don Henley (ex Eagles). It’s about why UFOs wouldn’t bother to come here.

      From memory, lines include “would they zoom across the universe, just to get McNuggets?” and “would they climb into the saucer, to find Orlando’s Rat* and hug it?”

      * Orlando’s Rat = Mickey Mouse

  7. I highly recommend the work of Vaclav Smil who is described Thus on his Blog
    Your comment is awaiting moderation.
    Vaclav Smil does interdisciplinary research in the fields of energy, environmental and population change, food production and nutrition, technical innovation, risk assessment, and public policy. He has published 40 books and nearly 500 papers on these topics. He is a Distinguished Professor Emeritus at the University of Manitoba and a Fellow of the Royal Society of Canada (Science Academy). In 2010 he was named by Foreign Policy as one of the top 100 global thinkers

    His latest Opus is Energy and Civilization: A History by Vaclav Smil widely available in lots of formats.
    Energy Myths and Realities: Bringing Science to the Energy Policy Debate
    by Vaclav Smil is another very welcome addition to the Discourse by Smil.

  8. https://www.gresham.ac.uk/lectures-and-events/part-two-prosperity-and-resource-scarcity-what-role-should-finance-play regular readers may enjoy this from our host from a few years back.
    A video of the discussion loads at the top of the page or there is a pod cast sound only for slower connections.
    Panel Discussion:
    Prosperity and Resource Scarcity – What Role Should Finance Play?
    Professor Paul Ekins, UCL Energy Institute
    Charles Secrett, Founder, The Robertsbridge Group
    Emin Eyi, Partner, SP Angel
    Dr Tim Morgan, Global Head of Research at Tullett Prebon Group
    Read more at https://www.gresham.ac.uk/lectures-and-events/part-two-prosperity-and-resource-scarcity-what-role-should-finance-play#0K4dXzTlSgYOeUPb.99

    • Good question.

      Several times over the last few years the UK has been saved by the timely arrival of ships carrying gas from the Middle East mid-winter.

      It’s like the accelerating transition to Veganism which The Guardian is pushing these days: not wise.

      Otzi the Iceman, reported in another article, knew better: it seems that he stuffed himself with ibex meat and fat – the latter apparently revolting – in his last meal, to face the cold.

    • Where the fire starts
      In the coldest face
      Is where the heart
      Becomes in place
      Of the finest arts

  9. A little off topic; your indulgence requested
    3 examples of how hard it is to change things and get a net gain out of it:

    ‘Concho Permian drlg costs +17% in’18 & +30% in ’17. Counter to shale playbook that costs falling. That’s all, it’s a change. Lateral lengths & well performance matter. Which lateral length to use? $ is $ so that’s what I show.#OOTT #oilandgas #oil #WTI #CrudeOil #fintwit #OPEC’ Art Berman tweet.

    So the first link shows that sea levels are going to rise for a thousand years, even if industrial society collapses tomorrow and CO2 emissions fall to zero. Yet the costs of the embedded CO2 in the air continue to extract their pound of flesh as infrastructure is destroyed. The second link shows that reverting to a more primitive society has costs as well as benefits. Net gains may be illusions. The third link shows that for all the ‘amazing technological advances’ in horizontal drilling and fracking, the costs are stubbornly high.

    Which just goes to reinforce Alice Friedemann’s point about the great gift we were given with fossil fuels, which gift is not likely to be replicated again. I’ll leave you to draw your own conclusions in terms of the enormous debt we have racked up and the prospects for actually making good on the debts.

    Don Stewart

  10. One more example:

    This short TED talk lays out the facts on the loss of diversity in the microbiome and the resultant explosion of chronic disease. It happens for monkeys captured in the wild and transported to zoos, and it happens to indigenous people in southeast Asia who come to the US as refugees. But it turns out that the most damaged group are long time residents of the US…we are characterized as the most damaged species thus far studied.

    So industrialization has been a two-edged sword. On the one hand, it has given us the food and life style which promotes a microbiome which leads to chronic disease. On the other hand, industrialization also MAY give us the tools to take remedial action.

    If one set out to calculate ‘physiological prosperity’, then any gains we have experienced since peasant farming days have been very much less than the change in GDP.

    Don Stewart

    • “A bit OT” is right! I would hardly expect anything else from the Guardian or the Washington Post, and I doubt if Mr Trump’s golf swing or his sleep will be disturbed by this.

      What I like most about it is the implication that, in telling lies, Mr Trump somehow breaks with political tradition. People like G.W. Bush and the Clintons were truthful, presumably, and “spin” didn’t exist before 2016. And maybe JFK and Richard Nixon were exemplars of truth-telling?

      I don’t buy it, somehow…….

    • Well it’s the current day distortion of the truth made worse by social media which was not around or less prevalent at the time of previous Presidents.

      Trump’s lies cannot be seen in a better light just because previous tenants of the White house lied too although Jimmy Carter was probably more honest than most.

      However getting any politician to tell the truth 100% of the time now – or in the future – will never happen. It’ll be interesting to see who they blame when decreasing prosperity starts to bite even harder or there’s GFC II.

      No doubt the UK will come under fire for not accepting chlorinated chicken and food soaked in corn syrup.

    • My point about Donald Trump was influenced by awareness of the MSM’s loathing of him. This reflects various agendas. Social media does a great deal of harm – whether it does any good to offset this I wouldn’t know, as I don’t use it (one look at Facebook was enough!)

      I for one wouldn’t favour admitting American produce, because farming practices in the US are dominated by big corporates, and that goes a lot further than just chlorinated chicken. Likewise, I would never eat at an American fast food “restaurant”, or knowingly buy any food made by a US conglomerate. The EU seems to take a similar line on farm practices – so, if the UK did admit these products, it could become impossible to export farm produce to the continent.

    • “What I like most about it is the implication that, in telling lies, Mr Trump somehow breaks with political tradition. People like G.W. Bush and the Clintons were truthful, presumably, and “spin” didn’t exist before 2016. And maybe JFK and Richard Nixon were exemplars of truth-telling?”

      The biggest difference is that Trump’s lies are not in accord with the political and media establishment’s catechism.

  11. I only watched part of one Trump campaign speech, and in that he pointed out very forcefully an undeniable fact which the status quo people who revile him as a liar most certainly do not like: the obvious decay of US public infrastructure, and of general prosperity.

    The demagogue actually plays the part of he little boy pointing at the emperor – not naked, but in tatters.

    Bernie Saunders also seemed to address the issue of decline and growing impoverishment, and was dealt with summarily by the Democrat status quo.

    • It’s disturbing to realise how many decent, ordinary people think very negatively about Mr Trump, simply because that’s what the media tells them to think. If the interpretation of him as the opponent of ‘the Davos elite’ holds true, he faces an uphill struggle, paralleling that of the “populists” against the unpopulists.

    • Sanders was also anti-immigration when he started his run before he fell in with the Democrat party line. There’s a quote from him from 2015 where he says something like “why would I be pro open borders? That’s a Koch brothers program!”

  12. As for US food: yes, it’s muck, and in a trade deal they would try to swamp the Brits with it. The UK for reasons of food security – as well as general quality – needs both to protect the best British livestock farmers, and ensure good access to food supplies coming over the Channel and Irish Sea rather than from much more distant suppliers.

    • There can be no doubt about this being accurate. The effect of US food imports on Mexico since NAFTA has been devastating both for pushing rural farmers off the land and proletarianizing them into shanty villages to work in factories for a nominal wage as well as destroying public health.

  13. John Hussman on our Ponzi economy

    Hussman lays out a persuasive scenario for how we get greater and greater leverage into the system. He also understands that real assets cannot be a debt that cannot be repaid.

    My question: Does anyone know how to estimate how global nominal wealth would change if we suddenly delevered to the extent permitted by reasonable assumptions about energy supply?

    Don Stewart

    • Interesting article, thanks.

      The closest I’ve got to that calculation is to work out the amount of deleveraging required to restore debt/GDP ratios to earlier years’ levels. Huge numbers result.

      A problem with all this – and a big challenge when building SEEDS – is the debt/GDP interface. How genuine is GDP in an age of rapid debt escalation.

      Simple example:

      GDP is $100bn and debt is $300bn. Ratio is 300%

      Now, borrow $100bn and hand all of it to consumers to spend.

      GDP is now $200bn. Debt is now $400bn. Ratio has fallen to 200%.

      Is this:
      – Really “growth”?
      – Sustainable?
      – Sleight of hand?
      – A Ponzi pyramid?

      What we could do (historically and projected) is debt per unit of energy consumed.

      Also, we could use surplus energy (net of ECoE) as the denominator.

    • The issue of security forces turning on the rich in their compounds is one I had considered before, but it seems like it has an obvious answer for getting the best odds: you need men with families onsite. The most dangerous thing is the single man with nothing to lose and the ability to breed to possibly gain by winning your wife or daughter (or granddaughter, etc). It’s not perfect but it’s probably the best you can hope for in terms of increasing your odds of NOT being usurped by your own security force.

    • I find the idea of drawing the rich’s desire to withdrawn to compounds for ‘The Event’ to modern entrepreneurial spirit a bit much. I think it’s just human nature for men with the means and the vision to see what is coming to act in this fashion. How is it any different from the Neolithic hill forts all around Great Britain, for example?

    • I don’t disagree with his points about the reality of the attitude towards technology and people, but I just don’t see the link between that and the rich wanting to set up bunkers to save themselves and their families when SHTF.

    • Three observations:

      Revolutions are usually the product of economic mismanagement.

      The authors of that mismanagement usually expect either to prevent the event (through coercion) or to survive it. They are usually wrong.

      Their better option, usually, is to change sides. Currently, this would mean abandoning their fellow unpopulists and joining the populists.

    • There is truth to that if that situation is one of a revolution being able to really make an alternative structure, but I tend to share the opinion that those oligarchs in the article have of things being pretty much screwed when “The Event” really occurs. I suspect we’ll see a round of revolution before then, but I don’t see it leading to any kind of sustainable situation given the resource constraints and complexity issues.

    • The people have no interest in disorder. When they do wrong, it is their error, and not their crime. But with the governing part of the State it is far otherwise. They certainly may act ill by design, as well as by mistake. “Les révolutions qui arrivent dans les grands états ne sont point un effect du hasard, ni du caprice des peuples. Rien ne révolte les grands d’un royaume comme un Gouvernoment foible et dérangé. Pour la populace, ce n’est jamais par envie d’attaquer qu’elle se soulève, mais par impatience de souffrir.” These are the words of a great man, of a Minister of State, and a zealous assertor of Monarchy. They are applied to the system of favouritism which was adopted by Henry the Third of France, and to the dreadful consequences it produced. What he says of revolutions is equally true of all great disturbances. If this presumption in favour of the subjects against the trustees of power be not the more probable, I am sure it is the more comfortable speculation, because it is more easy to change an Administration than to reform a people. Edmund Burke, These present discontents.
      1769, Edmund Burke began the pamphlet here given, Thoughts on the Present Discontents. It was published in 1770, http://letthemconfectsweeterlies.blogspot.com/2017/03/on-present-discontents-burke-opined.html
      eventually every one cottons on ( and it only takes 5% of us ( see Erica Chenoweth’s Work),

      There is an Equation called the Change equation which conceptualises the point at which change is likely to see motivation outstrip inertia,
      My Poem Bourgeoise Resolution is a comment on how it is the enablers and courtiers of Rulers who Maintain regimes, the aristocratic Oligarchy has several layers of Middle and Upper Management before the 95% cotton on to where the real money and power resides.

      Revolution usually ends in a separate tyranny Bakunin annoyed Marx intensely with his liberation theory which is at odds with that found in Marxism.

      ”They [the Marxists] maintain that only a dictatorship—their dictatorship, of course—can create the will of the people, while our answer to this is: No dictatorship can have any other aim but that of self-perpetuation, and it can beget only slavery in the people tolerating it; freedom can be created only by freedom, that is, by a universal rebellion on the part of the people and free organization of the toiling masses from the bottom up.´´
      —Mikhail Bakunin, Statism and Anarchism


    • I agree entirely about the resource issue. If, as I believe, growth is over, then what’s required is adaptation to this new reality. The “revolution” really needed is a revolution in our thinking. Whether reaching this new plane of thinking will include a revolution in the most usual sense of the word is a secondary issue. It does seem pretty unlikely that a post-growth situation can support inequality at anywhere near current levels.

    • Such an extreme revolution in thinking can only occur with religion, for better or worse. The major issue one encounters after realizing this is that the modern rationalized man is not truly capable of belief in religion without a massive change in worldview which few people are capable of making.

    • This raises an interesting issue. Let’s assume (pretty realistically, I’d say) that GFC II happens. This destroys fiats, in the process wiping out a lot of financial ‘wealth’ and requiring, in essence, a new monetary system. By the time the dust has settled, it becomes inescapable that growth is over, and was a one-off event based on fossil fuels.

      Is religion the only way that mankind can create an intellectual response to these new circumstances?

      Alternatively, imagine – again, this looks increasingly feasible – that a single (but previously-important) economy goes bust, far beyond any possibility of rescue from outside. Does some sort of religious “revival” ensue?

    • It depends what you mean by “religion”.

      If you mean religion as it is in the vernacular with a God like figure then maybe not.

      If you mean a structured body of thought which rationalises man’s place in the World then maybe (Communism would be a “religion” in this sense notwithstanding what Marx said about the opium of the masses).

      The difference may be down to how apocalyptic the crisis was; if there has been major disruption to peoples way of life then they are more likely to embrace religion as we know it but if it’s a question of another Great Depression as suffered in the US in the 1930s then perhaps it’s the second.

    • Indeed.

      Given the evident influence that religion exerts – and the power that God (if He existed) would wield – it’s remarkable how little real effort has been put into studying this issue from an objective standpoint. Some people start from the premise that ‘there cannot be a deity, so leave it at that’. Others assume that ‘even if there is a God, we’ll never know more’. Yet others say that ‘our faith already answers all these questions, and must not be questioned’.

      The few thinkers who have dared to look into this have, as it happens, reached some very valuable conclusions. The best example, I think, is Thomas Troward

    • An indirect light on this issue.

      I’m ploughing through a book entitled Darwin’s Doubt by Stephen Meyer at the moment which is a critique of Darwin. I find his views fascinating as It’s quite clear that there were major doubts about the theory of evolution from the start and these were even acknowledged by Darwin himself at the time. Later discoveries in genetics and molecular biology have reinforced those original doubts (which arose from the paleontological record which was known at the time- specifically the Cambrian Explosion) and reinforced the case for what Meyer is advocating: the theory of intelligent design (and by extension God). It’s a fascinating subject.

    • Can I make it clear to all – including myself! – that going down this route risks taking us too far from energy and economics?

      With this caveat, the finding of Thomas Troward (and others) is that the only force capable of moulding matter and energy into form is thought, because to act on matter, it must itself be non-material.

      Second, there can only be a single thought-process, as matter would otherwise take different forms depending on who was observing it. The term “god” is avoided. What emerges is a Creative Process beginning in contemplation – in the beginning, the only thing that the Creative Process could contemplate was Itself.

      This is strangely consistent with the Bible. For example, the statement “in the beginning was the Word” is a bad translation from the Greek “logos”. A better translation, therefore, is “in the beginning was the Design“.

      The creative force identified by Troward can, of course, be thought of as God if one is so inclined. If so, however, it is a deity who is objective, following a Creative Law, and who therefore is incapable (being non-subjective) of rewarding, favouring or punishing. (A “law of creativity” cannot take sides). Alternatively, the Creative Process can be thought of as the master or highest law of science.

      Finally, Troward – and others, notably Charles Haanel – contend that we can put this understanding to use.

    • My apologies Tim but one of the interesting things about this blog is that one derives so much more than the economics perspective and many of the references to books and videos are more than worth following up..

  14. Dear Dr. Morgan
    As per your two alternatives above. I am trying to remember how Shortonoil solved the problem when he was making a thermodynamic model. He used energy for his calculations as long as possible, and then converted to dollars.

    So I think it would go something like this:
    *Determine energy, net of energy cost of energy per period.
    *Determine prosperity for the same periods (which is net of debt)
    *Divide prosperity by net energy to get the capacity of the economy to produce prosperity per unit of energy.
    *Such a ratio could be trended. That is, as energy cost of energy rises, or gross energy declines, or a combination, then the amount of prosperity generated by a given unit of energy may be declining historically and may be expected to continue to decline in the future.
    *For the decline, one could use a straight line, or some derivative of a Hubbert curve. Or one might assume that the Singularity happens and everything becomes infinite, and we are into Hussman’s twilight zone in terms of debt, and now of energy. My bet would be on something like a Hubbert curve.
    *One could take a present value of the projected prosperity generation capacity in the future to get ‘present wealth’. If the nominal value exceeds that, we have an estimate of the size of the bubble.

    Don Stewart

    • https://drive.google.com/file/d/131E6kbMg1Zh19k_wPAPxALG_HfXkg5ke/view?usp=sharing

      Hi Don,

      I have taken all the Debt, Money Measures and Energy Outputs and converted all energy outputs to KiloWatts so this spreadsheet has a balance sheet of all Energy Reserves and present generating capacity and all netted out dollar money measures as levelised in the CIA Factbook.
      Financial Economy Net
      202,257,349,073,850.00 USD -280,890,757,276,200.00 USD

      -78,633,408,202,350.00 USD
      78,521,292,587,731 KWH
      -102,250,514,651,999 KWH
      -23,729,222,064,268 KWH


      I have still to double check all the figures but they are within the ballpark.

      What is interesting is Electricity Generated appears to suggest that installed generating capacity only runs 20% of the time across the board. That’s something I need to check because obviously if Uptimes can be improved even with existing infrastructure more Electricity can be generated.
      In your analysis above you do not mention embodied energy, Embodied energy and circular economy concepts are essential to understanding the output potential of a future steady-state economy which cannot possibly sustain the huge levels of waste in the present system.

    • Don:

      Here are some outline numbers worlwide.

      Please note that these are cumulative (all years from 2000 to 2017, inclusive, added together). (All are USD trillion PPP at 2017 values)

      GDP: $1835 trillion
      Prosperity: $1425 tn
      Therefore excess (GDP “claims” in excess of prosperity): $410tn

      of which:

      Additional debt: +$159tn
      Additional pension gap: +$108tn
      Other: +$144tn
      (where “other” means ‘excess valuations’ – of equities, bonds and property)


      – It might be interesting to note that the ‘excess valuations’ piece, now put at $144tn, fell to zero during GFC I. So excess valuation of $144tn has all risen since 2009. That fall can be calibrated at about $48tn – so downside scope in asset valuations is now roughly 3x the magnitude of the GFC I fall.

      – The pensions piece only really began after 2008 – it was created by the ZIRP response to GFC I.

      From this, a tentative indication is that we should look most closely for a collapse in valuations of assets such as stocks, bonds and property. This actually accords with quite a lot of ‘traditional’ metrics.

  15. Disclaimer: I am getting old and don’t do math the way I used to. So extreme caution is advised.

    If I look at Jean Laherrere’s graphs here:

    Click to access graphsjljan2018.pdf

    I crudely estimate that the world production of oil (excluding Extra Heavy) was around 70mbpd from 2000 through 2017, a period of 18 years. That equates to 459 billion barrels of cumulative production over that period. Using Dr. Morgan’s figure of 1425 trillion dollars of prosperity, cumulative, over that same period, yields a figure of 3100 dollars of prosperity per barrel.

    Jean forecasts that the world will lose about 70 percent of its oil production between 2020 and 2060, or around 2 percent per year. Which, according to my assumptions which follow, will yield a 2 percent per year decline in prosperity, globally. One could get into the geopolitical considerations and try to read the tea leaves for individual countries, but I won’t do that here. Suffice to say that the US aggressiveness in the Middle East, in the Baltic, in the Siberian Sea, and even Venezuela makes perfect sense to the realist.

    Now for my assumptions:
    *Oil is likely to be the first primary energy resource casualty. It is the trigger that we can pay attention to and get things broadly right.
    *Gail Tverberg’s current post argues that it is total energy from all sources that is important. I suggest that if we are talking prosperity, it is enough to look at oil. While Putin may be right that electric vehicles are a waste, and that the world needs to convert vehicles to natural gas as soon as possible, there will be inevitable losses as the conversion is made. Gas has a lower energy density, and requires new and expensive infrastructure. These costs are deductions from prosperity. So it is close enough for government work to look only at oil.
    *Google recently featured the first 1947 Vespa in one of its banners. Now Vespa like vehicles may replace private automobiles, but it is trucks that do 98 percent of the work (moving mass across distance). And there is really no substitute for diesel fuel to power trucks. Even rail locomotives are diesel/ electric. That is, the locomotive burns diesel to generate the electricity to turn the wheels. Consequently, while we may all be riding around on Vespas in the future, we should not confuse that with doing physical work.
    *Can we all be involved in the service industry? Prosperity is related to GDP, which measures how much production can be sold and what are people willing to pay for it. While it is currently true that people are willing to pay quite a bit for the ephemeral ‘services’ of Google and Facebook, the experience of advertising in the 1930s Depression should be a caution. The public turned strongly against the advertisers as the depth of the Depression became impossible to deny. As the public turned against advertising, the Federal Government took a stand against ‘false advertising’. Governments now encourage advertising, no matter how ‘false’, on the theory that anything that generates GDP, no matter how flimsy, is Good. But this worm may turn, as it has in the past. A 40 year Depression may change the outlook of our grandchildren beyond our reckoning.
    *What will happen to debt and wealth? Standing governments almost always side with whoever has the money…and very seldom with the Robin Hoods out in Sherwood Forest trying to redistribute the wealth. So I assume we will have a quiet civil war (probably no shooting), with the rich buying the loyalty of the guys with the guns. So the bottom of the social and economic ladder will be pushed down first to try to maintain the privileges of the elites. Eventually, gravity will win and, like a Red Giant star, it will all collapse into a much smaller space, operating at a much cooler temperature. Nobody will win that one.
    *Can the cost of oil approach the 3100 dollars capacity of the economy to use it? Yes, it can. Such a warning was at the center of Shortonoil’s thermodynamic model of the oil industry. His numbers (which I won’t defend here) showed a narrowing of the difference between the price and the thermodynamic value of the oil. Using 10 percent as the energy cost of oil, we have currently a cost around 300 dollars. So oil is currently a drag on the economy…not the boon it once was. So we might see the cost of producing oil increase to 1000 dollars, and the value of the oil decrease to 980 dollars as chaos grips the economy. If so, then only troops can keep the oil flowing, along with confiscation of private wealth. I haven’t tried to predict such an event. Suffice to say that the difference between the cost and the value is not as large as it once was.
    *Is there any hope for your grandchildren? Albert Bates has a current post talking about global warming, and whether mammals can survive. I posted a question to Albert as to whether it might not be a good idea for someone who wants to survive to plant a forest garden and live in it. Forests generate coolness, as compared to the surrounding land. Albert had not chosen to post the question, nor to answer it the last I looked. But suggesting to your grandchildren that they plant a 2 acre food forest might be a good idea. I will be compost in their garden. The outlook for cities with their ‘heat islands’ has to be grim.

    Don Stewart

  16. For idle speculation, scholarly dispute, analogies to Seneca, etc.
    This may appeal to the physicists and engineers in the crowd:

    When mud begins to dry, cracks form. Adrian Bejan of Duke University deduces certain patterns from first principles. One of the first principles is the minimization of the time to get from the old equilibrium to the new equilibrium. Now suppose that an oil powered civilization is chugging along with a smooth surface. Then the equilibrium is upset, and the surface needs to open cracks. Will the civilization move as rapidly as possible toward the new equilibrium? Suppose the political powers are determined to paper over the cracks? Does the shade of Seneca have any advice for us?

    For the philosophically inclined: How does a mud puddle formulate the principle of optimizing the speed of transformation?

    Don Stewart

    • I’ll read this when I get a chance, but discovering Bejan’s Constructal Law a few years ago completely changed my understanding of the universe. I think it’s pretty clearly the primary dynamic that drives our universe. I think it is probably THE most fundamental law of physics, possibly after conservation of mass and energy.

    • Constructal Law brings easy answers to many questions that otherwise seem difficult or like true mysteries, such as the genesis of life on Earth.

  17. As for planting forests as refuges, a law was recently passed in Italy – mentioned by Ugo Bardi – allowing local authorities to cut down whatever woodland they wish in order to turn it into wood pellets for stoves: it seems that as Italians grow ever poorer, they have turned to these stoves in a big way due to the very high cost of gas.

    He also posted an article on the city authorities in Florence taking a chain saw to as many -often ancient – trees as they can get at, denuding city piazzas of shade. the excuse? ‘Killer trees’!

    A civilisation in its death throes destroying at an accelerating rate those amenities which would be of value to future generations, and even to themselves in the short-term……

    PS On food and Brexit, it seems that the agri-giants of India are rubbing their hands with glee at the thought of Britain breaking away from higher EU standards. More fungiciide with your curry?

    The ‘hard-Brexit’ people seem to have no concern at all for such matters, and are thoroughly anti-environmentall: trade first and damn anything else.

    • I’ve reached the view that we do need to discuss the British economy here.

      There are likely to be two articles – both entitled Not about “Brexit”

      My problem with “Brexit” is that it’s pure theatre, whether it be drama, tragedy or farce. As such, it distracts from the underlying issues around economic performance (weakening rapidly) and risk (high and rising).

      I’m hoping to use SEEDS to unravel why these things are happening.

    • “Visceral” is right!

      I’ve started watching it – will watch the rest later. On an early technical point, simply raising wages does not, as Max K states, improve productivity.

      My commentary on the UK economy won’t be visceral, as I hope I’m always clinical (except when addressing the claims of fanatics).

      – Basically, conventional economics says the UK economy is jogging along OK, albeit sluggishly.

      – Observation of numerous economic, business, political and social trends and events says otherwise.

      – SEEDS points to an economy which is deteriorating rapidly, and with risk levels more than high enough to turn this into disintegration.

      My article won’t be saying this, but the situation is starting to look existential.

  18. Tim, I am looking forward very much to reading your assessment of the UK economy using SEEDS analysis. Surely, even on some conventional measures the national economic model is unsustainable, or at least incompatible with a rising tide of prosperity shared widely? My mind here is focused on the structural trade gap that is being bridged by issuing debt (making us reliant on the Kindness of Strangers) and selling assets into foreign hands (selling The Family Silver). I have come to the view that most, if not the majority, of national politicians that bother considering the economy do so using three measures: GDP, CPI and employment. If GDP is increasing, CPI is contained and employment is growing then the UK economy is ‘successful’! The trade gap is not a problem as it is being funded, and they seem to have no clue about the overseas income account. We know from history that things that look unsustainable can go on for a very long period of time before crisis hits. At some point, however, a day will dawn just like any other, but when it closes the circumstances of the United Kingdom will have changed irrevocably. I have no clue when that dawn will occur, but I fear that we’re getting closer with every passing day!

    • Indeed so. You don’t need even to have heard of SEEDS to recognise that the British economy is in very, very big trouble. A whole range of measures and observations point to the same conclusion.

      As one example, just take the consumer. Shops, pubs and restaurants are in melt-down. Consumer credit has been rising dangerously, and arguably is now ‘maxed out’. Car sales, having been sustained by easy credit, have now turned down.

      Britain is now just one global recession, one world financial crisis or one oil price spike away from disaster.

  19. Dr. Morgan
    I think you are right about the ‘just raise wages’ claim. Max and Stacey have a long history with the UK, though they now live in the US. They apparently experienced some censorship in the UK. Similar censorship is discussed in the second half relative to the banking scandal they talk about. So between Stacey’s dismay at the policies of Margaret Thatcher, and Max and his guest’s revulsion about the banking scandal, I would label it ‘visceral’.
    Don Stewart

    • Quite so, and I do myself try to be clinical and objective.

      Their sign-off on this is that the British economy is finished. That, unfortunately, has a kernel of reality. I don’t know how, with faltering prosperity, any economy can support a banking system which, measured by total assets (i.e. loans) is 11x GDP.

      My phrase about this is that the UK “dodged a bullet” in 2008. It will require more than luck to dodge the next one.

    • Two recent papers from Prof Richard Werner, well worth reading Whilst Energy is fundamental a means of determining price signals based upon a falsified theory could only have made things worse and has done.

      III. Successful Development Policy: Harnessing Money and Institutional Design

      Based on his long experience close to the government of England, Lord Acton claimed:

      “Official truth is not actual truth,”

      (Lord Acton).

      As we saw, the central banking narrative has collapsed on all fronts. The main pillars of their false belief system, for too long propped up by fraudulent ‘economics’, have all crumbled.


  20. Symbolic of the state of the UK?

    New apartment blocks in London and elsewhere have been found to be covered with highly dangerous – if externally shiny – cladding.

    Heavily-mortgaged buyers find themselves on the hook for properties which are ‘unsaleable, unrentable, and a danger to life’.

    Moreover, as a result of the misguided attempt to keep the property bubble inflated, the government itself has a 20% share of the value of many of these apartments.

    Not just a Potemkin facade economy: there’s a pit with stakes the other side of the painted boards!

    I shall have to ready my dinghy for escape to Bilbao……

    • Thanks. I think there’s a certain shabbiness about the UK now, consistent with SEEDS’ interpretation but not with any positive claims about “growth”.

  21. Like others, I really like the tone of presentation and debate on this blog given the hard (but to my thinking, unassailably logical and realistic) conclusions drawn from Dr Morgan’s work on energy-based economic data. Really appreciate all your hard work behind the scenes and send many thanks for the altruism in presenting it at no cost either! It’s such a shame your work is not mandatory reading for all new MP’s, and that the BBC don’t give you airtime such as they give to the gullible-friendly, allegedly non-partisan ‘think tanks’.The occasional addition of off-topic info & links by other commenters is also very interesting and much appreciated, as long as it is contained and subordinate to the main focus of the blog.
    Please can you explain the full extent and consequences of our dependence on ‘the kindness of strangers’, assuming I have interpreted that correctly as foreign investment by global capital, in the event of loss of confidence in our economy? The purchase of assets is understandable, and the mechanisms behind the artificially inflated value making assets attractive to purchase, but what is the whole picture of that dependence please?

    • Many thanks, Jackie, and, as I think you are new here, welcome aboard.

      I’m happy to do this, especially SEEDS, built on the principle of ‘to see if it could be done’, but now a powerful tool.

      I’ve done a lot on the BBC over the years, but wouldn’t want to do so again.

      The “kindness of strangers” issue has many aspects, but here are a few pointers.

      Britain has long had trade deficits but, until the mid-2000s, usually balanced this pretty well with inward income flows. (Trade + income flows = current account).

      For a long time, though, Britain has been a big net seller of assets, and a big net borrower from abroad. Initially, this means an inflow of capital, balancing out the outflow on the current account.

      However, each asset sold sets up future streams of outflows of profits and dividends to overseas investors, and each new debt creates forward interest outflows. This is why there has been such a slump in the current account. Living on borrowing, and the sale of assets, is short-sighted, of course.

      Greatly simplified, but that’s the gist of it.

      Questions – the “kindness of strangers” issue – now include:

      – Will investors leave their profits in the UK, or repatriate them?

      – Will they carry on buying UK assets, and lending to the UK?

      A lot of this comes down to confidence. With lots of shops, pubs etc closing, the implication is that the UK consumer is hard-up – so what’s the point in investing in business that need to sell to that consumer?

      If the answer to this is negative, there’s not much of a case for owning GBP.

  22. Dear Tim, what about improvements in energy efficiency? Surely this would offset the cost increases due to the rise in ECoEs?

    For example, McKinsey predict that:
    ” By 2035, McKinsey research expects that it will take almost 40 percent less fuel to propel a fossil-fueled car a mile than it does now. By 2050, global “energy intensity”—that is, how much energy is used to produce each unit of GDP—will be half what it was in 2013. That may sound optimistic, but it is based on recent history. From 1990 to 2015, global energy intensity improved by almost a third, and it is reasonable to expect the rate of progress to accelerate.”


    • Thanks, welcome, and a good question.

      First of all, such ‘efficiency’ calculations tend to be based on reported GDP. But GDP has been inflated artificially.

      Globally, since 2007, we’ve had growth of $30tn. To get it, though, we’ve had to create $99tn of new debt, inject c$28tn of QE, and hugely underprovide for pensions. Borrowing $3.30 for each $1 of additional GDP implies that much of the claimed “growth” is simply the spending of borrowed money.

      Second, the ECoE curve is exponential (and compounding), whereas claimed efficiency gains tend to be linear.

    • Apologies, I see you have answered my question to some extent on this link:

      Click to access surplus-energy-economics-interpreting-the-post-growth-economy2.pdf

      Output from manufacturing, construction, agriculture and the extractive industries increased by only $20bn, or just 0.9% of all growth between 2008 and 2016 in US. Therefore, the improvement in energy efficiency has been largely a mirage because growth has been driven by debt fueled consumption of services.

      Nevertheless, if it will take almost 40 percent less fuel to propel a fossil-fueled car a mile than it does now, as McKinsey say it will, surely that would help offset the rise in ECoEs?

    • Energy efficiency in particular applications can certainly be improved, and it would be strange indeed if that were not so.

      But here’s a useful analogy. You’re driving a boat along at a constant speed of 7 knots over water. (That’s efficiency). But there’s a counter-current. (That’s ECoE).

      Early on, that current is 0.25 knots, and you hardly notice it. When it’s speeded up to 4 knots, you notice. When the current reaches 7 knots, you’ve stopped moving forwards at all. Right now, as far as the West is concerned, the counter-current is 7.5 knots.

      Critically, the rate at which the current is speeding up is increasing (the exponential function). Before long, we’re likely to be going backwards very rapidly.

      Also, making cars more fuel-efficient is great, but we’re constantly finding new ways to use energy – or to waste it……

  23. I find this analysis fascinating. I finally feel like I understand what is going on with the economy, especially in relation to the GDP, inflation and unemployment figures and related distortions. It tallies with the experience of most millennials, who find, despite being better educated than their parents, that they can’t afford the same quality of life.

    • Thanks, and you are very welcome. I’m very glad that it helps.

      I’ve been doing this for some years now, and I think I can say that the energy-based approach has good predictive accuracy. What I mean by that is that outcomes seem to conform with your observation that it makes sense of things that can otherwise seem illogical.

  24. Thermodynamics; Nate Hagens; The Elephant in the Room
    Nate Hagens doing his talk, which I imagine most of you are at least generally familiar with:

    In the first 5 minutes he develops some basic numbers:
    *The average human laborer is paid 57 US dollars per day
    *The average US laborer is paid 285 US dollars per day (loaded costs, I assume)
    *Oil at 80 dollars a barrel provides the same energy as 6,000 days of human labor.

    BUT, I developed a number of 3100 dollars of prosperity per barrel of oil. Which sounds pretty good compared to the 80 dollar cost of the barrel. But 6,000 days times 57 dollars per day is worth around 350,000 dollars. A lot more if the worker is an American.

    How can we explain the disconnect? How can the work potential in a barrel of oil be worth so much, theoretically, but so little in the marketplace. Please note that Hagens says very early in his talk that the industrial revolution was enabled by inefficient use of energy, but the energy was so cheap it didn’t matter.

    And so we come, I submit, to one of the primary disconnects: thermodynamics. We have to conclude that the great majority of the energy in the barrel of oil ends up as waste. And it would be a lot worse if we counted pollution as a cost. If we began with crude oil in a reservoir, as opposed to oil in a barrel, the energy content would be the same, but the value of the oil would be less, and so the situation would be worse.

    Optimists will say that we can get vastly more efficient. Pessimists will point to reality. Visionaries will think of ways to reorganize society. Oil companies and economists will say that there are no limits on the price of oil, and the marketplace will provide. The Powers That Be are likely to keep doing what they are doing so long as it keeps them rich and powerful.

    Don Stewart
    PS The usual warnings about trusting old men who attempt mathematics

    • I’ll have to look into this.

      Nate Hagens is very good – and I’m glad you mentioned him, as it reminds me that I owe him an email.

  25. Dr. Morgan
    I am rethinking Nate’s arithmetic and my own.

    With sober reflection, I don’t think that comparing the ability of a tractor to move a block of stone to a human’s ability to straightforwardly move a block of stone is very informative. A human is a composite of muscle, teleological goals, and deeply invested in the Constructal Law design process. Even Nate’s picture of humans building pyramids may be misleading. As I understand it, Constructal Law investigation has revealed that the humans who built the pyramids used quite sophisticated design to minimize the power requirements.

    I don’t know exactly where to go with this, but I have tentatively concluded that raw comparisons of human ‘work’ to brute force work is deeply misleading. For example, a human can learn how to leverage natural processes to accomplish what industrial agriculture accomplishes with a very much more brute force approach. From a public policy standpoint, it would seem that human ‘work’ should not be taxed, but that brute force ‘work’ performed using fossil fuels should be the major source of tax revenue in a world choking in CO2. Such a policy change might very well promote your ideas of walkable and transit friendly cities.

    Don Stewart

    • Thanks Don

      These are indeed complex issues, yet conventional economics wholly fails to recognise the truly central role played by energy. The nexus between nutrition, human labour and exogenous energy inputs is shockingly overlooked. I tackled this at some length in my book.

      Fortunately, ‘all roads lead to Rome’ where conclusions are concerned. Seldom can so many indicators – energy, environment, economics and more – all have pointed so unequivocally to the same conclusion, which is the need to redesign our society (including habitation, work and travel).

      Environmentalists have long argued for this, and economics, properly understood, supports their case.

  26. Dr. Morgan says, “Seldom can so many indicators – energy, environment, economics and more – all have pointed so unequivocally to the same conclusion, which is the need to redesign our society (including habitation, work and travel).”

    It’s the “singularity”? Before it became a synonym for the beginning of the techno-utopia the word referred to a point in time when things become so complex as to be completely unpredictable. Or, is it just the inconveniently timed confluence of existential crises?

    Environmentalists have long argued for this, and economics, properly understood, supports their case.

    I’d say we argued for it in vain. I certainly did argue, and certainly in vain.

    When I recently stumbled onto your blog I immediately had a question, but wondered if you had addressed it in the past. I reread your book, but did not review all of the posts here. If it has been answered, a URL would be much appreciated.

    Models typically have predictive power within constraints, and I suspect that yours do too. So, given the slope of the worldwide decline thus far, the existence of the Seneca Cliff, and all your knowledge, can you predict the slope of the future decline? How long will the decline take, and where will it end?

    (Interestingly (to me) I asked the same question of the singularitarians at Kurzweil’s site. After several months, they actually responded with a link to a study that they had ongoing when I posed the query. The “study” showed that the technological utopia is near. 🙂 )

    • Confining my reply to economics, I believe that models, SEEDS included, are better at handling trends than shocks.

      To illustrate, SEEDS contends that global prosperity has ceased growing, and is now broadly flat. Within this, people in most advanced Western economies are getting poorer, but prosperity continues to improve in the emerging economies. These are trends, in the sense that the model is projecting ‘more of the same’.

      This begs several questions.

      First, can an individual developed economy just carry on getting a bit poorer each year, or does this trend eventually intersect with a critical point where its economy (and/or its society) disintegrates? I don’t know, and I don’t think any model can predict this – though I suspect that we’re not too far away from finding out.

      Second, what about collateral damage? If one or more economies disintegrates, do other economies just carry on, or is there a domino effect? I suspect the latter, but don’t believe it can be modelled.

      In defence of SEEDS, I’d say that conventional economics, often with techno-nirvana implicit, simply assumes ever-growing prosperity. At least SEEDS ties economic prospects in to broader issues, so at least enables the right questions to be asked.

  27. Suggested Question to Think About
    *What is a ‘developed economy’? Is it a country, or a corporation? If it is a country, what holds it together? Is it debt, and the prospect that the rich can actually cash in with the backing of the government? If a ‘developed economy’ is actually a corporation, then the fact that General Motors now sells more cars in China than in the US is informative, but tells us more about mobile capital than countries.
    *What happens when a country with a distinct currency begins to fail as an economic entity? Can the capital invested in the country simply escape to a sunnier climate? Or is capital still ‘sticky’? BREXIT may give us a clue.
    *Jeff Bezos gives the Secretary of Defense a tour of Amazon. Amazon is a leader in surveillance. All those devices Amazon sells collect data. The ‘military industrial complex’ has taken on a new meaning since Dwight Eisenhower used the words. Are national governments just pawns of the corporations?
    *If a country is operated on the principles of Margaret Thatcher, then it is providing very little in the way of ‘refuge’ from the storms of life. Can such a country survive? Or will the centrifugal forces of unrestrained individualism lead to the disintegration of the flywheel?
    *What happens when a rogue actor (e.g., Donald Trump) begins to try to reclaim national sovereignty over economic matters? Some serious people have suggested that assassination is not out of the question.

    Just the tip of the iceberg….Don Stewart

    • Very good points all, especially about Donald Trump, who I for one believe is indeed a proponent of “American nationalism”.

      Big corporates don’t like that, of course!

      In Trump’s favour, though, the US has always displayed isolationist tendencies, I think, and it was very difficult (pre-Pearl, impossible) for FDR to sell the case for US involvement in the Second World War.

  28. It looks like technology really will ride to the rescue on this one. A US company called NanoTech Engineering says their graphene solar panels reaches a 94% efficiency (compared to around 20% for large commercial silicon-based PV panels), and the cost per Watt of their panel will be 0.55 cents (compared to a US average of $3.26 for silicon PV panels).

    NanoTech’s panels are reportedly built from ten layers of graphene and a carbon nanotube forest on top. The CNTs convert the photons to electrons while the graphene is the conducting layer. The company says that this structure enables the high conversion efficiency – while still being very cost effective. They say the cost to produce and install the panels will be about one third of the cost of silicon based solar panels. They are in the process of finalizing a financing round, which they hope will bring in $30 million to enable them to commercialize the panels.


    • Great news, if true – but I remain to be convinced that this is possible at scale.

      Any technical (and especially energy) process with claimed efficiency of 94% (or anywhere near) wakens the sceptic in me, I have to say.

  29. I’d settle for the pot holes being filled in before messing around with solar energy.

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