#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. Thanks for another informative post Tim. When China does implode/explode I’m sure future economic students will enjoy analysing it as a case study of reckless economic policy.

    For all his efforts to make himself untouchable – Xi Jinping could be brought down by something right under his nose.

    I’m just wondering how China’s unraveling will take place – perhaps a headline saying Chinese stocks sliping at record rates – just before widespread panic selling kicks in.

    I would have thought that stocks across the World would then start to collapse – perhaps by as much as 30 – 50% until they reflect their real equity.

    • Thanks. Chinese history has some disturbing precedents for what might happen politically if the government cannot keep its side of the Grand Bargain.

      A stock market fall of the magnitude you mention would destroy enormous amounts of debt collateral. Bubbles are always built on debt. If all investors lost when bubbles burst was their own money, it wouldn’t be too bad a problem – the very worst that can happen is your investment value falls to zero. But there is enormous debt invested in equity markets – as indeed in corporates themselves, the things investors buy, of course – thanks in large part to debt-funded buybacks. So this is a compounding problem. The investor finds himself having taken on debt to buy a piece of a debt-loaded company – hmmm…

  2. Great article Tim.

    I really liked the comparisons between China and the US.

    I have wondered if the Chinese ‘secret plan’ is to use credit to build real things while they can, before it all dries up due to a GFC. Hence the ‘full steam ahead’ in the borrowing.

    I imagine it is hard for a foreign creditor to repossess a city, or a highway system.

    Maybe I am giving China too much credit here 😉

    • Thank you. I enjoyed writing this one, so you if and others draw benefit from that then that’s great.

      The ‘both in the same box’ idea came out asking what the real, fundamental, trend predicaments behind the ‘noise’.

      Recognising that money may become worthless, so spending your own (and others’) on things that will retain value makes sense. My observation – subjective, I know – is that China is governed more competently than most Western countries, so it’s a perfectly plausible interpretation.

  3. Thank you for another very interesting article Dr Morgan.

    In a trade war between the US and China, who do you think loses least?

    • Thanks.

      Hard to say. Given the volume and employment priority that I identify here, logically it would be China. My guess would be that, if I can work this out, so can someone in Washington.

      But there are further complexities here, Europe, Russia and Iran being examples. Europeans can get by more easily without coke, pepsi, levis, nike and American motorcycles better than can the Americans who make them. The US attempt to make Europe follow American policy on Iran and Russia might misfire. The new government in Rome openly advocates a relationship with Russia that defies US policy. Others might follow suit. The centre of gravity in Europe that has swungagainst “the establishment” is perfectly capable of swinging against the US as well. Even Britain, normally loyal to America, doesn’t like being told who it can and can’t trade with.

      This brings us back to isolationism, always a lurking temptation in the US, and one which FDR had to overcome in 1941. I think it was Rostow who long ago worked out that the Western hemisphere can’t win out through isolation, given the resources of the Eurasian land mass.

  4. Kurt Cobb comments on the National Security angle in the US for reinvigorating coal:

    and a study which predicts:
    23 percent loss in per capita earning globally by the end of this century (resulting from changes in agriculture, crime, storms, energy, mortality, and labor).

    see section VII

    I will add a few comments of my own:
    *IF Wall Street was convinced that global warming alone would generate a 23 percent decline in per capita income, then I suspect that there would be considerable reluctance to loan money for a hundred years at 2 percent interest.
    *I don’t know if Trump is trying to reinvigorate coal because he (or the military) understands the fragility of the electric grid and he wants reliable base generating capacity, or if he is merely trying to keep a campaign promise. As Cobb notes, he has attracted a long list of opponents, who have at least as much political clout as the coal companies. It can’t be a secret at the top echelons that Britain recently went two weeks with zero wind power generation. And Trump has the legal cover he needs with the ‘national security’ justification.
    *One reason I insist that David Johnson’s work on agriculture is relevant is because a lot of the work on grain probably assumes (implicitly) that there are no fungi in the soil (which is true in almost all industrial fields). You will note the dire predictions for grain production in the New York magazine article. If fungi are cultivated, as David is doing, then the ability of crops to withstand heat is likely greatly enhanced. David’s fields in New Mexico are routinely exposed to temperatures of 110 degrees and above. At high temperatures, the ability of the plants to absorb water and transpire it to cool themselves becomes critical. NPK fertilizers make it harder…because they kill the fungi. Somebody in addition to David needs to do some serious work on this issue.

    Don Stewart

  5. Dr. Morgan

    To what extent might China’s massive debt “problem” a part of their government’s conscious strategy of mercantilism? So China buys up mineral resources, foreign land for food, and foreign companies, builds up its infrastructure in record time, and then…….oops, cannot pay back all of the debt created. If most of the Chinese debt is held internally by Chinese citizens and institutions, would these defaults be a big deal, in the grand strategy of building a country? Yes, lots of Chinese citizens lose a lot of digital “wealth” when the debt bubble burst, and the currency collapses, but they will have got an industrial society built in record time in return. Am I being too fanciful here in imagining a strategy that does not really exist? (I am not endorsing industrial society; they all seem likely to collapse for multiple reasons in the future.)

    • Good point, and please see my reply to Dr O’Neill. Getting from A to B might be tricky, because of the chaos involved, and getting from theory to practice might be tough – but isn’t impossible. It’s noteworthy how China is buying up resources around the world, most obviously in Africa.

    • If there was a complete crash then they would have to measure the actual GDP of the economy they’ve created and dish it out on some basis with a new currency.

      I would say a form of digital currency.

      True people’s savings would disappear overnight as would other’s debt – but it would be a day zero plus one type of event.

  6. Extract from the Telegraph about Heathrow (runway 3) financing and debt. With fuel going up and eventually passenger numbers going down how can any business model be made for it?

    Of particular interest is the way private equity investors can use a companie’s existing debt to reduce profits so hence tax. A nice little earner.

    Article written by Jeremy Warner.

    “Heathrow scepticism
    How many times have we been here before? At least twice in the interminable debate on how to expand airport capacity for London and the South East. Last time we got this far in approving plans for a third runway at Heathrow, the endeavour was scuppered by a change of government. It has been pretty much stuck ever since.

    But after last week’s parliamentary vote for outline planning approval, we seem finally to be taxiing towards take-off again. Close followers of the saga will know that this doesn’t necessary mean anything. There are myriad different judicial and environmental challenges waiting in the wings. And even if they are overcome, there remains the issue of whether it is actually possible to finance the thing without a massive government bung or a crippling rise in landing charges.

    Looking at the already crushing levels of debt Heathrow carries on the books, there is good reason for scepticism.

    By agreeing to scrap plans for Terminal 6, Heathrow has managed to whittle the mooted costs down to a slightly more tolerable £14bn in today’s money, but this assumes no over-runs, which given the size and complexities of the project, looks wildly optimistic. Factoring in the operating costs once up and running, total costs over the next 30 years that have to in some way be financed rise to nearly £50bn.

    Both the secretary of state, Chris Grayling, and Heathrow’s chief executive, John Holland-Kaye, have claimed that the runway can be financed at “close to” present charges. Believe it when you see it. Certainly it is not believed by Willie Walsh, chief executive of IAG, owner of Heathrow’s biggest airline, British Airways. For Walsh, there is “zero possibility” of Heathrow delivering on time and to budget.

    He also points out, correctly, that Heathrow has very little incentive to stick to budgeted costs, as regulators allow the airport to be remunerated on the money it spends. The more the expansion costs, the more Heathrow is allowed to charge.

    The greater scandal about Heathrow, however, is the way it is financed in general. A bit like Malcolm Glazer’s purchase of Manchester United, this was a company that was essentially bought with its own money.

    Private equity buyers borrowed the great bulk of the funds needed to bid for Heathrow’s then holding company, BAA, and then subsequently loaded that debt on to the company. It’s a neat trick, because the effect of the consequent debt servicing costs is to reduce profits to a level where the company ceases to pay any corporation tax. The Exchequer’s loss is the new owners’ gain.

    Obfuscation is the way of our privately owned utilities; the exact numbers are hidden in a bewildering array of interconnected holding and financing companies.

    But according to research conducted by John Busby, a retired engineer and project manager, the essence is that over the past decade, Heathrow has gained £860m in tax credits while simultaneously paying its bondholders around £6bn in interest and its shareholders (90pc foreign) £2.5bn in dividends. During this period, charges per passenger have risen from £8 to £23, making them by far the highest of any comparable airport in Europe.

    In any case, given the already weighty levels of debt, it seems very unlikely that Heathrow will be able to build this new runway without a further significant rise in charges.

    Investors and lenders will simply refuse to bankroll it if charges are capped. But don’t take it from me. This is what Holland-Kaye told the BBC’s Today programme last week: “It would be foolish to guarantee flat charges. That’s exactly what got Carillion into trouble.” Quite so”

    • I can’t see a strong case for expanding LHR. Any such plan is based on extrapolating trends in demand.

      But, taking the UK as an example, with people spending less in shops, restaurants, pubs and so on – and with 27% of estate agents now at financial risk – is extrapolation into “ever greater demand for flights” valid? Admittedly, the UK is a somewhat extreme example, but prosperity is deteriorating in the US, Canada and most of Europe – if anyone doubts that, just ask the voters…..

  7. Thanks for another great article, Tim! Since every dollar of debt is a dollar of savings somewhere I still think a good way to look at the problem is the lens of currency collapse as the death of the value of savings. If debt (and thus savings) is increasing faster than production, it means that saved money is over-valued for future production and the present value is at risk of a pop.

    Much like the problem you point out with houses, we can only exchange dollars with each other. And if too many dollars lay claims on too little activity and production, we have a problem.

    This puts the reserve currency of choice squarely on the chopping block. I think we can increase production by propping up aggregate demand – but not without price increases based on the cost of inputs. This isn’t really inflation, per say, since salaries won’t go up much (except perhaps for truck drivers in the permian basin and the like).

    • This is at the heart of SEE, where I treat money and credit as “claims” on the output of the ‘real’ economy of goods and services.

      Logically, if claims increase more rapidly than real output, some claims cannot be honoured, so have to be destroyed – by default and/or by the dilution effect of inflation. Because we measure inflation wrongly – not least by excluding asset price inflation – we miss the extent to which dilution is happening. According to J.S. Mill, value isn’t lost when a bubble bursts – that’s simply the recognition of value already destroyed by malinvestment. So, if cheap money has created bubbles all over the place, value is already being destroyed at huge scale – we just haven’t recognised it yet.

  8. I am an engineer and my strong point is not economics!
    But I have concern over the view that, as expressed earlier, of a currency collapse due to uncontrolled inflation. Let’s look at another scenario where a world wide equity market collapse occurs. Surely those that hold cash, when so many have lost theirs during the financial panic will be in a good position. Cash becomes king. It has happened before and surely could happen again.

    • Unfortunately, any equity market slump means that some of those who have borrowed to buy stocks can’t repay their debts. If it’s a full-on collapse, that level of default could (would) threaten to bring down the banks. That’s where bail-ins are likely – money is taken from savers to fill the gap left by defaulting borrowers.

      You or I or many others might call that theft, but that doesn’t make bail-ins unlikely. Many economists think depositors at a bank are investors in that bank and, like any other investor, must accept risk. I think they’re customers, not investors, but mine is a minority view.

      In short, if borrowers get wiped out on a big enough scale, depositors lose their money. Cash might be king in a modest slump, but a collapse would produce regicides (those who kill the king).

    • ”That’s where bail-ins are likely – money is taken from savers to fill the gap left by defaulting borrowers.”

      How does this work with EU €100k deposit guarantee?

    • First, I’m not sure it’s sustainable in a melt-down worse than 2008. Second, in investment terms it isn’t a huge sum – selling a single property would take most investors well beyond it, so it gives little comfort to someone thinking of switching from (say) property to cash.

      Lastly, I place little trust in political promises, let alone morality in government. In 2008-09, borrowers were bailed out, and savers have been screwed ever since (just look at what’s happened to the annuity rates for pension savers forced to turn their pension pots into annuities). Any notion of moral hazard was a casualty of GFC I. So, if they don’t feel like honouring it – or decide to reduce it to a lower sum – I think they’d do it without hesitation.

      This is why I wouldn’t want to be going into a future crash heavily weighted towards cash. Ultimately, if borrowers default, asset-holders lose.

    • Thanks for the answer.

      I was thinking about someone having less than €100k in a bank before it gets into trouble.

      If ECB guarantees up to €100k either the bail-in has to be from amounts over €100k, or it is just a awkward way of ECB/government bailing out the bank.

    • There are precedents for bail-ins. One of the major problems occurred in GFC I when Ireland unilaterally guaranteed all deposits in Irish banks. I think you can apply this to more than one account so long as they are independent entities.

      But the sheer scale of some countries’ potential problems in GFC II could make the guarantee unaffordable. This has happened before, including GFC I.

  9. Thank you Dr Morgan for another insightful article.
    I think that some other posters (Dr. O’Neill and Shawn) have also made some valid points with regards to the motivation to develop quickly irrespective of the debt build-up – a true prisoner’s dilemma/tragedy of the commons if ever there was one. The Chinese government seems to be going all out to capture and use as many resources as it can in the limited time that still-relatively-low ECoE energy is available. It is noteworthy that the West’s greatest period of economic prosperity coincided with China’s reversion to a mainly-agrarian society under Mao. Deng’s decision to industrialise ultimately and predictably brought greater competition for oil and falling prosperity in the West.
    What’s your view on the fact that China’s debt has in the main been accumulated because of infrastructure and capital expenditure, in contrast to the West’s deficit spending being used to finance current social welfare expenditure? It would seem to suggest that the Chinese are playing the longer game, building in some resilience.
    With regards to the “Grand Bargain”, many Chinese people who are middle-aged or older can recall clearly a childhood and adolescence spent materially impoverished, and even hungry. They appear to view their current prosperity as wonderful but also ephemeral. The general attitude I detect is, “if it doesn’t last we’ll go back to our hometowns and work the land once again”. Whether they would be able to or not is a moot point, but I rather think that they are likely to fair much better than their Western counterparts when BAU finally succumbs to the inevitable.

    • Thank you. You make some very good points, and I take it you know a lot about China. The country’s history includes some truly extreme instances of breakdowns in social order, and of what would (in the West) be called ‘civil wars’. This is part of the context in which I place what I call the “grand bargain” between state and people.

      It’s true that most of China’s debt has been accumulated building infrastructure and capacity – only now does the emphasis seem to be shifting (somewhat) towards household credit. This seems more sensible than the Western uses of debt expansion, which include social spending, consumption, and the accumulation of wealth by a small minority. Looking ahead, though, infrastructure isn’t a once-and-for-all purchase, but requires maintenance. I still think China’s use of debt has been wiser than what has happened in the West, and I agree entirely about resilience.

      Historically, there is one very big difference between the rural and the urban poor. Revolts by peasants (not a disparaging term, it simply means ‘country people’) seldom achieve anything. Most revolutions (a subject I studied at university) are caused by the concentration of poverty and anger in cities. Both France in 1789 and Russia in 1917 were overwhelmingly agrarian countries but, in both cases it was urban discontent which brought down the regimes. I am NOT for one moment suggesting anything similar in China, but it IS noteworthy that China has transitioned remarkably from rural to urban concentration. China’s leadership knows more than Westerners about revolution theory, it being part of the party’s heritage. So this knowledge may influence recognition of what I call the “grand bargain”.

  10. Please note

    The latest SEEDS dataset for China (2.19) has now been placed at the foot of this article. It’s also on the Resources page.

    From this you can get data on prosperity, GDP, debt, borrowing, ECoE and per capita numbers.

  11. Hi Tim

    Slightly O/T but have you seen this from Charles Hugh Smith:


    As regards the energy component of productivity this seems consistent with your SEEDS system but it seems to me he doesn’t give sufficient implicit weight to the other factors such as technology. A secular decline connotes permanency but it may just be a lull before other new things come on stream (AI; robotics; fusion power etc). Robert Gordon sees our reduction in productivity as cyclical and the tail off of discoveries made in the 19th century.

    • Thanks. Having read this, the idea that Keynesianism was a product of the prosperity produced by cheap energy makes sense. But the same can be said of Smith-style market economics, hastily dropped in GFC I, when market forces looked poised to take out many of the very same people who previously had proclaimed the virtues of “the market”.

      I can’t see a technological way out of this. My view is that technology works within the laws of physics, and specifically within the laws of thermodynamics. Fossil fuels, the one-off legacy of millions of years of biological activity, represented latent potential. As their value (in ECoE terms) deteriorates, I can’t see a technological fix within the envelope of energy physics. I hope I’m wrong about this – but I rather doubt it.

  12. Excellent article. I would have reservations, though, about the ‘Grand Bargain – an exchange of civil rights for government-engineered prosperity – as the Chinese have never known such rights, an expectation of which we in the West tend to project on other races and cultures.

    Conceptually it is possibly beyond them. We might make such a bargain in a great crisis, knowing what we are losing: they have never had the rights to surrender. That said, clearly the Party has to keep on delivering.

    A friend in Singapore who married a mainland Chinese lady – a former model, lucky man – has taken to saying that he is desperate to return to the West, as he cannot stand one characteristic of the Chinese (his wife included)which seems to eclipse all others: a profound and corrosive cynicism. ‘They find it impossible to credit good and disinterested intentions behind any act.’

    I’ve noted the same characteristic in Russians, and Iranians: everyone has their price, money is behind every act, everyone can be bribed, etc. The implications of this for the way in which one would tend to view various forms of government need not be stated.

    On the whole, their dearest wish is not be become a government target. With such a mindset, born of long experience, there is no reason to believe that a democratic system would necessarily be preferable to a dictatorship, since all men are corrupt , liars, and, when the opportunity presents itself, thieves.

    I recall an astonishing conversation I had with a rich, apparently very westernised, Iranian lady, a firm opponent of the theocratic dictatorship: she wanted it to end, but was rather keen on another kind of dictatorship! Why? ‘Dictators are strong, they get things done!’ What sort of things? I asked. ‘ Get rid of the worst people – like the Jews!’ I have to say, the immense gulf which opened up with these words ended our friendship. If the Iranian theocracy falls, one does wonder what would emerge…….

    • Thanks. On the first point, most Chinese may never have known western-style civil rights, but then they had never experienced western-style prosperity either. There’s no automatic connection, but the culture which outlawed any contact with western influences is long gone. History is littered with examples of blood-letting in China where governments have lost the support of the populace. Anyway, I stick to my “grand bargain” interpretation, which I extend here to the US under Mr Trump.

      Cynicism is certainly a characteristic I’ve observed in my limited Russian contacts. One of my associates, when in Russia, tried to explain to his hosts the honesty of himself and his company. The response was incredulity – anyone in business is de facto a crook – and they didn’t mind, so long as they got their share, but would he please drop the tiresome nonsense about honesty? I suspect that such cynicism is a legacy of Soviet times, when propaganda was intense, and nowhere near the truth. After the Soviets came the corruption of the ’90s. Things may be changing now.

      Moreover, is cynicism in Russia different from, say, the US or the UK nowadays? Is the way many businesses now treat customers and employees less than cynical? My suspicion is that the abandonment of market economics during GFC I introduced a whole new wave of cynicism.

      I don’t know enough about Iran, but I would suggest that history here may be instructive. Iranians have few reasons to love the West. America makes no secret of its hatred of Iran. It must be easy to persuade Iranians (and many others) of the “evil” of the West. From there, it’s not a long leap to the horrid creed of anti-Semitism.

      Let me stress that I’m not condoning or approving anything Iran does. But I do want to understand, objectively, about Iran as much as about anything else.

    • I think a better way to describe the Chinese situation is that there is a cultural inheritance of the concept of the Mandate of Heaven which continues to implicitly operate today. The government is considered legitimate because of the prosperity the country presently enjoys. If that changes then the regime will have lost the MoH and people will likely agitate for change.

  13. You may have noted this article, commenting on how China’s RMB is in trouble. The central bank claims that it has adequate FX reserves to counter a fall in RMB.

    With the exception of the US (as the issuer of reserve currency), no central bank, not even China’s, can ever have enough reserves to out-bid the market. Anyone whose memory stretches back to 1992 will remember what happened to Norman Lamont………

    This SEE article may turn out to have had good timing………..

  14. About the regulator’s guarantees for bank deposits, for example the EUR 100K in the Eurozone or the GBP 85K in UK. Surely a central bank would merely choose to print more money rather than default on the guarantee?

    • In theory, yes – especially with moral hazard no longer even considered.

      However, money-printing as a solution has huge problems. Taking the UK as an example, the total assets of the banking system are 11.3x GDP. In a rippling wave of worldwide defaults, how big a scale of asset toxicity do you have to have, and how much money do you have to create, before you destroy the credibility of the currency? Even the anticipation of such action could bring about this outcome.

      One possible counter is to show that you’re serious about upholding the value of your currency – perhaps making bail-ins a statement of resolve.

    • Yes, I was watching the England match (though I’d have preferred it to be Wales….) (Interestingly, people I know in the hospitality trade here in Spain wanted England to progress – it’s good for sales of alcohol……)

      Yes, he’s missing the point, which is energy (I could hardly have expected a reference to ECoE).

      I’ve written quite a few CapX articles myself in the past. It’s interesting that, having recognised that unfairness (rather than envy) is driving opposition to “market” economics, CapX has now picked up on the cost of essentials too. All that remains – apart from recognition of the ECoE problem – is a focus on debt!

  15. From The Automatic Earth

    Not directly relevant to this post, but a favorite subject of Dr. Morgan:

    The problem is systemic. In the US the problem is share buybacks, which I read recently have exceeded $5 trillion in the last decade, meaning that US companies are now by far the biggest buyers of their own shares. That is, once again, market manipulation. And this manipulation does matter. People think their savings and pensions are safe because of rising share prices. They do not realise it is all a con-trick. And companies claim that their pension funds are better funded as a result of these share prices, and so they are meeting their obligations to their employees when that too is a con-trick. They may be insolvent when the truth is known, so serious is the fraud.

    Don Stewart

    • Thanks, and agreed, of course. Stock buybacks are expected to top $1tn this year, turning yet more equity into debt. The market loves cash-burners, is propped up by the debt funding buybacks, and many investors are themselves highly leveraged. What on earth could go wrong?

  16. Another thing is that – according to the press – retail sales are in freefall in Germany – and it is accused of having an unbalanced economy.

  17. Hi Dr Morgan,
    As ever, thanks for your alternative view of what’s happening in the world. Now, I need to do something positive. Given we seem to be circling the plughole of history, where everything is overvalued, what are the least worst investments for us little people.

    • A good metaphor, and we certainly seem to be circling the plughole of fiat currencies.

      The sequence from here is likely to be a debt-based crisis, to which the authorities respond by creating enough new money to destroy faith in currencies.

      I don’t have any answers on investment – and I wish I did – but I think it’s critical to look at the difference between the real and the purely financial. Property and gold, for instance, will still be there, whatever happens to money. But that has to mean physical ownership, not paper entitlements. Cryptos, of course, clearly do not fall into the ‘physically real’ category.

    • Alan
      Just a couple of signposts which may promote productive thoughts about investment for the future…
      *Albert Bates is speaking this week in Estonia:


      *And, from Australia, we have a primer on increasing the productivity of soil:

      Click to access Healthy-Soils-Symposium-2017-Terry-McCosker-Cropping-Principles-session-1.pdf

      While it is possible that your survival depends on the amount of ammunition and the quality of the firearms you have managed to acquire, it seems to me that a bedrock capability is the capacity to grow food. At the present time, the barriers are mostly knowledge and the will to do what needs to be done and also to NOT do destructive things (as Albert Bates mentions).

      I am pretty confident that nobody can accurately predict everything about the future, but I am also pretty confident that getting started is a good idea for anyone under the age of 70. Those over 70, to quote Blanche Dubois, will ‘depend on the kindness of strangers’….or maybe, their children. Those who plan to depend on the kindness of strangers should build some skills now, and conserve their mental and physical capacities, so they have something to bring to the trade.

      Don Stewart

  18. Don

    ‘It seems to me that a bedrock capability is the capacity to grow food’ Sadly if the worst happens it would also mean having the capability to protect the food you’ve grown.

    • Donald
      Agreed. For a lot of reasons, one needs to be part of a community of like-minded people. Internet acquaintances are not enough.
      Don Stewart

  19. From 2017:

    “History has proven that credit bubbles always burst. China by far is the biggest credit bubble in the world today. We lay out the proof herein. There are many indicators signaling that the bursting of the China credit bubble is imminent, which we also enumerate. The bursting of the China credit bubble poses tremendous risk of global contagion because it coincides with record valuations for equities, real estate, and risky credit around the world.”

    Click to access Crescat-Capital-Q2-2017-Quarterly-Letter.pdf

    • This makes sense, thanks.

      The point from my perspective is that the scale of bubbles, the excess in market valuations and other parameters are measured in relation to what?

      We already know (and I think this gaining general recognition, at least intuitively) that GDP as a benchmark doesn’t work.

      This means that we, with SEEDS, are in an advantageous position, being able to measure these things against the true benchmark of carrying capacity – which is prosperity.

      This in turn means that we are seeing statistically things that others can measure only intuitively.

    • I find all this impending crisis worrying because despite all the warnings on here and YouTube (for example) regarding debt – EROEI – the shale oil deceit etc it just don’t appear to getting into nation’s consciousnesses.

      Even when I post links to this site on the Guardian’s business pages – I may get a couple of thumbs up but rarely any replies and certainly no one willing to discuss.

      However I sometimes feel that the top people in World Government’s are beginning to become aware but are frightened of the ramifications of the general populace finding out.

      It could be that they are already involved in propaganda against the truth – for example the news articles I read in several newspapers about oil companies living in fear of peak demand not peak oil.

      The ‘hidden’ debts of shale companies certainly don’t seem to be worrying investors at the moment – but one look into their accounts would reveal the truth about the horrific amounts of their debt.

      Perhaps we’ll suddenly reach a tipping point when the full impact of debt and EROEI appears on the BBC or ITV business news and other main media outlets across the World.

    • You raise some very important points, and all I can do is try a logical sequence here.

      First, the evidence for heightened risk and weakening prosperity is compelling. One doesn’t need even to have heard of SEEDS, ECoE, EROEI, or whatever, to know this. The voters aren’t fooled about prosperity. Numerous conventional metrics can confirm falling prosperity and elevated risk.

      Second, do the authorities know this? I’m sure they do, even if they don’t necessarily understand fully why this is happening.

      Third, though, if they do recognize it, would they tell the public? You don’t need to be a conspiracy theorist (and I’m not) to see why they wouldn’t go public on it, and neither will the mainstream media.

      Fourth, there are excuses for many things. Specific, local problems can be blamed on Donald Trump, “Brexit”, and a host of other “reasons”. This won’t wash forever, but it’s holding the line so far.

      So, can we make a conventional, financial case – not using ECoE etc – to assert this? I’m sure we can. The narrative here is that debt escalated pre-GFC I – cheap money was used to counter it – this has built up still more, creating compounding problems – the policy assumption is that, if another crisis (my “GFC II”) happens, the only counter is QE on a vast scale – and it has to be doubtful in the extreme if faith in currencies could survive that.

      Those of us who do understand what is happening cannot expect a willing audience, certainly not at policy level. We have the tools to make the case – and here I make an unblushing plug for SEEDS – but perhaps our only comfortis going to be “forewarned is forearmed”?

    • To Tim and houtskool-‘

      To be informed oneself is sufficient…..’ Yes try as I might I can’t get away from the reality. The good news is that my cat seems undisturbed by all this. Her only inkling that something might be wrong is when I can no longer provide her with cat food.

      I note that the report on China is nearly one year old and still no bang. Someone / something is holding it all together. Perhaps we have a latter day Hans Brinker.

    • Yes Donald, until now they managed to ‘keep it up’. They managed through manipulations in debt ratios, currency swaps, QE, gov and corporate bond buying, etc.

      In the end, they won’t be able to counter gravity with monetary adventurism. Be glad we still have time to prepare and prematurely change our future mindset.

      I’ll post you a link to an interesting article about monetary adventurism.

    • Oh well – I’d hate to be the person who has to go and tell Xi Jinping his country is about to explode.

    • It seems we monetise oil already through US shale.

      Trump is asking KSA for a lot more barrels. Because shale oil debt is for all to see and coming to an end.

  20. Don’t stress Donald: the fact is that most people don’t even see what is around them on the street – human beings are, in many ways, remarkably unaware and unobservant animals even when it a matter of physical reality, let alone such dry and distant subjects. One should not really entertain any higher expectations of them. To be informed oneself is sufficient…..

  21. Alice Friedemann editorializes and reprints a Robert Rapier article to the effect that there is no indication electric vehicles are making any dent in demand for oil.


    I have the queasy feeling we are about to see a 1929 to 1933 event, with no light at the end of the tunnel.

    Don Stewart

    • we have too many candidates for the Credit Anstalt role!!!
      Don Stewart

  22. I regard my large and growing wood-pile, into which an awful lot of sweat goes (area twice that of the house is now used for storage) as my best ‘investment’:

    1/ Hard to steal – not worth the effort expended in carting away.

    2/ Could conceivably be killed for it (and house) in extreme crisis. But then the game really would be over in every respect and probably not worth enduring.

    3/ Energy costs can only go up and conventional supplies grow unreliable.

    4/ Improves with age – seasoning.

    5/ Not obviously ‘wealthy’, in fact looks eccentric and even an indication of economic ‘failure’ in 21st century Britain.

    6/ The sight of it is reassuring in the most primitive way.

    7/ Property rights are probably fairly secure for the next 5 years or so. Further a wise man should not look.

    8/ Fitness benefits.

    9/ Exercise of foresight rather than simply crossing one’s fingers is always psychologically healthy, as Countess Iris Origo noted in her ‘War in the Val D’Orca’ – excellent book.

    I have also furthered good relations with my new neighbours, (Israeli-Polish) by offering free and immediate disposal of all the wood they have cleared, and doing it, thus building trust and good relations.

    Think of the things a financial salesman wouldn’t try to foist on you, and you might have a real ‘investment’……..

    • Donald
      If we really want to understand what is wrong with the monetary economics view of the world, and how economics of a different stripe is really important, perhaps a good place to start is this interview with Lisa Feldman Barrett:

      In a nutshell, humans are not meant to live alone. We groom each other, which regulates our body budget. The psychiatrist Daniel Siegel comes at it from a little different angle and argues for an ‘integration of consciousness’…sort of ‘making peace with one’s own body, other people, and the world’. It is, in my opinion, a mistake to try to turn this reciprocal grooming into money….a little like trying to sell sex robots. Such efforts lead us to the present world where clinical depression is a major chronic disease.

      But we also have to understand that grooming is a two-way street. I do things for you and you do things for me. I suppose there may be such a thing as pure altruism, but mostly the world works on reciprocity. Reciprocity works best between living, breathing humans. Money based economics easily distorts things and misses the point because money is such a powerful illusion.

      Buying a head of lettuce from a local farmer, or swapping garden produce with a neighbor, are not the same as purchasing a sex robot. If we are on the downslope of what is possible in terms of monetizing everything, then we need to relearn the skills required for reciprocal body budgeting, or integration of consciousness, as you prefer. ‘Local’ is not necessarily a walk in the park, as the amount of domestic squabbles on the police blotter attests.

      Don Stewart

  23. Reblogged this on MUSO MUSINGS ON FATHERHOOD THEORY AND STUFF and commented:
    It is the question of the distinction between The Financial Economy and traditional money measures, with and all the assumptions they entail, & the Energy Economy and its different set of assumptions. Where I find my unease with some of the conclusions arising out of a confusion of discrete Data in each, which is not related to the other. Energy Cost of Energy ( ECOE) makes perfect sense to me, but the price of a Barrel of oil in Dollar terms has no relationship to ECOE what so ever.


  24. Tim – perhaps slightly OT but I was looking at the website ‘Wealth Manager’ which has a league table of the performance of certain find managers.

    Right near the top of the table is a fund called Man GLG Undervalued Assets Profesional Acc producing spectacular returns of 15.4%

    Should the fund perhaps be renamed ‘MAN GLG Assets which aren’t as overvalued as all other assets Profesional Acc’

    The return seems a bit too good to be true – at the very least sustainable.

  25. Just a post regarding today’s Business news – IMF has cut German 2018 GDP growth to 2.2 percent. Following on from newspapers reporting that German retail sales are in freefall does this mean that the EU’s main engine is in trouble?

  26. Here’s something that seems well worth reading. The central contention is that, ever since he entered politics after 9/11, Donald Trump has sought to champion an American nationalist cause against “a global ruling class which gathers every year to congratulate itself, as we watch, in Davos, Switzerland”. The argument is that, whilst it has a strong US component, this elite serves its own interests, not those of the United States.

    If this is accepted as a working hypothesis, it could explain Mr Trump’s actions in a number of areas. It could explain his trade policies, including stopping TPP and weakening NAFTA, as moves against an elite whose power is rooted in the global movement of finance, goods and services. It suggests that he wants the UN to revert to a forum role, and sees no merit in supporting NATO.


    • In my opinion Trump frontruns deglobalization. If he does this in cooperation with other main powers, i don’t know. Deep inside i have a feeling they are working out plans to downscale things to a more regional level. The main powers know what we know, they are aware of our current energy balance. My two cents, and just a guess of course. Look at what they do, not what they say. You cannot control the world on declining net energy.

    • Hi Tim – I got a little confused at times – perhaps by the wayward grammar – as to whether the author actually agrees with Trump’s actions – is a fiery opponent or a neutral commentator.

      Certainly Trump seems to want to grab everything he can and is aware of the ‘energy’ benefits of having a relationship with Russia.

      It certainly looks looks like America first……in everything.

    • Donald Meysann is a French Academic the Grammar is the Translators.
      Translation Credited at end of article.
      Pete Kimberley

    • Roger – do you then think that Thierry agrees with what Trump is doing in principal? Thanks

    • James Corbett’s latest interview follows a similar thread re the NWO.
      I would tend to agree with houtskool that declining surplus energy will make it difficult to progress global control. What you can achieve at regional level will be important. Talking of surplus energy I have been studying historic sun spot activity, weather patterns and global events. We are currently in cycle 24 which is not dissimilar to cycle 14 1910, check out the winters!!! Are we hitting volatile cycles and energy limits at the same time?

    • This is a fascinating issue, and not just because it’s an interesting interpretation of Mr Trump. If we put together three things, we might get an interesting synthesis:

      1. Trump leading de-globalization on a ‘put Americans before the globalist elite’ basis.

      2. Globalization going into reverse anyway, for a variety of economic reasons, including de-growth

      3. The ‘grand bargain’ position I set out in this article

      This could put a whole new slant on many things. The EU, for instance, is perceived as being anti-American in its stand against certain corporations in the tech space, but this might be anti-globalist rather than anti-American.

      Then there’s the proposition that the globalists want areas to which they cannot extend their reach (Russia comes to mind) to be isolated from the areas where they can extend their influence. If so, this would put Russia and others on the same side as Mr Trump, the shared factor being opposition to the globalists.

      Moreover, the globalists, having pretty much run the show for a long time, might now be in retreat, a trend exacerbated by a turn to “populism” which is turning the globalists into “unpopulists”.

      Finally, “financialisation” of the economy could be a globalist ambition, suggesting “de-financialisation” as a future trend if globalisation is now in retreat.

      I’m coming to the view that the globalists might have expended their last ammunition during GFC I, saving their structure by sacrificing their acceptability.

    • Thanks Tim – I’m still finding the translation a little ambiguous which is making the analysis unclear.

    • They know doc. They know. They won’t acknowledge though, because that would close Hormuz, challenge Aramco IPO and crush retail by 65%.

  27. Roger no need to answer my question now about the views of Thierry now

    Part one explains his standing

    • Every central bank tries to shrink its balance sheet for what i’ve read. Japan cannot stay behind because the ¥ would implode?
      Or they are preparing for GFC II?

  28. View from Psychology
    Some of you may question what relevance psychology and the science of the mind has to do with ECoE and financial leverage. I’ll try to be brief, but persuasive.

    Dan Siegel, page 255 of Mind:
    ‘This is what energy flow really means. This shift may also be what self-organization harnesses in its ever-present push toward integration to maximize complexity, to create harmony. When this flow is thwarted, when probabilities cannot intertwine differentiated elements into a coherently linked larger whole, when we are not integrated, we move toward chaos or rigidity.’

    Two similarly disposed thinkers are Adrian Bejan, the physicist who proposes the Constructal Law as a law of thermodynamics, and the Canadian psychologist Jordan Peterson who says that the Yin/ Yang symbol represents rigidity on one side and chaos on the other, with the curvy line between representing the path of wisdom.

    An individual’s mind represents some balance of lots of different experiences and concepts. For example, the notion that ever more stuff is my due, and will surely happen, and will ease my existential pain, has to co-exist with notions about being ‘a good, religious person’ or possibly ‘life has no meaning’, or ‘eat, drink, and be merry’. Each person arrives at some sort of balance, although the evidence from mental health statistics is that we are doing it less successfully than we once did.

    Now, convince people, or just scare people, that the ‘more stuff’ part of that equation is not going to happen, and will be replaced by ‘less and less stuff’. And the psychology predicts a move toward either chaos or rigidity on the part of the individual, with probably a split in the society as some want to move in one way and some the other. (The fight between the fascists and the communists in WWII Italy??)

    It is not NECESSARY that the individual fail to adapt to a lower standard of living. I was born almost 80 years ago, with a very much lower standard of living, and had a thoroughly good time. It’s not that it can’t be done, but that it takes some work to rearrange the flows of energy and information in the society and in the individual’s mind.

    Don Stewart

    • An instructive chart about this is included in Prof. Tim Jackson’s recent paper, page 15 (link below). The rate of productivity growth in the UK has been falling relentlessly, and is now at a trend rate of +/- 0%.

      My conviction, based of course on SEEDS analysis, is that the UK economy is degrading rapidly – I’ve used the phrase “falling to bits” before now. Prosperity per capita is falling at a rate of about 0.8% annually, though in 2018 alone a decline of 1.1% is forecast. Prosperity in the UK peaked in 2003, at £24,550 per person (at 2017 values), and was £22,020 last year (-10.3%).

      You can see this wherever you look – the High Street meltdown, car sales, the plight of outsourcers like Capita, the inability to fund adequately services like defence and health (remembering that the real scope for taxation is determined by prosperity, not income, because otherwise you’re taxing sub-subsistence incomes), the rising cost of essentials (including energy) vs incomes, the bubble in property, and the dangerous recourse to rising levels of consumer credit.

      This outcome has been a combination of bad judgement and bad luck. ECoE has been rising sharply since the UK became a net importer of energy. Policy re. nuclear has been an utter shambles, making this even worse. The economy has been run on a combination of borrowing and asset sales to sustain levels of consumption in excess of value ceation. Latterly, debt growth has moderated, with an adverse impact on GDP. The economy is unbalanced and over-financialised – too much banking, with manufacturing barely 9% of output (EA average is nearly 18%). Big chunks of reported GDP come from “imputed” (non-existent) rent and the “generosity of strangers” (who fund the current account deficit).

      This is not sustainable, for several reasons. First, the banking system is far too big. Financial assets are 1130% of GDP, but 1580% of prosperity. Second, debt is excessive, at 361% of prosperity, up from 283% in 2007, before GFC I. The FA ratio, in particular, is potentially lethal in any kind of crisis. Even on reported numbers, it’s worse than the ratio that got Cyprus into trouble.


    • Thanks Tim an excellent article.

      I wonder how our car industry would look in 3 year’s time if PCP’s PCH and HP and deals were banned (in an attempt to cut down on household debt) and an actual car loan rate was set at 8% with you having to visit your bank manager (like the old days) to actually put forward your case for the loan.

  29. Donald

    Thank you, glad you enjoyed it.

    I think of these deals as a form of subprime, and are also the tail-end of a period of denial – on prosperity grounds alone, cars had become unaffordable, so such financing packages were introduced to permit sales to continue courtesy of – as usual – debt. This is “late in the game” stuff.

    Three years is a long time. By then, and if we escape a financial shock in that time (a big “if”), prosperity in the UK economy will have deteriorated further. Thus far, this deterioration has been linear (since 2003, indeed), but could by then have crossed a critical-mass Rubicon – put another way, I’m not sure how much more impoverishment the system, or the public, can handle.

    Not necessarily relatedly – but not necessarily unrelatedly, either – I’ve read that, in full-year 2014, there were just over 1000 moped crimes in London. In the first nine months of 2017, there were over 17,600.

    Rates of 8% are impossible unless inflation soars. Rates have been lower than inflation since 2008, and few economies coud co-exist with positive real rates.

    • Hi Tim I put the 8% rate on as a means to make loans unattractive / unaffordable as another way of reducing household debt.

      Now as far as I know moped crimes are mainly committed by young people. Obviously lack of any decent employment prospects could well be driving the increase so it could get far worse.

      I do remember an article warning about the development of an underclass if proper social funding wasn’t put in place. This was around the year 2000 – and here we are.

      I also saw a documentary about he trade in cocaine and how many young couples have decided that an evening in with beers and cocaine is preferable to going out. Of course this is fueling the growth in drug gangs.

      Now cocaine can stay in your system for 2 – 4 days after one shot and up to 12 if you’re a regular user. Therefore one way of stamping it out would be to have mandatory drug tests at work on unspecified days. Instant dismissal if positive.

      But with prosperity declining it could be that many more switch to initially soft drugs to get away from the realities of a failing economy where decent jobs are few and far between.

      The next 10 years are going to be very difficult – and who knows after that.

    • Hi on the subject of car deals I’ve just read that in May £3.17bn was borrowed. Looks like madness but it reminds me of a scene from ‘On the Beach’ the 1959 Nuclear holocaust film.

      With Australia being the only major landmass where a huge radioactive cloud hasn’t yet reached the general population know their days are numbered.

      However they organise a ‘final’ Grand Prix notable for the fact that many of the participants drive like mad men – basically what have they got to lose – die doing something they love – or die by radioactive poisoning.

      It’s the same way with all these car purchases – I guess many are paying no attention to the massive debt cloud that’s looming and simply want to enjoy themselves one last time.

  30. https://www.youtube.com/watch?v=gGeevtdp1WQ A very Good Varafoukis Talk this,
    One question I think that shines out of this talk is the misallocation of Capital Buy the Financialised (Big Bang) economy since the Early 80’s When it really got Going. It is not a left-right thing, it is One Rogue element of the Establishment elites against the rest of the Establishment Elites and the rest of us.
    The ENrgy Question is, of course, the underlying driver of the prosperity engine, but MisManagement and poor allocation of resources has not helped and is a huge part of the problem.

    Understanding the debt Basis of Money I believe makes a lot of the Micro palliatives irrelevant to the overarching Task ahead, I am Optimistic.

  31. The moped muggers are globalisation in action: the usual London suspects, run by Asians who have networks to sell the i-phones in Africa, where a British origin is seen, apparently, as classy…..

    Easy money, quick and certain sale, little chance of getting banged up – it’s a no-brainer, innit? I’d love to know whether this is happening in other European cities?

    The sort of people doing this like crime: it’s their livelihood, easy hours (getting up at 2pm is preferred, the chavs in this village are like that too) and they would not be in line for good jobs in any system, boom or bust.

    Having said that, the cost of living has certainly gone up and must incentivise them, but not over just one year – this is about trade networks, hence the sudden expansion of business.

    I know someone who lives next to a West Indian criminal family in London – prostitution (including minors) theft and drug dealing. During the London ‘riots’- basically a big shoplifting spree with a dash of arson – he heard the daughter of the house say to her mother (prostitute, retired, she became too ugly) : ‘Mum, mum! I gotta stop! I’ve nicked too much and don’t know where to hide it!’ ‘Animal spirits’, one just gets carried away sometimes? They are raided regularly by police, to no avail.

    Gypsies and ‘travellers’ are also thieving more, as they have lost a lot of income from the regulation of the scrap metal business which was such easy money to them.

    Oh, I don’t know, maybe they are all just noble class warriors revolting against the injustices of Capitalism? Yes that’s it! 🙂

  32. The other Grand Bargain which is not being delivered is that which serves as the foundation stone of the EU.

    European states had – unlike the benighted Chinese – something to give up: full sovereignty.

    In return for the sacrifice of which, EU citizens were promised the restraint of Germany’s natural economic weight (and arrogance) ; ever-rising prosperity, equality and civil rights through free trade within the bloc and Europe-wide legislation; an end to intra-state tensions and rivalries; and permanent freedom from dictatorship and totalitarianism.

    On every point, the EU has demonstrably failed, and – above all in southern Europe – the promises seem empty, with Germany understood to be the dominant, controlling European power.

    Mass prosperity, so heady and intoxicating pre-2008, is definitively at an end in Spain, Italy, Portugal – a very slight uptick in youth employment recently, not much more.

    And in Central and Eastern Europe, Brussels is showing a totalitarian face in seeking to impose large numbers of unassimilable migrants on those states which have benefitted from European development funds.

    • I’m not particularly pro- or anti- where the EU is concerned. The Euro is another matter, because trying to combine a single monetary policy with numerous sovereign budgets is madness.

      In its favour, the EU increasingly stands up against big tech, much of which is US-based though not, in the Trump sense, loyally “American”. If we agree with the interpretation that Mr Trump is an ‘American nationalist’ trying to bring down the globalist elite, then he and the EU are on the same side. Thus far this is a nuance within the unpopulists, but could be an important one.

      I’m considering a SEEDS overview of the world economy set in a context of ‘resisting the globalists’. Just a sketch idea at the moment – alongside possible SEEDS reports on Ireland, or the UK, or (a tougher project) the Euro Area.

  33. Stranded Carbon Assets,
    From, Stranded Carbon Assets
    Why and How Carbon Risks Should Be Incorporated in Investment Analysis 2014. Generation Foundation.

    “(a) Direct Regulation: Regardless of whether carbon pricing manifests as a coordinated global
    response to the Carbon Budget or is enforced through national, regional, state or local carbon pricing
    or ‘cap and trade schemes’, the result would be a material shift in the valuation of carbon-intensive
    assets over a short period of time and hence the stranding of carbon assets.

    Macroeconomic impact of stranded fossil-fuel assets April 2018.
    Mercure, J., Pollitt, H., Vinuales, J. E., Edwards, N., Holden, P., Chewpreecha, U., Salas, P., et al. Macroeconomic impact of stranded fossil-fuel assets. Nature Climate Change

    “Here we use an integrated global economy environment simulation model to study the macroeconomic impact of stranded fossil-fuel assets (SFFA). Our analysis suggests that part of the SFFA would occur as a result of an already ongoing technological trajectory, irrespective of whether new climate policies are adopted or not; the loss would be amplified if new climate policies to reach the 2°C target are adopted and/or if low-cost producers (some OPEC countries) maintain their level of production (‘sell-out’) despite declining demand; the magnitude of the loss from SFFA may amount to a discounted global wealth loss of $1-4tn”

    This is an interesting viewpoint on the scenario that alternative energy sources replace Fossil fuel resources of energy ahead of the expected economic life of Fossil fuel asset investments.

    My own perspective on the analysis is that where Capital Wealth is calculated as to embodied energy rather than FInancial *Capital*, the losses to those holding fossil wealth would be diminished in financial terms only, but not in embodied energy terms necessarily.

    Here is a Graph of World energy use in terms of TerraWatt Hours, My own analysis and synthesis of the World Debt Money economy and the world Energy economy is proceeding well. I must say the Financial economy serves only one purpose and that is a one-time conversion reference point for explanatory purposes. The Financial System based on debt will in time be recognised as and studies as an artefact of late-stage financialised Capitalism. Energy Cost of Energy makes much more sense and Tracking real energy wealth, and prosperity, if Tims hypothesis is correct that Energy is the driver of prosperity, which I think he is.


  34. The Doors of Perception
    Check out just the picture and initial few sentences at:

    The point is that a minimum investment sail board can outrun a thousand horse engine and a multi-million dollar racing yacht. Now, of the 3 contestants, which one do you think was getting the best dopamine rush?

    Yes, it is true that Business as Usual is Doomed…but is that all bad???
    Don Stewart

    • Interesting article (I read the whole lot). I didn’t know that Jimmy Carter had pointed out future energy problems and the need to economise. I will be looking into the election of Ronnie in detail.

  35. I would love to see hear your insights on Ireland and Canada. You did say a while back it would make you unpopular with them but it sounded like they would both make very good case studies.

    Ireland has almost no energy resources of its own and relies completely on imports. Brexit and the fact it is a base for a large number of American companies whose commitment to Ireland will be shallow in the face of a possible EU breakup and Trump demands to repatriate American companies puts it in a vulnerable position.

    I left Ireland 28 years ago but always felt something didn’t add up regarding its spectacular growth. Although some of the growth does seem legitimate, I think a considerable part of it is shallow and based on leverage and asset prices which have been bid high. However I have found it hard to articulate why when talking to people in Ireland and it just sounds like sour grapes. In theory Ireland’s GDP per capita is considerably higher than UK but when in Dublin it just doesn’t feel like it and I think your concept of GDP and prosperity being two different items has something to do with it.

    Interestingly, Irelands GDP jumped a spectacular 25% in 2015 in just one year. (mainly due to aircraft leasing operations) However you can be sure that the average Irish citizen didn’t feel 25% richer that year and I think it makes a good case study for distinguishing GDP growth from prosperity.

    I had some friends move from the UK to Canada last year, I also suspect a good part of what seems like good times in Canada share a lot with UK and Ireland. However Canada does seem to have decent (but expensive) hydrocarbon resources to rely on.

    • Thanks.

      I do intend to look at both Ireland and Canada. In brief, though, that leap in Irish GDP – “growth” of 25%! – was really about how the activities of multinationals are recorded in GDP. It’s been called “leprechaun economics”.

      This isn’t replicated in SEEDS numbers, so prosperity is now less than half of recorded GDP. This has huge implications for prosperity-based risk measurements such as debt and financial assets. Accordingly, Ireland looks highly indebted on this basis, whilst the scale of banking system exposure is truly grotesque. Ireland is rated riskiest amongst the 27 economies on the SEEDS system, the main reason being its bloated banking system. Banking assets are 15x GDP on a reported basis, and 28x prosperity as measured by SEEDS. Ireland seems to be actively and pretty rapidly shrinking its banking sector, but I can’t see how risk exposure can be reduced to anything like a safe level.

      Canada is a simpler story, essentially a huge bubble, founded on borrowing and most visible in property prices. Over the last ten years, each C$1 of growth has come at a cost of over C$7 in net new borrowing, Energy resources are a big plus for Canada, but financial policy over the last decade looks irresponsible in the extreme.

    • Pretty frightening.Many blame the savage cuts in youth social workers as well as the police.

      Cutting social workers who can prevent crime from the source doesn’t seem to make any sense.

      Seems like as the number of easily available barrels of oil go down – crime goes up –

    • @Donald,
      I think your correlation is “Spot-On”, and as the cost of energy increases and people’s prosperity decreases, then we can all look forward to much higher crime rates. I would however not assign too much importance to social work. When you are broke, having a heart to heart with somebody is not going to stop you putting a brick through the window of the Off Licence and making off with a bottle of vodka.
      When the Real Economy catches up with the Financial Economy, then the government will have very few resources left. The spending grandess of today will be over. Welfare, social work and free bus passes will be the first to go. Many of these Social Workers themselves are going to end up amongst the ranks of the unemployed. However, I believe that Police numbers will increase again. The establishment will need them as protection from the baying Mob.
      From a social point of view, and with continuing financial distress, the future of the UK does look to be very grim indeed.

    • Eloquent statistics!

      What we see here is the highly successful application and expansion of an effective business model: nothing more, nothing less.

      In a real Crisis, they will no doubt turn to child kidnapping and home invasions which can prove very profitable too – even in dirt-poor Haiti they are kidnapping.

      Crime is both way of life and ‘real work’ to these people, so we should hope the show stays on the road leaving them with no incentive for further expansion of their activities.

    • It seems to me that very special circumstances prevail in the UK, making trends more extreme there than elsewhere.

      For a start, the economy is deteriorating very markedly. This reflects a combination of adverse energy trends and mismanagement. Over the past two decades, the UK has swung from a significant net exporter of energy to a sizeable net importer. When this happens, the rate at which ECoE worsens becomes accelerated. ECoE is rising globally, and in most countries, but the UK is experiencing a worse rate of change.

      Second, and starting in (roughly) 2000, the UK went through a period of extreme financial recklessness. This presents ongoing dangers. Specifically, the banking system is approximately 11.3x GDP but 15.6x prosperity. The risks implicit in these ratios are self-evident.

      The result of these two trends in combination has been a rapid rate of deterioration in prosperity. This in itself puts considerable strains on social order. But this has been compounded by political mistakes. Government becomes harder as the public are getting poorer, just as it would get easier if people were getting more prosperous. When in gets harder, a higher order of judgement and decision are required. But these are not in evidence.

      Because the focus here is on energy and the economy, I have been pretty neutral about “Brexit”. But one cannot be equally ambivalent about the relationship between government and governed. Whatever the merits or demerits of the decision itself, the public did vote to leave the EU.

      The establishment always opposed that decision, so were likely to be tempted to subvert it. How? One way would be to reverse the decision. The second would be to carry it out, but in a meaningless form.

      The vote cannot be re-run, because that would smack of “keep on voting until you give us the result we want”. Instead, the latest proposals from government amount to BINO – Brexit In Name Only – which contravenes the wishes of voters in a number of specific areas. This in turn suggests that Britain may experience a demonstration of what happens when trust breaks down. This, of course, compounds the strains already created by the deterioration in prosperity.

    • Tim despite your neutrality over Brexit – as an economist do you think it’s advisable for the UK to end with with a hard Brexit i.e. no trade deal with the EU whether or not that’s what people voted for. If you could just treat this question in isolation putting aside SEEDS etc – thanks

    • Donald

      It’s not a straightforward issue in any terms – so really don’t believe anyone who tells you that “Brexit” is definitely either good or bad for the economy. It’s more a question of what the UK makes of it.

      Trading with Europe is important, all the more so now that the world is being split into trading blocs by rolling protectionism. But no-one suggests ceasing to trade with Europe, the EU isn’t a growth market, and is not without its own troubles. Where growth exists worldwide, it’s in emerging economies.

      I think I’m right in saying that Britain stills sells more to Ireland (tiny, and a basket-case, IMO) than it does to China (which is certainly growing, even if they’re using debt to do so). If the US wants less trade with China (which Trump does), and if the EU follows a similar line, then that has to be an opportunity for the UK after “Brexit”.

      So leaving the EU “ups the ante”. Do it well, and benefits can result. Make a mess of it, though, and things will be worse post-“Brexit”. My fear is that, going on current form, the powers that be in Britain will make a total horlicks of it. To do it well, the UK has to earn the admiration and the esteem of trading partners, and that requires a mindset that delivers value, and treats customers (and employees) decently. It seems to have been going in the opposite direction for a long time now.

      If you believe in cheap labour and the quick-buck, don’t leave. If capable of reforming radically, then it’s an opportunity.

      Sorry if that’s equivocal, but at least it’s an honest answer.

    • Thanks for your reply Tim – regarding negotiations and competence let’s see what the new guy Dominic Raab is like – he’s young and very well qualified (in International law).

      I’m with you 100% concerning treating employees well. Some employers just don’t seem to understand that frightening (through the threat of losing their jobs) and overworking their staff is counterproductive.

      Generally when the energy crunch really begins to bite I can only hope that people begin being nicer to each other and more helpful.

    • Also, the frightening think about this is (a) taking a big step whilst (b) managed by idiots. (That’s not a party political point, by the way). Someone needs to get a grip – and quickly.

  36. Since the whole financial system is based on confidence, the authorities must be keen to keep a ‘steady as she goes’ condition and to avoid any ‘turbulence’ that could upset it. Is this perhaps why there is so much panic about a (hard) Brexit? Obviously the EU has its own reasons to fear Brexit but it is interesting that Barack Obama made an intervention which was really none of his business. Could Brexit be the catalyst that brings about the next global collapse? If so, it is not too far away….

    • Personally I think specially trained youth workers can make a difference in communities but maybe not deter the hardcore of offenders.

      With the Government in disarray at the moment over Brexit I doubt there’s much chance of them subscribing to the information on websites such as this which reveal the bigger challenges facing us.

    • Very much so, Dr.Ian.
      I recall the Scotland Independence referendum of 2014.
      Everybody and their dog was rolled out to prevent it happening. Business leaders were summoned to Downing street and told to say that they would increase prices in Scotland, or leave the country with ensuing job losses.
      Merkel et al ( as you say, ” None of their business ! ) spoke out against it, as did every other political leader including your man Obama.
      Yes, he chucked in his 2cents too !
      The Scots were told that if they leave the UK, then they would have to leave the EU too ! ( . . are you having a laugh ? )
      There was never such a vicious assault on democracy, since the days of the Roman Empire !
      This lets you see just how desperate those in power actually are, just to maintain the status quo.
      As for “Brexit”, well I have been saying all along, that it’s not going to happen !

    • I simply wish that politicians in the UK and the EU would grow up and start acting like adults.

      The current situation is appalling puting jobs at risk – unsettling businesses and frightening those employed by them.

      Their behaviour has come straight out of the classroom.

    • Ian:

      Even if we ignore “Brexit”, the UK is one of the four at highest risk amongst the 27 economies whose prosperity and risk are modelled by SEEDS.

      The main reasons for the UK’s high-risk status are (a) the rapidity with which prosperity is deteriorating, and (b) the excessive scale of the banking system.

      Where “Brexit” feeds into this is that it (a) has a paralysing effect on government, and (b) drives a wedge between governing and governed. Just when a common purpose is most required, the “Brexit” row is creating the opposite.

  37. From the Automatic Earth yesterday:
    ‘Oh, and as for incompetence, that’s something you’ll see everywhere as economies dwindle, it’s not a British trait. They’re just among the first to face the challenges. The vast majority of politicians in the west will be exposed as grossly incompetent once the markets start to really go down. It’s easy to make the impression that you know what you’re doing in times of growth, but the litmus test is trying to deal with crisis. Most ‘leaders’ will fail.’

    As we see cabinet ministers abandoning the sinking ship. Now, if they had been paying attention to SEEDS???? (or just common sense and what their eyes could see)

    Don Stewart

    • Agree entirely. I don’t think anyone in the higher echelons of politics and government understands either the severity of economic deterioration or the reasons behind it.

  38. Tim, thank you for the continuing series of excellent articles and my thanks also to the many informed commentators.
    I think that alarm bells about the UK economy are ringing to anyone prepared to look, read and think even using traditional statistical measures, yet the British Establishment continues to blunder on a scale that is truly epic. If one then looks at SEEDS then alarm bells, claxons, sirens are at full-volume and warning lights flashing red.
    As I see it the UK is in deep trouble: trend GDP growth has halved (even after official statistical recalibrating of GDP to increase the figure), the rate of growth of household income has collapsed, we’re now a net importer of energy – just at the point when EROEI has become adverse, we’re more dependent than ever on imported food, we’re running a 4% trade deficit and consuming vastly more than we produce; and we’re funding this lifestyle by issuing debt and selling assets into foreign ownership, and now the net foreign income account has swung from positive to negative, and our currency continues losing purchasing power against real goods and services at an alarming rate.
    This surely constitutes a dire economic picture yet the British Establishment sails serenely on seemingly totally oblivious towards the absolute calamity that, I think, is absolutely assured. The extent of ignorance and denial is simply breath-taking in terms of its proportion and scale. The Fourth Estate, including the BBC, is now so utterly adrift from its moorings and enfeebled that it is no longer able to perform its primary function – in fact it has become a national embarrassment.
    The possible consequences of the approaching calamity are too terrifying to bear thinking about.

    • Very true – for example of you look in the Guardian the Government seems to be crowing about 0.3% growth which we know has been created by debt.

      However despite all the doom and gloom I’m watching the football semis with beer – going to watch Surrey vs Essex at the Oval for the T20 blast – with beers and if England make it to the WC final – I shall watch it with yet more beers.

      I will face up to reality on Monday morning.

    • Your observations about some of the many good things about Britain makes the chronic weakness of understanding and leadership all the more regrettable.

      But I’m with you in spirit, entirely. I prefer village cricket, and wish it was Wales, but those are details. England still brews the world’s best beer!

    • Kevin

      Seen with any perspective at all – other than from within the political fish-tank – the UK economy is in a process of disintegration. Even if we look past the statistical caveats, “growth” isn’t lifting prosperity. The High Street meltdown, plus the scale of consumer credit, are just two indicators that the average Joe is getting poorer. Accepting decline, and adapting to ‘shabby gentility’, isn’t an option, because social strains are showing, and the sheer size of the banking industry hangs like a sword of Damocles. So ‘more of the same’ isn’t an option.

      The establishment is ever more self-serving. It survived the last great challenge to its position (1956-63), but may not survive the challenge under way now. The BBC has turned into a propaganda machine, not – I stress – for the government, but for its own fanaticisms.

      Calamity does seem inevitable. The analogy here is surely the WWI phrase “Lions led by Donkeys”

  39. I’m working on a piece about Ireland at the moment, but increasingly think putting the UK through the SEEDS process might become necessary……

    • Interesting article, very much a ‘view from inside the fish-tank’ as our host puts it so well, and a nice bit of sucking-up to Hunt.

      One thing that did jump out among all the right-wing politician’s cliches, crude Russophobia and great naivety about the potential for global expansion in the UK economy through the conjuring trick of new trade deals, was the extraordinary assertion that New Zealand has been so subverted by Chinese influence that it should be questioned whether it can be kept in the ‘Five Eyes’ intelligence network with any safety!

      As for Hunt as the man to perform miracles, a friend of mine, a transplant surgeon, led the failed campaign to have him removed as Health Sec. on grounds of incompetence and intellectual incapacity, unable to master his brief- I have never seen him so worked up, and he is the mildest of people.

      Hunt, it will be recalled, not so long ago offered the priceless wisdom -the fruit of his deepest reflections – on economic matters that the British ‘need to be more like the Chinese’. Well, did he mean massive and unstable credit expansion threatening implosion?

      I’m not sure whether he was also the minister who referred to ‘the dignity of work even at very low pay’? That’s pretty much his mind-set, and those like him. They should, I suggest, try a low-paid, over-supervised warehouse job and assess the state of their dignity afterwards.

      These (very) right-wing people are most unpleasant, and the least suited of all suited to guide Britain through some very dangerous times.

    • Reading this article again, I’m not even sure where to start. “Brexit” is being sabotaged – many would say “betrayed” – whilst the idea that the UK remains a major player on the world stage ignores many things, ranging from economic weakness to the sadly diminished size of the Royal Navy. On that front, building two big carriers without enough aircraft to fly off them, or the vital escorts (frigates/destroyers) to protect them, smacks of delusions of grandeur.

      If the UK wants a role on the world stage, here’s an acid-test – redirect the money earmarked for the HS2 white elephant into procuring, say, 20 new frigates, and be prepared to order these from foreign yards if (as is likely) these offer best value, and quicker delivery.

    • Regarding frigates – well as long as we dont use the Northrop Grumman intercooler system which has badly affected out Type 45 destroyers.

    • I’m pretty sure that support for the Conserrvatives will crash at the next election. But can there be a better option, unless the system is reformed?

    • Well I can’t vote for Corbyn. To be honest Tim how long would it take to restructure our economy.

      There are of course some easy wins which you have mentioned – treatment of employees and customer. Employees can be treated well but would all firms be able to give them a decent salary without going bust?

      But as for infrastructure – return to a productive manufacturing base (which would need more energy) I’m not sure.

    • We can do very little of this we do not have the surplus energy, we do not have the surplus energy to fight for what is left, hence the NATO issues. We will probably capture as much surplus as we use obtaining it. All we can do is redistribute energy from the very people who voted for Brexit and Trump. Interesting website. Thank you to a commentator on Finite World for a video link.
      A 100hp tractor is equivalent to 1000 people. You can work for hours on £35 worth of red diesel……
      The reality of War and power.
      ‘Between 1950 and 1972, total world energy consumption increased 179 percent, much faster than population growth, resulting in a doubling of per capita energy consumption’

      ‘U.S. policymakers saw economic growth as essential to preventing the recurrence of the divisive ideological and social conflicts of the interwar years’.

      ‘To fuel economic recovery and to prevent western Europe from becoming dependent on the Soviets for energy, the United States sought to ensure that this critical area received the oil it needed. Economic growth, in turn, was crucial to mitigating the divisive class conflicts that had divided European and Japanese society in the first half of the century.’

      AMERICA FIRST!!!!!

    • What I found odd about the CapX paper is that it can’t shake off the Great Power delusion.

      As Tim says our prosperity is declining; we have huge challenges ahead (robotics/AI; demographics; climate change and of course energy); and in our spare time we will lead an FT coalition.. Frankly I think it’s going to be more of sauve qui peut over the next twenty years than reasserting our Great Power status.

    • “If the UK wants a role on the world stage, here’s an acid-test – redirect the money earmarked for the HS2 white elephant into procuring, say, 20 new frigates, and be prepared to order these from foreign yards if (as is likely) these offer best value, and quicker delivery.”

      Tim – My time in the MoD Strategic Balance of Investment studies area suggested a good investment for a balanced force over the next 20 years would be:

      More frigates
      More support helicopters
      Some more multi-role fighter-bombers

      I always felt the ‘Carrier Strike’ capability was ‘shoe horned’ in to the scenarios unnecessarily to justify a past procurement decision and that were more of a ‘geopolitical perception investment’ to show the UK was ‘punching above its weight’ rather than a good defence investment. They also seemed to cause additional problems in hypothetical future military campaigns because they needed a lot of protecting, which resulted in took assets being taken away from other productive activity they could be performing in the campaign.

      Frigates seemed to be cost-effective across a range of scenarios and defence policy variations.

    • Kevin

      It’s a sobering thought that, even in the depressed circumstances of the late 60s and early 70s, after cancellation of CVA-01, TSR2 and the purchase of F111s, the RN still had between 60 and 70 frigates and destroyers.

      An FT columnist remarked not long ago that, with conventional defence threadbare, replacing Trident could be likened to a man in tattered clothes flashing a Rolex in the vain hope that somebody might be impressed.

      The carriers, I always felt, were only built to protect jobs in Gordon’s beloved Scotland. At present, the RN has only 17 operable escorts, assuming that HMS Lancaster.is now mothballed and at least one T45 will always be undergoing major repairs. The rule of thumb is that only 1 in 3 is ever deployable, the others being in refit, in transit or training. Just 6 deployable escorts is a truly depressing thought.

      Also, the Fleet Submarine (SSN) strength has been cut, not to mention LRMP, without which a hostile submarine can follow a Trident boat from its one known point of location, i.e. departing Faslane.

      Major power? Hmmmm….

    • We used a number of different concepts such as FE@R (Force Element At Readiness) ratios. Like you suggest, 1 FE@R needed multiples items to achieve it.

      There are ‘force multiplying’ factors from modern technologies: Precision guided weapons, intelligence, supply and command and control.

      A higher proportion of the defence budget is spent on these force multiplying things than on frontline assets, compared with the past.

      So you can end up in situations where single digit numbers of deployed assets could achieve greater military effects than dozens of previous generation systems, through force multiplication factors.

      However, there are still some task types where the critical factor in success is numbers deployed. It is inescapable.

      Is the UK military more capable than in the recent past? Difficult to say, in some ways yes and in others no. But what the UK needs to do has also changed.

      The more pertinent question to ask, would be: “Is the UK military fit for it’s intended purpose as outlined in policy?”

      I would say generally “yes, at the moment”. But we could get caught out again by unanticipated situations, like Afghanistan.

      The military is always fit for purpose officially though, we just scale back defence policy when we can’t do things 😜

    • “Tim it feels like we’re wide open if a major conventional war started.”

      Donald. It may feel that way, but we need to think carefully about what we mean by a “conventional war”.

      In a globalised world a major conflict affects multiple actors. Hence, in policy there is an assumption that a coalition would be mounted in response.

      There is a risk that the UK could overextend itself in its contribution to a coalition resulting in an difficult and embarrassing situation.

      The way I made sense of it is that we have been, since WWII a vassal state of an American hegemony. We are obligated to deploy a contribution to the American led campaign. We also also offer some nice specialisations.

      I do agree with Tim that the UK is not a major power, but it does seem to be part of a major power.

      Pretty much all the work I did in UK MoD was focused on interoperability and adding value as part of a US led campaign. Alot of money is spent on that.

    • Hi thanks for reply – I guess May better stay on the right side of Trump during his visit.

      I wonder if the MOD takes a serious view of the impending energy crisis?

    • When we look at the role of the US in all this, we can accept that there is “imperialism” in play, but the question posed by Mr Trump is this: whose imperialism is it? His answer seems to be that the US may act ‘imperially’ – but on behalf of the ‘globalising liberal elite’, not on behalf of Americans. So “America first” doesn’t mean ‘putting America before other countries’ but ‘putting America before the “liberal” elite’. That informs his trade policy as well as his stance on NATO.

      If we’re right to see him as an opponent of the “liberal” elite, we can understand why there is opposition to him which is so much more vocal than it was towards GWB, even though Iraq and Afghanistan show that the latter was far closer than Trump to being a ‘war-monger’.

      One doesn’t have to be an admirer or a supporter of Mr Trump to oppose much that he, too, opposes.

    • “I wonder if the MOD takes a serious view of the impending energy crisis?”

      Within the MoD defence planning community there is a recognition of energy availability issues being a catalyst for conflict.

      However, there isn’t any real study of the effect on increasing ECoE.

      Increasing ECoE would no doubt push up the cost of maintaining and running the Defence enterprise day to day. Just like everything else. Meaning pressure on defence to achieve more value for money as it competes with other government departments.

      This is a matter if prioritisation of funds for cabinet decision makers.

      I have no doubt that for specific military campaigns energy resources would be prioritised for military use. So I don’t see short term energy crises or increasing ECoE as an impediment to operate a military campaign.

      Unless defence is prioritised for funding then I expect a gradual deterioration in capability over time due to increasing ECoE.

    • Thanks – I was hoping for a study on EcoE as the GOvernment might just take notice if it came from the MOD

    • Donald

      The two biggest threats to the UK way of life are (a) ECoE, and (b) financialization (“spending borrowed money and believing this is ‘growth'”).

      It seems obvious (to me, anyway) that GDP “growth” is in direct contrast to a deterioration in prosperity which, surely, is visible for all to see. Yet still nobody really poses the question: “why?”

    • Well as you know I’ve written to my MP in the past – but he just forwards it to the Treasury – and that’s basically it………

    • The fundamentals – not understood, yet, by the powers that be – are that ECoE is rising, narrowing the range of choices just as it (a) impairs prosperity and (b) increases costs. On the latter, government often wonders why it spends more on the NHS yet finds that still more money is needed. That, in part, is the ECoE cost effect.

      Amongst other things, the ECoE process squeezes the scope for taxation, because it drives a widening wedge between GDP and prosperity. In calendar 2017, the UK raised £740bn in tax. That’s 36.4% of GDP (which was £2,038bn) but was already 51% of prosperity (£1,454bn). As ECoE rises, there’s a ratchet effect. Looking ahead to, say, 2025, maintaining taxation at 36.4% of GDP would raise £835bn – but that would absorb almost 59% of prosperity. Put another way, weakening prosperity per capita reduces the ability to afford to pay tax.

      Because neither the ECoE effect nor the financialization effect (creating illusory growth by spending borrowed money) is understood by policymakers, assumptions and plans are based increasingly on false premises.

      On the one hand, then, the scope for spending on defence is being eroded. On the other, what does this tell us about what is required of the services?

      First, as ECoE rises and prosperity weakens, pressure on governments results in a push towards protectionism, if only to put the blame on “cheating foreigners”. We cannot conclude that trade wars become fighting wars, but neither can we rule this out.

      Looked at another way, would – say – Russia want to invade Europe? There’s nothing to gain for Moscow in that, taking on a continent with worsening ECoE, dwindling energy supplies and social tensions not unrelated to migration from regions destabilised by Western meddling. On the other hand, Siberia, lying on China’s northern border, is a tempting resource target, not just energy and minerals but, critically, water too. I’ve had it on good authority that Russia is aware of this risk. I still don’t anticipate ‘great power conflicts’, though.

      Meanwhile, Mr Trump is committed to reducing American interventionism – surely a point strongly in his favour. If the US isn’t going to invade more Iraqs, there’s less pressure on the UK to get dragged in to such things.

      So the likelier need is for power projection over great distances for limited (but intense) periods.

    • Fundamentally, what is needed is a world view (affecting economic management as well as foreign policy and defence) founded on an energy framework, and incorporating an understanding of the effects and tensions ensuing from rising ECoEs.

    • A good idea – it’s anyone’s guess how you could get the message across.

    • Thanks Tim for the figures and the analysis on possible conflicts.

      Now regarding China’s debt bubble – there’s even worse news. Although money has been spent on housing – it seems like huge swaths are very poorly built and are falling down after just a few years.

      So debt has been created – but some of the assets built by it are basically worthless – so in the event of a financial crash there’s nothing tangible left.

      Perhaps it’s a taste of things to come where we’re unable to even to maintain our existing asset base properly.

    • This is a logical consequence of deteriorating prosperity.

      Please put it down to exasperation – rather than conceit – if I say that, whilst SEEDS portrays the situation as it is, policy remains founded on conventional economics which portrays the situation as it isn’t.

    • There are more videos by the same team – effectively local authorities sell land to get much needed money.

      Building companies move in and build rubbish. Investors buy and then sell quickly as the property bubble grows. So of course eventually someone will end up with a worthless ‘asset’.

      What a waste of energy – as mentioned a while ago I think building standards should be as high as possible so that our assets last.

      Hopefully at some point in the future we may have solved the energy crisis.

    • “Fundamentally, what is needed is a world view (affecting economic management as well as foreign policy and defence) founded on an energy framework, and incorporating an understanding of the effects and tensions ensuing from rising ECoEs.”

      Totally agree.

      In would really like to see a school of governance which anyone working as a senior government decision maker needs to graduate from. A critical subject being energy literacy.

      Energy literacy, including ECoE, is something I am doing at home with my eldest son. I consider it part of his basic science education.

      Do we need an Energy Literacy campaign across all levels of society?

    • Hi yes we do need energy literacy – however I think some of the message is getting through with 50% of UK young people wanting an electric car and climate change is taught at schools.

      With all the pressures on young people at the moment with mental health amongst them a major issue – perhaps introducing the ‘end of the World as we know it’ scenarios discussed on here might be a little too much at present.

    • Thanks Kevin

      What baffles me at the moment is the sheer scale of isolation from reality, certainly in government and, quite possibly, in Whitehall too.

      One example is the new “Brexit” plan. In failing to deliver what the public voted for, it’s perhaps just an extreme case of ‘par for the course’. But the banks don’t like it; we now know that Mr Trump doesn’t like it; and it’s a racing certainity that the EU negotiators won’t buy it.

      Then, more fundamentally, there’s the economy. Even GDP growth, a misleading indicator, is pretty close to zero – and, even in pure GDP component form, it’s demonstrable that growth is now minimal, and is negative in per capita terms. Put another way, you don’t need any SEEDS-type indicators to demonstrate that the economy is shrinking – even conventional metrics show it. Sectors such as retailing and hospitality are going through a fire-storm – and these are lead indicators, the businesses which suffer first when consumers feel the pinch. Productivity growth is now +/-0%. Consumer credit is excessive, as acknowleged by the BoE.

      Then there’s social cohesion. Just one example is moped crimes in London – more than 23,000 last year, compared with just 827 just five years previously. Yet all the government seems to do is extend censorship of opinions it doesn’t approve of.

      Aside from “Brexit”, the planning of projects like HS2 and the LHR expansion seem deranged in the economic context as even conventional economists must by now understand it.

      What’s going on – sheer lunacy? Or are those in power dazzled by the reality, like a rabbit in the headlights?

      I find it totally mystifying – and may need to write about, something I’ve been trying to avoid.

    • There’s a big complexity here within the “free movement” issue. For the EU, free movement is a political statement of unity – in that sense, it is similar to the Euro, nota rational currency in economic terms, but a political statement.

      For the global elites, on the other hand, it’s part of a doctrine of globalization which enables jobs to be shifted to the cheapest location (or cheaper workers brought in), and capital to seek the highest returns. This ideology is unrelated to – and hence may be inimical to -the national interests of any country. The best way to interpret Donald Trump’s position is that he leads a fight-back against this form of globalization – and this in turn accounts for much of the opposition to him.

      It is indeed complex – even before we mix deteriorating prosperity into the brew.

    • Yes, but globalisation has different meanings. It may be that the EU supports – as surely we can all – the spread of development to poorer countries. That’s not exactly what ‘Davos, Inc’ means by it…..

    • So they sound like they have some decent objectives despite the dislike for many of their rules.

      If say oil was plentiful and no decline in EROEI I would say stick with them for the time being.

      Trump is just too volatile if you’ve been reading his outbursts during the day

    • I, too, sometimes regret Mr Trump’s use of twitter. But he may see it as a way of bypassing the mainstream media in communicating with ordinary Americans.

      Here are some questions which that ‘ordinary’ American may be asking himself or herself:

      “Who poses the greatest threat to my privacy and individual rights – Russia and the FSB, or ‘big tech’ companies which take my data and use it for their own ends?”

      “Who has done most to undermine my prosperity – China, or the big corporates which have shipped out my job to Mexico or Vietnam?”

      “Who poses the greatest risk to my liberty – North Korea, or state apparatus controlled by big business?”

      So “America first” might not be the US versus Moscow, or versus Beijing, but the US versus Davos.

    • I’d be interested to see the actual thoughts of Americans posed by your questions.

      Despite his use of Twitter Trump’s faux pas was his interview with the Sun which he now claims was fake. No doubt the interview tapes have mysteriously disappeared.

    • On the actual thoughts, my guess is that a large number already think that way – which is implicit, I think, in Mr Trump’s victory – and one of his aims is to convert ever more of them. A fascinating survey (preceding his election) showed remarkable levels of rage against (in particular) telecoms, airlines and many other business sectors. The ‘us vs them’ theme has been established for a long time now, probably since 2008.

      On faux pas and twitter, I’m not convinced that Mr Trump trips over his own feet quite as often as most people think – there may be method in it. The net effect of his actions over the last few days has been to weaken an already tottering government, and further undermine Mrs May, even whilst saying nice things about her. Is that outcome contrary to his aims? If he can promote a “real” Brexit – rather than the establishment’s preferred BINO (Brexit In Name Only) – he strikes a blow both at the establishment and at the EU.

      He must be telling fibs about the interview, though – the alternative, that the Sun deviated from strict factuality, is surely unthinkably out-of-character, isn’t it?

    • I’m disappointed – I always thought the Sun was the fortress of truth – oh well another illusion shattered.

      I understand what Trump may be up to – but still not convinced that his version of the World is the best for our country – although I’m not sure if there is any scenario that will help the UK (putting aside diminishing prosperity)

      May is in a no win situation – she simply can’t appease everybody – her cabinet – the EU – Trump
      – the electorate.

      I guess no one really knows the exact damage a hard Brexit would do – but in times of diminishing prosperity I was one for leaving things as the are (we remain in the EU).

      We simply cannot afford any more harm to our economy. I don’t feel that the energy costs of increasing our trade with faraway countries has been properly factored in. I prefer a known partner on our doorstep – which is why I’d like a second channel tunnel to be built for commerce.

    • Mrs May seems to have found a mixture which annoys everyone, not least because its trade provisions cover goods, but not services.

      My start-point is that the public voted for Brexit, so this has to be delivered, and not in a purely cosmetic form. If “the establishment”, having incurred the wrath of the public by bailing out bankers barely ten years ago, fail to respect the vote, they may find themselves in dangerous and uncharted waters. I’ve heard that, within the last few days, one normally-staid Tory grandee (NOT a hot-head or a Leave supporter) has warned that, if things carry on as they are, the UK may be in a State of Emergency within months.

      On the basis of competency and outcomes, there’s a case for Mrs M being removed. With prosperity deteriorating, and the Brexit process looking disastrous, I can’t see why anyone would want the job. The Tories cannot risk angering the voters with yet another election – which I’m sure they’d lose – so they might need to ‘think the unthinkable’ and give Boris J a go. He could hardly make things worse!

    • Tim – I’ve read many conflicting reports about the bad and good effects of a hard Brexit. I do not know which to believe however I don’t feel that any current analysis can really predict what will happen.

      I respect your view that a full Brexit should be delivered- however my view remains that with all we know about EROEI / debt etc – adding any extra uncertainty into the economy is unwise.

      Brexit is just that.

    • It’s only fair to say that things could never have been the same for the UK in the EU after the referendum. For decades, I suspect, British premiers have waved the “eurosceptics back home” card under the noses of other leaders as a negotiating ploy. If Remain had won, the justification for British recalcitrance would have been a lot weaker.

      To be clear, my concern is what happens if “the establishment” is seen to have repudiated the choice of electorate. With FPTP, no separation of powers, a nominated upper chamber and increasing censorship, democracy in the UK is already pretty weak.

    • Yes I understand your view Tim – my view is geared towards the economy setting aside political considerations.

      Well all we can do is wait and see – with the decline in prosperity and changes in the public’s mood our David sadly chose the wrong time to call a referendum.

      I wonder how our discussions will be in July 2019?. I’m putting a reminder of this comment on my mobile for July 14th of next year.

  40. Lest we think that humans are rational…

    From the Automatic Earth today:
    It is a strange world where in some parts of the globe children are left to drown when the rubber dinghies they are put in to escape warfare and poverty in order to reach a place where they are expected to be able to grow up in peace and safety and have an education and a future, fail to carry them there, while in other parts they are put in cages and camps, torn away from their families, simply for looking for a better life and future, and at the same time other children just like them are rescued by heroes bigger than life from all over the planet, from a cave they are trapped in, in a no holds or costs barred operation.

    What is the difference between these children that could ever justify such divergent treatments?

    The rest of the article includes some thought about the EU asking Egypt to play a pivotal role resettling refugees back into Africa and the Middle East. Egypt responds that the fighting that the refugees are fleeing is largely the responsibility of the western countries, including the EU.

    One of the mysteries to me is why the EU countries have been so supportive of invasions and bombings of the countries generating the refugees. Did they never put 2 and 2 together? Do they really think that millions of refugees are the answer to some ‘demographic problem’? Living in the US, I assess my own country’s actions using a different metric…we do it because we can and we don’t care about lives lost.

    Unless, I suppose, it is a few children trapped in a cave.

    Don Stewart

    • I think blaming the EU overstates the case – most of the interventions were the responsibility of Britain, France and the pre-Trump US.

      There are reasons to hope that we’ll see less of this in the future. As I understand it, Mr Trump is firmly opposed to intervening in this time-dishonoured way. Britain seemingly lacks the military capability to do more of this, and it wouldn’t surprise me overmuch if France followed the Trump line.

      A broader issue is that what we might call the “liberal” or “globalist” elite favours free movement of goods and services, labour and capital within a “ring-fence” which excludes, for example, Iran and Russia. It favours this, of course, because it benefits from it.

      We’re now witnessing a rolling popular push-back over all this – that’s part of why “Brexit” won the vote, and Mr Trump won in the US.

    • Don – a good point- children trapped in a cave brings in great advertising revenues. Children at risk in leaky boats or washed up lifeless on a beach does not.

      Sorry I know my remark is very cynical.

  41. Dear Dr. Tim,
    I am sorry to misdirect the ongoing debate, but only for a brief second.
    I must take exception to your comment above, “England does brew the worlds best beer ! ”
    I am afraid that that accolade belongs to Germany.
    OK, maybe the Czech Republic.
    England may well brew a few very fine Ales, but Beer ?
    Sorry, no. 🙂

    • Hannen Alt was the House beer of the Dusseldorf Dragons Rugby Club when I played for them in the early 80’s Donald, Schlosser Alt was another favourite. Apfel Korn and Schlosser Alt lead to may a regretful morning. The Dusseldorf Alt Stadt was a great place for a Night out Then as I am sure it is now. Happy Days.

    • I was there in February – it was -5 even during the day but the Alt beer was still nectar. When I worked in Dusseldorf 2004 – 2005 there was talk of a rugby club but by then I was already too old to play seriously.

    • OK, we’ll agree that Britain produces the best ales – which I for one prefer to beers (which I call lagers).

      On best lager, though, wouldn’t Belgium have a good claim?

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