#131: Not about “Brexit”


What follows is an analysis of the British economy, from the perspectives of performance and risk.

It is not a discussion of “Brexit”.

Readers are, of course, welcome to discuss any pertinent issue, “Brexit” included. But a non-“Brexit” focus has to be stated clearly, because one of the most regrettable effects of the whole “Brexit” process has been to divert attention away from the economic fundamentals. Distractions don’t come much bigger than “Brexit”.

Perhaps the most striking characteristic of the British economic situation is the stark divergence between two different views. One of these is an official and consensus interpretation, founded on conventional economics, which portrays performance as no worse than lacklustre. There is, however, a raft of other indicators which paints a much less satisfactory picture.

Analysis undertaken using SEEDS – the Surplus Energy Economics Data System – indicates that prosperity peaked as long ago as 2003, and that the consequent strains are now becoming ever more apparent. Declining prosperity, of course, characterises most advanced Western economies. The United Kingdom stands out, though, for the rate at which prosperity is deteriorating, and for the elevated level of risk associated with this trend.

The great dichotomy

According to conventional metrics, the economy of the United Kingdom continues to grow, albeit at a less than sparkling pace. GDP is expected to increase by about 1.4% this year which, though hardly impressive, at least outpaces the 0.6% trend rate at which population numbers are expanding. People are, then, getting gradually better off, whilst unemployment remains low.

The problem with this interpretation is that it is hard – arguably, impossible – to square with a host of other indicators. First, wage growth is very subdued, barely keeping up with CPI inflation, and falling steadily further adrift of the cost of household essentials.

Second, productivity growth has fallen to virtually zero, having averaged just 0.2% since the 2008 global financial crisis (“GFC I”).

The labour market is characterised by increasing casualization and insecurity of employment, factors which contribute to depressed wage levels despite officially-low unemployment.

There is every reason to suppose that consumers’ ability to spend is in rapid retreat. Customer-facing businesses (including shops, restaurants and pubs) are going through a fire-storm of closures, failures and job losses. Consumer credit has climbed to potentially dangerous levels, with anecdotal evidence that this credit is being used, not for discretionary purchases, but simply to meet living expenses. There is also reason to suppose that big-ticket purchases are in decline. Surveys indicate that large and increasing numbers of households are struggling to make ends meet.

Government, too, seems strapped for cash, not really knowing how to provide necessary increases in funding for areas such as health, defence and care for the elderly. Local as well as central government looks resource-constrained.

Broader indicators of economic stress include homelessness, with young people, in particular, finding accommodation to be costly, often of poor quality, and hard to obtain. Seemingly-rapid rises in violent crime – including a dramatic surge in moped offences, of which there were 23,000 in London alone last year, compared with just 827 five years earlier – do not seem consistent with a prospering society.

In short, there is an abundance of evidence that, far from getting better off, the average British person is getting poorer. At first glance, this is impossible to square with any level of reported “growth” in economic output.

The SEEDS interpretation

An answer to this conundrum is supplied by SEEDS, which indicates that prosperity per person in the United Kingdom has been declining relentlessly since as long ago as 2003.

Over the period since then, reported GDP has risen by £386bn (23%), to £2.04 trillion last year from £1.65tn (at 2017 values) in 2003. Against this, however, aggregate debt increased by £2tn (62%).

This means that each £1 of reported growth has been accompanied by £5.20 in new borrowing. It also means that, against current growth expectations of about 1.4%, the UK typically borrows 5.7% of GDP each year.

The stark implication is that, like many other Western countries, Britain has been pouring cheap credit into the economy to shore up consumption. In short, most of the supposed “growth” of recent times has been nothing more substantial than the simple spending of borrowed money.

Stripped of this borrowing effect, SEEDS calculates that, within recorded growth of £386bn since 2003, only £77bn can be considered organic and sustainable. This puts ‘clean’ (borrowing-adjusted) GDP for 2017 at £1.59tn, barely ahead of the 2003 number of £1.53tn. On this basis, underlying growth has not kept up with increases in the population, so that ‘clean’ GDP per capita has decreased by 5.1% since 2003.

The compounding headwind has been a sharp rise in the energy cost of energy (ECoE). This, of course, is a worldwide problem, but has been particularly acute in the United Kingdom. Back in 2003, Britain’s ECoE (3.4%) was lower than the global average (4.5%). Today, though, ECoE is markedly higher in the UK (9.2%) than in the world as a whole (8.0%).

On a post-ECoE basis, prosperity per capita in Britain has fallen by 10.3% (£2,540), to £22,020 last year from a peak of £24,550 in 2003. Prosperity has declined in other Western countries over the same period, but Italy is the only major economy where the fall has been as rapid as in the UK.

SEEDS shows no sign of this downwards trend slackening, and projects that British prosperity will be a further 4.2% lower in 2022, at £21,090, than it was in 2017. In short, the average person is getting poorer at rates of between 0.5% and 1.0% each year.

Meanwhile, of course, his or her share of aggregate debt continues to increase.

Elevated risk

Deteriorating prosperity necessarily increases risk, because the ability to carry any given level of financial burden is a function of prosperity. Falling prosperity also impairs the ability to fund public services.

Trends in debt ratios reflect deteriorating prosperity. Aggregate debt at the end of 2017 (£5.25tn) equates to 258% of GDP but 361% of prosperity, the latter number having risen markedly since 2007 (283%).

More worryingly, the rise in debt exposure has been matched by sharp increases in proportionate financial assets, a measure of the size of the banking system. The most recent figure, for the end of 2016, puts Britain’s financial assets at 1124% of GDP, but this rises to 1547% when prosperity, rather than GDP, is used as the denominator. The SEEDS estimate of financial assets in relation to prosperity at the end of last year is 1577%, again sharply higher than the level on the eve of the financial crisis in 2007 (1285%).

Measuring debt and financial assets in relation to prosperity are two of the four risk yardsticks used by SEEDS. The UK looks high-risk on the debt measure, and extreme-risk in terms of the scale of its banking exposure.

On the third risk criterion, which is dependency on the continuing availability of credit, the British score is no worse than that of most comparable economies. The United Kingdom does, though, also depend on a continuing ability to borrow from abroad, to sell assets to overseas investors, and to attract inward flows of capital. This dependency looks risky, because the severe travails of customer-facing businesses, and the implied hardship of consumers, necessarily impair the attractiveness of Britain as a place in which to invest.

Finally, Britain has a high score on what SEEDS calls “acquiescence risk”. Put simply, the less prosperous people become, the less likely they are to back painful recovery plans should these be required in a future financial crisis. Worsening prosperity has already had a marked effect on political outcomes in America, France, Italy and elsewhere, and the same factor is likely to have tilted the balance decisively in the referendum on “Brexit”. Should it become necessary for Britain to repeat the 2008 rescue of the banks, popular acquiescence in such a measure should be no means be taken for granted.


SEEDS 2.15 United Kingdom 21072018


495 thoughts on “#131: Not about “Brexit”

  1. Just a thought about places of (relative) safety…if there are any

    A few years ago I heard the recording of Winston Churchill’s ‘blood, sweat, and tears’ speech for the first time. What struck me was his declaration that the Germans posed a deadly threat to ‘our empire’. Now, as someone who grew up on Midwestern Progressiveism, which was staunchly anti-empire and anti-royalty and anti-Wall Street and anti-Corporate Giantism, it was hard to square Churchill’s obvious tie between the prosperity of some islands off the west coast of Europe with the rule of a global empire, and the story we had been told about ‘fighting for freedom’. In Churchill’s eyes this global empire was worth all the ‘blood, sweat, and tears’ that were necessary to keep that empire under control. The empire was also under attack from Japan in the Pacific.

    Once one buys into the logic of Empire, then wars, either of conquest or attrition, become inevitable…or so it seems to me. The view from the United States today is schizophrenic. On the one hand, we have the Empire of the Petrodollar, which sustains Wall Street and Corporate Giantism. On the other hand, we have the US Deep State, which is very much about old-fashioned Empires maintained by military might and vassalage to a small group of people who rule that Empire from Washington DC.

    In my simplistic model, Donald Trump represents the Empire of the Petrodollar. He really doesn’t care whether Europe wants to be a vassal state or not, since he can’t see much profit from European vassalage. Nor does he care very much about pouring money into Japan so that they can fight with North Korea. Which brings Trump into direct conflict with the Deep State, which lives very well ruling their Empire.

    If we complicate the model a little bit, we begin to realize that a few of the people in the Deep State are actually numerate and literate and can read the doom in the SEEDS tea leaves as well as Dr. Morgan. While they may agree with Keynes that ‘in the long run we are all dead’, in the short run the ‘extend and pretend’ strategy has allowed a lot of children to attend Ivy League colleges, and marry well, and create grandchildren who gather each year on the family yacht. My local bank had a picture of just such a prosperous family posed on a dock in front of their boat, and the title was ‘generations of wealth’.

    I think there are two main threats posed by Russia. First, the Deep State is mired in procedural processes that demand ever increasing escalation against a foe that isn’t fighting back. Russia’s conventional armies are in no way a match for the combined forces arrayed against it. What Russia has done is to re-invigorate Mutual Assured Destruction. Hypersonic weapons neutralize all those aircraft carriers arrayed against it, and which it could not hope to emulate. The Pentagon thinks that it knows exactly where to draw the line in terms of antagonizing Russia, because nuclear war with hypersonic weapons really is mass suicide. Russia assures the US that it is now in the hands of the computers….a decapitation strike on the Kremlin will be followed by automatic responses. This situation is ‘intolerable’ as Trump and his then Secretary of State said early in his administration. But the inevitable Deep State logic of Empire keeps grinding toward war.

    The second threat posed by Russia is, amazingly, capital flight. If some seriously rich people begin to emulate Johan, then bad things happen to the Empire of the Petrodollar. And so continual harassment of the alternative universe in Russia, and to some extent China and Iran, becomes the new normal. And harassment of Germany for the Baltic pipeline becomes completely understandable. I don’t think Russia could absorb any significant amount of the financial capital that would need to flee the over-indebted Western countries, but the Petrodollar Empire can’t afford even the hint that it is unstable.

    My advice to Dr. Morgan would be to avoid young women in bars who seem to find him irresistible.

    Don Stewart

    • Don,

      With regard to Russian military threats.

      The US/Coalition ability to project power worldwide is underpinned by intelligence collection and carrier strike.

      Russia has been working with many countries developing what I would refer to as anti-power projection solutions. The anti-aircraft, anti-ship, anti-satellite missile systems are a cost effective foil to ‘US led interventions’. Hypersonic missiles are just faster (Mach 7-8), and hence higher performance, versions of the supersonic cruise missile technology already being used (Mach 3-4).

      By selling these capabilities to other countries Russia hinders the US ability to operate it’s military with impunity across the world. Obviously this supports Russian agendas but also may other countries.

      The real threat posed by these technologies is that the US may no longer be able to EASILY go anywhere and do anything it wants. There is now a realistic threat of high losses in the early phases of an expeditionary campaign and countries like Iran and China could effectively restrict the US Navy from operating in specific areas and important straits if they chose to.

      With regard to hypersonic nuclear weapons:

      I don’t believe there is any realistic intent for a nuclear warhead versions of such weapons, that would negate their attractiveness because they wouldn’t be cost-effective systems anymore.

      Modern nuclear weapons last I checked are already “hypersonic”. The ICBM in launch reaches 17 Mach and the MIRVs it deploys could have far greater velocity on re-entry, Hint: they use “hypersonic aerofoils” for descent control.

      So in summary:

      Russia does not pose a direct threat to the US, but technology it develops and sells, in partnership with other nations, does pose a threat to unhindered US military global power projection.

      I don’t have a view in if this is ‘good’ or ‘bad’. But it does change things.

    • ‘Dr’ Kevin, please stick to the subject. Before we know it we will all be talking about colloidal silver or AI drones and forget about declining Ecoe.

    • HOutskoo, I thought carefully about responding on this point of Russian threats, initially raised by Don, since it could be considered off topic. However, I did for the following reasons:

      1. Increasing ECoE increases the incentive for global actors to project power, to access higher quality resources, to maintain growth for longer or to mitigate the effects of degrowth. A general point o the consequences of increasing ECoE which is a common point of discussion on Tim’s blog.

      2. The ability to stop or hinder nations, like the UK, doing this on their own or as part of a coalition could significantly effect resource access and hence the prosperity of those countries. UK future prosperity is the specific discussion here and hence the ability to project power globally is, in my view, a critical factor to take in to account when considering the rate of decline of prosperity in the UK.

      Sorry, I should have pointed out the relationships.

      3. Tim likes military, and maritime warfare in particular, so I thought he might find the connections between his multiple interests…interesting 😉

    • Thanks, Kevin, and I am indeed fascinated by maritime warfare – I’ve flown off a carrier, been on amphibious assualt exercises, and stood on top of the reactor during a visit to an SSN.

      I agree with the connections that you make here. If growth is over, the economy becomes a zero-sum game, and therefore competitive. Moreover, trade wars gain popular support in hard times, and hot wars are a time-dishonoured way of distracting the public from problems at home.

      Strategically, Russia doesn’t need (and I’m sure doesn’t want) to usurp the role of the US. Rather, it seeks the ability to restrict what the US can do. That the US did not get its desired outcome in Syria exemplified this. Iran and China are harder to predict. But it’s encouraging that Mr Trump opposes interventions of the sort favoured by his predecessors. In a 9/11 situation, I feel Trump would have launched immediate air attacks in Afghanistan – without giving al Queda a fortnight in which to redeploy! – but would not have invaded. I somehow doubt that he would have pursued ‘regime-change’ in Iraq.

      It’s interesting to reflect that Britain’s (earlier, England’s) prowess at sea far exceeds achievements on land. At Waterloo, the general commanding was Irish, and the best regiments were Scots and German.

      Be that as it may, recent experiences on land have not been encouraging, not least because the UK cannot deploy sufficient troop numbers.

    • Dr oneill, thanks for your reply. I read a few blogs and there’s a lot of trolling. To hinder indeed, by changing the subject, to ridicule or whatever. The public must not know, must not see through the fogs.
      Thanks for clearing things up.

    • When I worked for MoD doing conceptual modelling if the ‘defence enterprise’. I developed an interpretation of the military as part of a larger resource extraction solution. Two primary functions were described:

      1. ‘Spearheading’ exploitation of resources, through threat of action, or direct action.

      2. Defending resource flow solutions.

      While this view was extremely unpopular and challenged the official ‘force for good in the world’ narrative, it did seem to correlate well with historical activities of the UK and others when employing ‘military assets’ over the past few thousand years. Which was my argument for it’s validity as a conceptual model.

      When using this model to evaluate the UK capabilities it is obvious the UK has severe capability shortfalls. New area of denial missile systems increase the size of that shortfall. Purchasing systems such as F-35 and increasing interoperability with US forces are an attempt to reduce it.

      I suspect we may be in an unofficial new arms race between the West and the ‘New East’ driven by the increasing ECoE context.

    • Kevin

      My view is that what we’re witnessing now is a process of “regime change”, brought about – as so often in history – by economic hardship and perceived inequity. The incumbent regime is the”liberal/globalisation” elite, headquartered in Davos, and its challenger is a broad anti-globalisation coalition including Mr Trump and many populist parties. The latter, because it draws fuel from deteriorating prosperity – seems the likelier winner.

      If so, Russia is an interested but fairly relaxed observer on the sidelines, seeing potential advantage – whilst China is a much more worried spectator.

      Be that as it may, any interpretation which ignores energy misses the point. Haven’t human conflicts almost always been about resources?

  2. drkevinoneill
    You obviously know more than I do. The last I read on the subject was that Russia’s new generation of weapons can be launched from airplanes. So they are less vulnerable to first strikes than ICBM’s in silos. What I read was that US intelligence initially dismissed ‘tubes strapped to airplanes’, but that recent testing in Russia has convinced them that the threat is real. The fact that the weapons were developed at a far lower cost than running the massive US military/ industrial complex should be sobering, but is not. The fact that the weapons have the ability to destroy the world should be sobering, but is not.

    I should note that some other amateur observers come to different conclusions. For example, Dmitry Orlov concludes that MAD will make the military more cautious in dealing with Russia and China and Iran than the clueless politicians, and since the military actually runs things, a nuclear war is very unlikely. In terms of the vassal states, Ugo Bardi has written pretty extensively about the Roman Empire. I don’t read and remember everything he says, but as I remember Rome pulled out of England when it became unprofitable. Marcus Aurelius knew that his time with the legions on the Danube was a waste, but he couldn’t figure out how to stop it…which is the logic of empire at work and the Deep State’s ability to swiftly assassinate.

    Don Stewart

  3. drkevinoneill and others
    Consider the model of Empire as a financial arrangement. How much should the people who lived in England have been willing to pay to keep the Roman Legions and the Roman administrative apparatus in place? The alternative, as I remember, was the break-up into small kingdoms with lots of civil war and the creation of legendary heroes like King Arthur. Maybe the real history is worse for the residents of England than the alternative of paying to keep the Romans in place.

    While my wife and I were in France decades ago, we saw a Roman arch celebrating the introduction of Roman civilization to the barbaric Franks, and how this was such a great advance for the people living in what is now France. I don’t think the sentiment is entirely one of self-justification. There really was a Pax Romana.

    Fast forward to today. Should Germany and France be willing to increase their contribution to NATO to keep the US involved in Europe? How much of an increase? Assume that Trump is, as I have portrayed him, doing the cold hearted math of the Romans looking at England. But also assume that there are powerful forces in the US who are determined to either see Trump dead or disgraced. And if the alternative is some sort of detente with Russia, how to deal with the fact that Russia absolutely must retain the ability to destroy the US, or else it will be a smoking wasteland. When one of the Scandinavian countries was acquiring medium range missiles from the US, Putin remarked to them that ‘now you are in the crosshairs’.

    I am not a European, but keeping on keeping on is frequently the safest course of action for politicians. If Trump sticks to his guns, I would not be surprised if the Europeans increase taxes, or cut benefits, in order to pay more in tribute to the US.

    Don Stewart

    • “Maybe the real history is worse for the residents of England than the alternative of paying to keep the Romans in place.”

      I don’t think so. Its better to die on your feet than to slave on your knees.

      BTW, dear Don, you seem to need a lot of words to expose your opinion. History is what it is; history.

    • Yes, I gathered that.
      I am hoping for a brief explanation, similar to the one Tim gave for Ireland in an earlier comment.

    • Canada’s economic position ought to be favourable, because ECoE is low (4.5%).

      But borrowing has been reckless.

      Each C$1 of growth is accompanied by C$6.90 of borrowing.

      The country typically borrows 11.5% of GDP annually, way out of sight of any conceivable level of growth.

      There is an enormous bubble in property prices.

      Prosperity is declining despite Canada’s resource wealth.

  4. houtskool
    ‘Its better to die on your feet than to slave on your knees.’ is a sentence without meaning. It’s easy to say things with no context, and hence no meaning.
    Don Stewart

    • We live in an empire of greed, with control over every aspect of life. The Matrix. I live a good life, but its all fake. I’m sick of it. We all slave on our knees, try to outrun endless growth. So, in my case i would love to get back on my feet. Problem is how long i can last… without enough surplus energy. Everything is fake Don, nothing is real. I’m a zombie already, so what could happen to me?

  5. Tim, I’ve been thinking and as you know I am at my most dangerous when I’m thinking!
    I would sum-up the position of the UK thus:
    At the macro level the British Establishment has deliberately reconfigured the economy to operate on the basis of low wages and high consumption sustained by borrowing (which makes the nation heavily dependent upon the kindness of strangers) and asset sales (selling ‘The Family Silver’ [including the Constable]) with the aim of maintaining levels of consumption in excess of value creation.
    At the micro level income growth has either stalled or weakened yet the Establishment wants households to keep spending (in order to maintain GDP), save more (to improve financial resilience), invest more (to provide for retirement), pay more tax (to fund public services), take on loans (to fund post-state education) and pay the highest price possible for housing (to protect the lenders).
    Would you say this is a fair summary?
    I will finish with a flourish by saying that the model is not sustainable in the longer term, and the delusion of the Establishment is slowly but surely meeting reality at the Banquet of Consequences.

    • You are exactly right. It’s not sustainable in the short term, either. A former colleague described the situation as “a banana republic without bananas”. The economy has become an accident waiting to happen.

    • @Kevin

      A very good summary but I’d disagree in one crucial aspect. the banks create 97% of the money in circulation so it is not the kindness of strangers that drives consumption but the recklessness of the banks. The banks are in a worse position than 2008 and will go pop again at some point. Even if we are in the EU I see no chance of the bail in provisions surviving the bust; it will be bail out – again.

      Also you say that income growth has stalled or weakened but the statistics don’t show major reductions in real incomes over recent years. Now I believe the numbers to be wrong and that Tim is right in that an essentials index would show a decline in prosperity via a reduction in real incomes. Debt is the bridge between desired consumption and real incomes and is what is keeping the ship afloat.

    • I would contend that these are linked. Banks do indeed lend money into existence, but doing too much of this eventually undermines any trust that “strangers” overseas place in your currency.

  6. Excellent summary, Kevin from Colne, a great mass of insane inconsistencies from our masters, based on incorrect assumptions as to national prosperity. The gulf between reality and the image promoted by consumer advertising grows ever greater.

    Moreover, the cheap labour importation model – which no politician Left or Right would ever openly admit to – has been profoundly corrosive of social and cultural cohesion, leading to a Balkanised country, in addition to growing class and inter-generational tensions. One just has to look at the racial and religious divisions in the boroughs of the larger cities to be more than a little alarmed – this always leads to communal violence in times of stress.

    And isn’t it incredibly arrogant to say ‘Poor of the world, come here to slave for our redundant elderly for a minimum wage and no security!’? I certainly wouldn’t be happy with that prospect. Particularly as in a declining economy there is no obvious ladder upwards from such basic work for them or their offspring.

    The other worrying trend I’ve noticed in the media is the growing envious antagonism towards property owners, however ordinary -assuming, it seems, that it all just fell into their laps as Boomers; landlords (often just trying to make up for obviously shaky pensions); people with any savings; and the elderly in general – in a recent Guardian article even those of 50 or so were castigated as ‘privilieged’, basically for having anything at all.

    This is all very unhealthy, and I have to say contrasts very unfavourably with Spain, where I have never once encountered this nasty and envious attitude towards older people, even in the most rabid online comments, (maybe his is due to the fact that family property is seen as just that?) and where there is real social cohesion as a community goal.

    Immigration – unassimilated – is ,of course, doing its damage in the major cities, and I have noticed ever angrier comments about that, including calls for lynchings and community action to deal with criminal foreigners. An awful lot of Latinos and Moroccans (horribly exploited, it should be said) did in fact go home after 2008 .

    On balance though, the Spanish atmosphere is far preferable, setting aside the usual political torments.

    Shadows seem to be lengthening over the land, and there is no prospect of a new sun of prosperity rising to dispel them.

    • In agreeing with you, I’d like to nuance just one part of it. This is the unpopularity of an older, property-owning generation. I think they bring a lot of their unpopularity onto themselves by their attitudes, in two ways.

      First, they act as though owning a valuable property is wholly a reward for virtue. ‘If I own a house worth £400,000 now, it’s because I worked and saved. It’s all been done by me”. Actually, the reason they own a property worth that much now is because of monetary policy, plus deliberate government policy to shore up (and, effectively, increase) house prices. Barring this, property prices would have remained at the collapsed level of 2009.

      Second, the implication is that the only reason why younger people aren’t in the same fortunate position is that these younger people are feckless and lazy. Some may indeed be both, but the main reason is that policy has priced houses out of their reach.

      I’ll never forget the outrage when Mrs May proposed to use part of the equity of older people’s homes to fund their care in old age. I felt bound to ask two questions. First, if you’re not going to pay it, who is? Second, since it’s government policy that has inflated the value of your house so dramatically, why is it wrong for government to ask for a slice of that gain? Or, put another way, would you prefer it if, to pay for your care in old age, the government introduced a flat 40% tax on all capital gains and inheritance?

      Beyond this cavil, though, you’re right. The better situation in Spain is very visible. This isn’t because Spaniards are more prosperous than the British, since they aren’t. Rather, it’s a matter of attitudes and social cohesion. Spain never really bought into the Anglo-American idea of ditching traditional values and replacing them with entirely material measures of self-worth.

    • I like to simplify things for better understanding. How much shampoo do you use when the bottle is almost full? Enough? A lot? Or, and i think this is what most people do, more than enough?

      And how much shampoo do you use when the bottle is almost empty, you don’t have another one, and shopping is four days away?

      Go on a stroll between your ears before answering. This goes for almost everything, including debt.

  7. Very good points, and perhaps some of those who have benefitted from the asset bubble are insufferable. And I would imagine that many don’t see at all that their benefit arises from state policy.

    Unfortunately, I get the impression that the younger generation are also, often, pretty feckless – or rather, such ardent consumers that if they are in god jobs buying stuff, holidays, etc, come first – they just don’t have the savings habit to start with. A customer says that his son and daughter in law are fiends for buying things on Amazon (he is retired so it is all sent to his house) and he can’t understand it at all. They have not hesitated to get parental help to buy.

    I don’t feel that having student loan money land in one’s account -with the passive acceptance of huge debt from the very beginning – is the best start to adult life. The best way to begin is to earn one’s money, which then has to be very carefully managed, with no overdraft.

    I was astonished, sitting on the train to Cambridge behind a big group of recent graduates talking very loudly just how many foreign holidays they were going on, and clearly spending very heavily on bars and restaurants in London, which makes money flow away like water down a storm drain.

    A friend recently married a much younger woman, Cambridge grad, well-paid, but totally penniless: the cause being eating out all the time and holidays. This surprised me, as she comes form a working class Welsh family, and is very sensible and down to earth in so many ways. But that is how all her peers live.

    Equally, I had trouble getting him to see that very high rents also played a part in the situation of the younger working generation: what got you a whole 3-bed house in 2001, now gets only a room in a shared house!

    He started in the City at £13k in 1992,and saved like hell, coming from a continental peasant family – saving is in the bone for such people. I’m the kind of chap who counts up the £1 coins in a tin every month, and likes the weight!

    Interestingly, the Basque economy is slowing down now, which they say is due to ‘an unfavourable external environment’ – well, that’s right!

    • I wonder whether these are symptoms of (subconscious) despair? I never underestimate the intuition of the public – they may not know GDP (let alone ECoE) from a hole in the ground, but they sense the direction things are heading.

      Where the UK is concerned, people have been indoctrinated into the belief that your worth is linked to ‘success’ and what you own. Some of us recognise that this ideology is both puerile and poisonous, but we’re in a small minority.

  8. The young graduate I met in the garden centre, mentioned earlier, told me that she and her friends had concluded that it was best to spend what spare money they had on fun, as there was ‘nothing to save for in the long-term.’

    Also ‘I only buy pot plants myself, as I’ll always be renting and I can take them with me when I move.’

    For those with better prospects, consumerism, Ryanair-type holidays, etc, is simply an ingrained habit now.

    And perhaps if most of your money goes on the rent, for not much space, then the incentive is to get out and blow the rest on fun somewhere nice.

    The irony might well be Labour under Corbyn being voted in by the young who want to be property owners with mortgages!

    • They’re also likely to have better things to do than respond to opinion polls or take part in focus groups…..

      The next election is Corbyn’s to lose.

  9. Younger Generation; Values; Hard Times
    I recommend dipping into a strange best seller:

    The book is a Socratic dialogue between a young man and an elderly philosopher in Japan. The philosopher is both a student of Greek philosophy and a follower of Alfred Adler’s mid-20th century philosophy and psychology. The author of the book (Koga) wrote it after many sessions with Kishimi, the philosopher. Originally published by a small house in Japan, it became a surprise best seller. Later, it was translated into Korean and became a best seller there also. Now available in English. (I don’t know how it is selling in English). The book seems to appeal particularly to young people who sense that the future is not what it once was, in terms of opportunities. And so this book, which is not about economic growth at all, offers a different way of thinking about progress. Among the tenets:
    *Two behavioral objectives:
    #To be self-reliant
    #To live in harmony with society and the universe
    *Two psychological supports:
    #Consciousness that ‘I have the ability’
    #Consciousness that ‘People are my comrades’
    *The objective of life is ‘community feeling’
    #Horizontal rather than vertical relationships
    #Harmony of life (looking at wholes rather than parts…e.g., money or social status)
    *Happiness is:
    #Feeling that ‘I am beneficial to the community’
    #Feeling that ‘I am of use of someone’

    I am only able to skim the highlights here. The book is brief but dense. I would add a few items from modern cognitive research, but the book stands very well on its own.

    I will note that Charles Hugh Smith has come up with reasons why Guaranteed Basic Incomes are NOT a good idea, but that payment for community service IS a good idea. Charles ideas would fit pretty well with this Adlerian viewpoint.

    From the standpoint of projecting the current hedonism of the young into the future, the experience in Japan and Korea is that when things get tough, the young are clearly able to rethink their priorities. One of the premises of the book is that the Freud/ Jung theory that history determines the current state of the individual is simply wrong. The Adler approach is one of ‘teleology’….goal driven. In my reading of the science, ‘goal driven’ is in the ascendent and the ‘victim’ story is dying an agonizing death…but taking down a lot of good people with it and wasting enormous amounts of wealth we can’t afford to waste. The message to the young is ‘You can change your life this very moment!’.

    Don Stewart

    • Very interesting Don.

      I have actually been searching for a suitable place to live in Spain, and have found a valley in the Pyrenees which, while it is of course part of the modern economy, has a community spirit which fulfills many of those aims – the sense of community and tradition does predominate, and the people are both hard-working and of good character I am told.

      There are still common lands and woods, and residency brings both rights and responsibilities to the community and its goods

      On the other hand, being Basque, private property is also of great importance – so the question is one of balance.

      A traveller in the 1840’s, Richard Ford, described it as ‘a Paradise’, and fortunately it has not been totally ruined since then.

      It is not in the least cosmopolitan, but I think I would with time be able to get over the fact that my grandmother was born not there but in a neighbouring valley – another country!

      The tourism there is Spanish and French, not at all international and trashy, just hikers. Mono-racial and mono-cultural, no tensions set to explode like Britain. The property bubble has not affected it greatly -people are crowded into the nearby city, Pamplona.

      If anyone would like to see these people having fun, just Google ‘Baztan Fiestas’: nothing corporate in sight! And who could fail to like those girls, especially the log sawing competition?!

      It’s worth noting that the Soviet Union, in the early phase, seemed to fulfill many of those psychologically desirable conditions which you enumerate – above all working for the common good, which is perhaps why people believed so fervently in it at one point.

      One of the great tragedies of Britain is that the absurdly high business rates, which no government will reform, strangle the creation of small businesses -and therefore of healthy local communities. I patronise them deliberately, and now really struggle to force myself to go into a mobile phone shop or the like corporate environment .

    • Thanks. I read that and it makes sense to me.

      Meanwhile, some of the world’s richest men seem to be trying to work out post-crash survival plans, when money ceases to have value. This is interesting, even though we should allow for a lot of paranoia.

      In other words, people ‘in the know’ might – like Russia – be preparing for what now looks inevitable to many of us.

      To repeat a point I made earlier, SEEDS calculates that scope for value destruction in 2008 was of the order of $84tn (worth almost $100tn in 2017 USD). This ‘cost of reset’ was ducked – so carried forward – using ultra-cheap money. Ten years on, SEEDS puts the scope for value destruction at close to $400tn.

  10. Tim, I thought a point you made in an early post was most interesting:

    ‘As I see it, where Britain is at right now is that huge (and rising) numbers of people are struggling to make ends meet. This isn’t about a “poor” or “feckless” minority, but about people in the middle quintiles.
    This is not understood by government, not least because conventional econometrics don’t reveal it. “Growth” based on spending borrowed money is assumed to be real growth – and, if your starting premise is as mistaken as that, understanding the reality, let alone getting decisions right, becomes impossible.
    A hazard here is misunderstanding by the public. A government which doesn’t understand these issues becomes perceived, instead, as government which doesn’t care about them.
    Somebody needs to explain to the powers that be that “no, whatever your experts tell you, the economy isn’t growing; debt keeps rising; average prosperity is declining; there is a huge pensions problem looming; and the public, perhaps mistakenly, assumes a lack of concern for their circumstances, when the reality may be nearer to ignorance”. It needs also to be explained that “this isn’t a flat spot in the economy; it’s the new reality”.’

    Last week a report from the House of Commons Treasury Committee on household finances (income, savings and debt) made much of the low level of saving among many households.
    This was followed by members of the national commentariat earnestly pontificating on the matter. Oh, the irony! Highly-paid national commentators, some on salaries between £150,000 and £199,000 confessing genuine bafflement that ‘little people’ earning £27,800 a year had troubling saving money! I suspect that many of the national commentators had not read the Committee report in full. Had they done so they would have come across the following statement:

    ‘Household incomes were hit hard by the financial crisis and its aftermath. But structural changes to the economy … mean that, for many households, the pressure on their finances will persist.’

    Shorn of posh language the Great Financial Crash did major damage to wages and this shows no sign of ending any day soon.

    Phillip Inman at The Guardian/Observer makes an interesting point:

    ‘Employment is strong and unemployment is low, but wage growth remains weak. This shouldn’t happen according to standard economic models. The Phillips Curve tells us that when employment is strong, wages go up. And the logic is unimpeachable …
    However, the standard measure of employment is flawed, argue the eminent economists David Bell of Stirling University and David Blanchflower of Dartmouth College in the US. Their recent study found that once underemployment was taken into account, the unemployment rate jumped from 4.2% to 7.7%. That’s why wages are rising at just 2.7% on average and not the 3% to 4% the Bank says it needs before wage pressure forces up prices.
    Underemployment is important because it adds-up the extra hours’ staff say they want to work. When a company thinks it needs to expand capacity; it doesn’t need to hunt around for extra staff at higher wage rates; it just increases the hours of existing staff. As long as this is possible, wages rises, and therefore price pressures, remain muted.’

    Pulling all of this together I’m coming to the view that a number of key statistical macro-economic indicators are no longer reflecting accurately the real nature of things. Policy-makers are reading the dials of GDP, employment and CPI leads and concluding that the economy is ‘healing’ and things are moving in the right direction. Yet GDP is showing fake growth, employment figures fail to capture underemployment and CPI fails to capture the increase in the price of essentials etc.

    The implications of this are little short of terrifying.

    • Thanks. I think I made the point about underemployment replying to an earlier comment. I also question whether the ONS’s Labour Force Survey (LFS) can really get data on the wages of those in casualised employment.

      More broadly, the main points made in my article are that prosperity is nowhere near official GDP per capita, that prosperity is trending downwards, and that risk increases in tandem with this process.

      So yes – official figures are misleading, undermining the value of any policy decisions made using them.

      I make no secret of seeing no plausible – meaning “likely to be pursued” – way out of this for the UK.

    • That is certainly the case in Spain – although of course the unemployment rate is higher than in Britain even in the stronger regions (Basque Country, Navarra, about 9-10%) – where I have been reading about the prevalence of ‘micro-contracts’ of one week,and of course very low pay.

      There is a lot of head-scratching going on there as to why wages are not rising, despite an undoubted recovery and increased employment (which now seems to be stalling).

      As for not understanding the true situation, apart from taking the wrong metrics as a guide, there is the Edwardian joke where the rich man says to his employee:

      ‘Having trouble getting to the end of the week?! How much of your wages do you spend on food, for instance? ‘

      ‘70%, sir’

      ‘Well, there’s your problem, my man! Take a tip from me: I only spend 10% of my income on food – do the same, and you’ll find you have much more for other things. No, no, don’t thank me for the advice, it’s my pleasure!’

    • Good one – though I think there are some who would like to turn the clock back even further, to the Victorian relationship between employers and workers.

      In the 1850s, Parliament ordered an inquiry into the prevalence of alcoholism in the industrial North. One woman, when asked why she drank so much, replied that “gin is the quickest way out of Manchester”.

  11. Amusing. Gin-drinking is resurgent, but it’s not that cheap stuff.

    Yes, Britain is turning Victorian, and not a few people may well want it: I recall Max pompous ass Hastings’ article in which he lamented the fact that workmen ‘no longer touch their caps (! baseball hats?) and call you ‘Guv’nor’ ‘ !!

    There is a true story of one of the Victorian City magnates who used only to eat an apple for lunch ( a no doubt 5-course dinner awaited him every night, and one can be sure breakfast was not light) who reprimanded his clerks for buying cooked lunches of pudding and sausages – ‘You’ll never get anywhere speeding like that -do what I do and only eat an apple!’

    I suspect there are still many in the Conservative party like this, and there were not a few in New Labour. A friend met an ex-minister from the Blair govt. at a swanky gallery show, and he said outright ‘I was never a Socialist, you know’. He was doing very well with various financial and property consultancies…..

    • Speaking personally, there is no political grouping that I hold in as much contempt as the Blairites. If Jeremy Corbyn achieves nothing else, getting rid of the Blairites will be a lasting achievement to his credit.

      When it comes to the Conservatives, or Labour under Mr Corbyn, I can respect their views without necessarily agreeing with them. “New” Labour removed any way to vote for the mixed economy of private and public provision. This meant that a tried-and-trusted, non-extreme economic system was taken off the table.

      If Mr Corbyn succeeds in purging his party of the Blairites, at least the voters will have a choice between two genuinely different programmes. Blair himself led the UK into a disastrous war for reasons which I still don’t understand. Brown thought that pouring cheap and easy credit into the economy was the elixir of growth – and so genuine did he assume this growth to be that he ramped up public spending accordingly, never dreaming that the abolition of “boom and bust” might not turn out to be permanent.

    • I watch a lot of cinema and have a large number of Japanese films. One theme that comes across continually is the notion of “giri” (obligation) and the burden that this imposes. In Japanese culture the burden is mutual; the servant must obey the master but the master has obligations too.

      The “Victorian” examples that have been given here are of course not mutual they are one way: from the bottom to the top and it is interesting that Japanese society has been, and is, much more cohesive over time than Western society and I’m sure the mutuality of giri has something to do with this; the Western way is more of a standing invitation to revolt.

  12. Xabier
    I should note that Adler is not at all like the Soviet Union, or China in the 1950s, or even like a religious commune. I can’t find the quote right now but Adler defines a human as a free being who is seeking harmony in a community. Which is where his notion of ‘horizontal’ relationships come in.

    When Wendell Berry writes about two farmers who get together to jointly hoe their rows, he is describing the situation that Adler is advocating. Or two people who get together to co-author a book.

    I will interpolate my own words, which don’t conflict with Kishimi’s words. It’s all about degrees of freedom. If one is in a coma, one has essentially no degrees of freedom. If one is a small farmer in a largely self-sufficient economic and social community, one has a lot of degrees of freedom. If one has a means of making money while contributing to the common good in New York City, one has a tremendous number of degrees of freedom. The trick, of course, is to avoid the necessity to lie, cheat, and steal to pay the rent in NYC. Perhaps the largest millstones restricting degrees of freedom for young people now may be their student debt and exorbitant rents.

    A difference between Identity Politics and Adler is that Identity Politics says ‘you poor soul, you have been discriminated against, and unless some superior power helps you, it is hopeless’. Adler says ‘begin right now, using the degrees of freedom you actually have’. But Adler also advocates a clear understanding of who you really are and your capabilities.

    Hope this clarifies…Don Stewart

    • Indeed.

      There’s a tendency to treat all these ‘tech’ stocks as a group, but actually there are significant differences. Apple actually makes things, and Amazon is a highly effective retailer, even if its market share might raise concerns on competition grounds.

      Some of the others, though, are just advertising platforms, which surely limits their capability for growth, especially if advertising as an industry is becoming ex-growth. About FB, additionally, I wonder if youngsters might come to regard it as ‘old hat’, and associate it with their parents’ generation?

      More broadly, i read Mr Trump as an opponent of corporate globalism, putting ‘main street USA’ before Davos. That’s part of why the mainstream media, and the “liberal” elite, take every opportunity to have a go at him. They’ve even criticised his amicable meeting with Putin, but what would they prefer – war?

      Ultimately, though, cheap money drives the market, not just directly, through multiples, but through buy-backs, and through tolerance of cash-burners.

    • Interesting link – a friend of mine has some a large investment in shares. I’ve told him repeatedly that there could be a huge price correction on the horizon but he takes his advice from a financial advisor who doesn’t seem to think so.

      As I informed Tim property surveyors have stated that they’re expecting a large correction to house prices.

      I’m considering buying a pair of earmuffs from Amazon so I don’t hear the big bang.


    • Donald

      Markets in assets generally have been freakish ever since we adopted cheap money as a “temporary” (!) solution to GFC I.

      As I’ve mentioned before, SEEDS indicates that, rather than pay up and restore normality in 2008, we ducked a ‘false value’ overhang of $84tn, and “extend and pretend” has seen that overhang climb to more than $400tn. That gives some idea of the scope for downside in asset values generally.

      It doesn’t surprise me that this isn’t generally recognised – crashes wouldn’t be ‘shocks’ if the consensus expected them. I think the “smart money” now does see what’s coming.

  13. An 18th century British version of the notion of ‘giri’ was perhaps the obligation of hospitality in great houses, which entitled all who came on business to a slice of ham and a pint of ale before they went. One aristocrat was so worn out by his hospitality obligations that he built a second house to escape to form time to time.

    I restored the memoirs of a lady of the Howard family, the great landowners, privately printed for the family and friends in the 1830’s, and she recalled that after signing of the peace with France they were dying to go to Paris, but delayed departure because they would have missed the annual dinners for tenants and servants, which would have been shockingly rude.

    Imagine, muliti-millionaires (I did the butler’s cellar book, too, and it had c. £1.5 million in today’s values of contents in 1815), who ruled their estate like gods almost, delaying their pleasures for the sake of established custom.

  14. Dr Morgan,
    Thank you for another very thought provoking and engaging article.
    I note that when you wrote ‘Project Armageddon’ you predicted that eliminating the Uk deficit by 2016 depended on some ‘pretty heroic assumptions’ . Are you now surprised that the deficit has now shrunk to around 2% of GDP or is this just another sleight of hand on the governments part?.

    You also predicted that ‘growth in public spending is a thing of the past’ now that large rises in spending on the NHS have just been announced as well as declaring other sectors of the economy as being ‘ex growth’. I think you were 100% correct in predicting that consumer incomes would fall as witnessed by restaurant and shop closures.

    My thoughts are that large government spending increases are unaffordable and reckless and that the deficit has been eliminated by inflating GDP by borrowings. I’d be interested on your thoughts 8 years on from your final report.

    • I agree.

      Project Armageddon was pretty bold for its time, and I stick by most of its findings.

      The central point was that austerity (advocated by one side) and stimulus (advocated by the other) might both fail, because neither could tackle fundamental economic weaknesses. I think that’s being proved right – as we watch.

  15. Tim – after seeing it mentioned in Ken’s post I read through your ‘Project Armageddon’ from 2011.

    You were clearly not a fan of Gordon Brown and made it clear why. However one thing that did shout out from you report was that there was no specific mention of ERoEI which of course has made the UK’s outlook even worse. (You did mention our diminished energy reserves though and rises in energy bills which were outstripping rises in nominal weekly pay)

    I often wonder how we would have done if John Major had stayed in power. I remember one newspaper’s headline being ‘How did he last so long?’ I personally liked him.

    Of course we now know that Labour’s election chant of ‘Things can only get better’ was hollow when you take account of the damage they did to the UK economy


    • Just read this article on older children living with their parents:

      Presumably a similar trend is happening in the UK and other ‘developed’ nations.

      Whilst this is generally presented as a negative, was this not the traditional model for most of history?

      When did the change occur, and why? Did fossil fuels facilitate this? Did fiat money increase it?

      And with a declining ERoEI and debt overhang, will it once again become the norm?

    • As for Gordon Brown, he deserves credit on developing countries’ debt. But I thought his tax raid on pension funds iniquitous, his selling off of gold reserves at the bottom idiotic, his claims about ‘boom and bust’ hubristic, and his passion for ‘light touch’ regulation niaive. I regard ‘New’ Labour as one of the worst governments the UK has ever had. We’re still seeing the consequences of its economic and broader follies.

    • Thanks for reply Tim – how did you feel about John Major? At the time would you have preferred him to stay in power – although you would have had no real idea of the mess New labour were going to make of things


    • I’m afraid I didn’t have much time for Major. I think it’s a pity that he succeeded Mrs Thatcher. The events of September 1992 reduced popular support to derisory levels, and his government, though solid on economic policy, was a bit of a shambles on everything else, and seemed to just cling on to power in the hope that ‘something will turn up’. Alas, what turned up was ‘New’ Labour.

    • Well at least he wasn’t as grey as portrayed in Spitting Image – Edwina must have put some colour into his life.

    • I was living quite near him when the Edwina story came out. Someone hung a sign on his gate saying “Just nipped out for a hot currie”. Not me, but I knew the wag who did it.

    • Well the revelation surprised me at the time.

      By the way my friend with considerable investments in shares has come back to me after I told him of the latest concerns.

      He says he’s not worried because shares do fluctuate over time and will go up again if there is another crash. However I’m not so sure this time.


    • Jonny

      Governments’ support for high house prices is bonkers. It drives up debt, favours speculation over innovation, creates dangerous bubbles, absorbs capital that could otherwise be used constructively, undermines labour mobility, and disadvantages the young.

    • If New Labour sang ”Things Can Only Get Better’, Stalin’s slogan was at one point ‘Things ARE Getting Better, Comrades!’

      Was this an intentional parody of real Socialism on the part of the Blairites?

      A party that said ‘With us, things will not get too bad,too quickly, honest! ‘would be more appropriate today.

  16. Please forgive me if I am straying into personal matters but how was Project Armageddon received by the management of the company you worked for – the message it contained must have been unwelcome for some ? (Labour supporters for one) . Did the reaction to the report influence your decision to start your work on Seeds?. I get the feeling that as head of research you were writing a report that was true to yourself rather than something that was influenced by the need to stay in tune with the drum beat of the corporate tune.

    • I was extremely fortunate to have the total support of management. We were almost always on the same page. Being a big project, this one was discussed in outline before work started on it. As time went on, there were some in – let’s jut say ‘influential’ circles – who got to really dislike some of my work.

      The energy-based stuff followed PA. Increasingly I was disatisfied with ‘conventional economics’. Whilst writing Life After Growth, I came to think: ‘the energy approach is great conceptually, but it won’t be more than ideas until it can be modelled’. SEEDS was difficult, and took more than four years to build. Personally, I think it’s a very powerful alternative to failing ‘conventional’ approaches.

      Just to correct you on one point. Though a ‘natural conservative’, I’ve never disliked Labour as a party. It’s produced some great leaders and policies in the past, and I’d cite Frank Field, for instance, as one of Britain’s few great politicians of modern times. I did, though, intensely, dislike the Blair-Brown governments, which I thought (and still think) were a disaster for Britain. I don’t doubt that many Labour supporters felt the same way!

    • Tim
      In some ways it’s fortunate that you had Terry Smith at the helm. He was known as a maverick but IMV that is wrong; he was, like you, a more perceptive analyst of the real situation rather than the Panglossian view of the majority.

      The normal City view of things was highlighted on one of the video references given here with Richard Werner. Werner described, very succinctly and correctly how banks actually operate. The other guest David Buick, dyed in the wool City man (younger than me!), and utterly in thrall to the conventional wisdom, looked utterly bemused by all this; Werner could have been a Martian.

    • Indeed so. Terry Smith is a genius, and he recruited me to TP. He is the brighest person I’ve ever worked with, and a really great man. I worked with him for about ten years at Collins Stewart – where the team that was put together was superb – and had known him since before then. Being an analyst himself, he’s the ideal boss for an analyst.

  17. ‘Deplorables’.

    I’ve stumbled across perhaps the earliest instance of this form of disparagement.

    When Pope Pius II was locked in a struggle with the Archbishop of Mainz in the 15th century, (he and his bankers had screwed him royally) he summed up his opponent’s supporters thus:

    1/ Drawn from the mass of the ‘common people, small nobodies’.

    2/ Failures, people ‘who couldn’t get on’ in the system, and ‘deservedly so’.

    3/ ‘Common criminals’.

    4/ Those who want to ‘pull their betters down’, and ‘detract from their dignity’.

    So, Hilary and those who sneer at Brexiters, and the discontented Italians, are showing that there is nothing new under the sun.

    • This tally’s very much with what Matthew Simmons wrote in ‘Twilight in the Desert’ years ago. If you haven’t read it I suggest you do. ‘Crude Awakening’ is very interesting too from many perspectives and Matthew along with many informed individuals including Colin Campbell (oil Geologist) etc etc. share their views.

      I guess $400 trillion of ‘claims’ has kept the oil flowing but can we pull that trick again?

    • Thank you I’ll have a look – but perhaps after I’ve returned from my annual walking trip to Switzerland in just over a month’s time so as not to have too much worry.

    • Just have to add that it’s a pity that Matthew died in 2010 – but interestingly he lost a bet because he’d forecast the average inflation adjusted price for a barrel of oil would be $200 by 2010 (source Wiki)

      However we now know that firms can’t charge that much because it sends economies into recession who then can’t pay it anyway. But it does mean that oil firms then lack the money they need to invest in exploration for new reserves.

    • Matthew Simmons’ ground-breaking book was really about the impending death of Al Ghawar, the world’s biggest oil field. We’ve known for more than a decade now that Saudi has been sustaining pressure by injecting truly gigantic amounts of treated seawater, with the productive area of the field shrinking as former production wells are converted to injectors. I find it plausible that Saudi wouldn’t want the disclosure normally required by an IPO.

    • Regarding the field – as one article informed me – due to the techniques used to keep up pressure the wells can dry up very quickly and not have a slow decline. A bit like a Duracell battery which gives all of its life – all of its life (Advert blurb).

      Message to World politicians – don’t upset Iran.

    • I have the highest regard for those people, like Colin Campbell, who have tried to warn about the risks. My emphasis is economics (on costs) rather than geology (exhaustion of resources) – but the consequences are the same.

    • Reading that Article reminded me of the Military Maxim, “The Map is not the Territory.”
      Measures of Productivity seem to me to be as flawed as those other mainstays of the dismal science Stick, GDP growth or the Retail Price index. They are deeply flawed static and whats more fail to capture the Non Monetised goods present in well ordered civil society.
      The definition of Terms and how stable those definitions are with respect to a reliable stable measuring unit seems to be the problem. Coupled with the Variance in the measuring unit ( Money) there is also the Subjective ranking of Needs and Wants. Whose point of view is being catered to seems to me to affect greatly the questions which are offered up for an answer. Google Economics as if People Mattered for details. http://bfy.tw/JBzv
      Einstien said something about Judging Gold Fish’s performance on their ability to Climb trees would perhaps be un-helpful and I suspect that our present methods of Valuing productivity have something of the Abilities of Tree Climbing Goldfish about them.

      We need to be more like Vinnie in my opinion.

    • Ahh a clip from one of my favourite financial films (I also love Margin Call and the documentary ‘Enron the Smartest guys in the room’)

      Yes you’re right our measurements of GDP are flawed – perhaps in the future one measurement will be the amount of pure original thought each of us have in terms of – for example – innovation – problem solving.


    • Wow ,Donald, Never seen that before I knew the name Lay and But clearly this story was less well publicised than it should have been.
      Still, the free market de-regulation cool aid is served up
      Thanks for the heads up

    • The Enron saga of greed – murder (people died when the air conditioning was down due to fake reasons for power cuts) and lies made for compelling viewing.

      With reference to the article I cut and pasted from the Telegraph perhaps there should be a follow up – ‘Trump’s Government – the most misguided guys in the room’


  18. Relative to Colin Campbell, Peak Oil, Donald Trump, Peak Productivity, Peak Prosperity, ETC.


    See Orlov’s graph today on both the decline rate of the shale fields and also the cash flow.

    Don Stewart

    • Thanks for post Don – yet more money will have to be created I guess to cover the shale debt mountain.

      I think there will be the inevitable films made post the next crash questioning why we allowed it to happen again. I can only assume it’s blinkered greed.


    • We’re in the wierdest market imaginable. Fundamentals – earnings, cash flow, debt, dividends and so on – have ceased to matter in markets determined entirely by monetary policy.

      The assumption is that anyone making any kind of systemically-risky loss will be rescued by the CBs. In this irrational climate, with money assumed to be ‘free when needed’, who cares about cash-burn dwarfing the dotcom bubble, or buybacks destroying the equity base, or ludicrous leverage?

    • Exactly doc. And, there’s no way back. They will try to crush a few small balloons like banning crypto’s in one country, import tariffs on certain products, or crush a currency somewhere. Its just poking the one big balloon, debt & trust through fiat currencies. Diminishing returns on their efforts, and the exponential function, the centre cannot hold as you know.

      They will come up with plan after plan, more ridiculous as time goes by. Never waste a good crisis!

      The ‘system’ holds as long as they can hide in the Fogs of Fiat. Very nice to meet like minded people.

    • The BOE rate rise yesterday is Significant I think, Carney I think has been an appalling Governor and his misstatements have been political wishful thinking lacking objective rigour in my opinion particularly on Brexit.
      A friend sent me this article today.
      Attachments11:49 PM (9 hours ago)
      to me

      Housing market wobbles
      Roger Lewis
      Attachments9:05 AM (10 minutes ago)
      to MTF
      The executive chairman, Peter Long, blamed the company’s woes on the “completely wrong” strategy pursued by the former chief executive Alison Platt, who resigned in January.

      Platt sought to run the estate agent like a retailer, bringing its sales and lettings businesses together and concentrating expertise centrally with local branches functioning like shops, a plan that triggered an exodus of middle management.

      “It completely destroys the business model by saying it’s a retailer and saying we don’t need management expertise locally,” said Long. “You disempower people, demotivate them and lose key expertise.”

      He said high debt, racked up during an acquisition spree in 2014 and 2015, was “compounded by the perfect storm of a chief executive getting the strategy completely wrong”.

      Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk
      Long doubled his salary to £360,000 when he took over the day-to-day running of the business from Platt, adding the role to his vice-chairman’s seat at travel group Tui and the chairmanship of Royal Mail.

      But he insisted he was not overburdened, despite also dealing with the fallout from last month’s pay revolt at Royal Mail, one of the largest shareholder rebellions in corporate history.

      He said Countrywide’s performance was improving, vowing that a turnaround plan could result in the company making an £80m underlying profit within three years.

      Blimey, this bloke has got more front than Selfridges Mike. The Retailer Strategy is clearly a way of squeezing wages and overburdening tick box valuers in centralised pools with little experience of Local Market nuances and idiosyncrasies.
      That activity is down 22% what does that mean for prices? have they also plummeted or are said Centralised Valuers presently still holding the line and pretending that overblown assets values are sensible.
      How much debt is secured on Hypothecated London Real estate world Wide? that could see some pretty serious knock-on effects especially in pricing counterparty risks in the new iterations of CDF’s and ETF’s and Syndicated Debt Book exotics.

      Perhaps the rise in BOE base rate yesterday was the Tallyho into oblivion that has been on the cards for so long Mike. Tim Morgan has stated he thinks the Autumn will bring the Grim Reaper to call in the debts of the party stragglers.

      Where are the Exits and Who has discretely exited, I think a peek at Executive options cash-ins and Stock sales might reveal some interesting contradictions, not least with this Long fellow.

      On 02/08/2018 7:17 PM, Roger Lewis wrote:
      BOE Raised Rates today, if fed does same that could start the serious rot, How stretched people are seems lost on the PTB

      On Thu, Aug 2, 2018 at 8:13 PM, MTF wrote:

      Japan..3rd bigest world economy…owns 40% of listed companies…only buyer of govt debt..debt to gdp 224% (>Greece)..anual interest bill 24% of govt revenues.

      Gotta be something wrong there…when it blows there will be a big bang all over the world.

      In 07/08 it was said that it was BNP Paribas closing a fund for redemptions that started the market rethink & then a crack in confidence & then calamity.

      Is this a similar event ?

      I guess I may sound like a Daily Mail reporter.


      Roger Lewis
      Attachments8:53 AM (18 minutes ago)
      to MTF
      Its a small step in logic from Markets are Built on Confidence to Markets are a Confidence Trick, Mike. The FInancialese these people resort to is one thing but this quote made me wince, “The board of directors and the management team are committed to considering all avenues to optimize shareholder value as we continue to build on the many achievements to date,” he said in a statement Thursday. Later in the article, it is said these people failed to beat the market for 5 years and trailed peers in 98th place out of one hundred, some achievement for a bunch of paper pushing gamblers.

      Finally, the final line on the BBC website explaining what the Interest Rate rise means.

      the Bank published what it thinks is the natural interest rate for the UK economy.

      It puts that at between 2% and 3%.

      That relatively low rate is partly due to an ageing population.

      Older people tend to save more and in the future, that will provide a greater pool of savings for lending to households and industry and help prevent the economy from overheating.
      Roger Glyndwr Lewis

      Retweeted Patricia
      Glad you said it, I was dumfounded.Roger Glyndwr Lewis added,

      Bank’s don’t lend savings!!

      It’s difficult to overstate the level of incompetence required for @BBCNews economic commentators to say this. And these are the ppl who educate the public ffs. …

      One has to ask, if the BBC is content to regurgitate Banking as intemediary tripe when will it ever admit or even begin to understand the connection of surplus energy and Prosperity?

    • Thanks Roger.

      I never agreed with ZIRP anyway – though painful, ‘reset’ would have been far cheaper in 2008 than it will be next time – so I ought to commend this rise.

      But I’m by no means sure the UK’s feeble economy can handle it.

      What fascinates me is that all the ‘official’ – conventional – reasons for doing it are mistaken. Essentially, they’re saying that the labour market is tight, and there is inflationary risk flowing from that.

      This is nonsense. The low unemployment figure does not mean workers have pricing power, because such a high proportion of jobs now are low-grade, insecure, poorly-paid and casualised. Few workers are in a position to demand higher wages.

      Second, and equally obviously, real wages have struggled to match CPI inflation, let alone the cost of essentials – which would not have been the case had workers really had pricing power over labour rates.

      Third, customer-facing businesses like shops, pubs and restaurants are going through a fire-storm, which can only mean that customers are short of cash to spend. Again, that woudn’t be the case if workers had pricing power.

      In this article, the BBC simple regurgitates the same nonsense.

    • Tim – do we have enough resources and energy to give everyone in this country a living wage which also allows them to go out for meals – buy clothes etc.

    • This might surprise you, but yes, we/they do.

      UK prosperity has weakened pretty relentlessly, and is still declining. That could be lethal in the context of debt and banking exposure.

      But, nearer-term, strictly day to day, per capita prosperity is still pretty high (SEEDS calculates it at £22,000). That’s per person, so it’s a bigger number on a per-household basis.

      Just in ballpark terms, £22k per person is about £50k per household (66 million people = about 29 million households). A lot of that has to go on necessary public services, and household essentials. If these absorb, say, half, it would leave £25k for discretionary spending per household.

    • But as you’ve stated Tim a growing number of the population are in lower paid jobs and are struggling – so despite the per capita figures what we’re really talking about is the distribution of wealth unless of course we can get the economy to grow – which – due to energy constraints – we can’t or at least not in the way it’s structured at the moment.

    • Redistribution has become what it’s all about. When average prosperity stops growing and starts shrinking, it ceases to be possible for everyone to get more prosperous simultaneously. As hardship spreads from the bottom up, numerical support for redistribution grows, soon reaching critical mass.

    • Hence the need for a wealth tax or an increase in general taxation for the higher earners. I’m sure Jeremy will do this when he is elected (I think the odds are over 50% that’ll he’ll get in)

      Anyway I’m hopefully off to see Surrey vs Middlesex at the Oval in the T20 competition this evening – a chance to forget about our economic woes.


  19. Hello Dr Tim. When you say:
    ‘This means that each £1 of reported growth has been accompanied by £5.20 in new borrowing’
    I wonder if you are comparing apples with oranges.

    Would it not be fairer to sum the increase in GDP over 14 years and then compare it with the increase in debt. So, say, an average of £200 billion for 14 years would be £2.8 trillion c.f. an increase in debt of £2 trillion.

    Still not great, but a lot better than before.

    • It’s a tricky concept, but growth and debt are ‘apples and oranges’.

      Your sums would be right if (a) each year’s GDP increment was ‘banked’, or if (b) each year’s borrowing was written off. Neither applies.

    • So, if we want to compare apples with apples, then the annual increment in GDP should be compared with the annual increment in debt for that year. Nest-ce pas?

  20. US Treasury’s debt plan confirms worst fears of Trump’s ruinous fiscal spree.

    Business headline from The Daily telegraph

    • US fiscal policy does look bizarre.

      But, if a previous president rather than Mr Trump was the author of it, it’s a fair guess it wouldn’t be vilified, but would instead be praised as ‘enlightened Keynesian stimulus’.

      Moreover, any US budget is a joint production between the administration and Congress.

      Since Mr Trump opposes two establishment preferences – “globalised corporatism”, and what we might call “coercive liberalism” – it’s hardly surprising if the mainstream media loathes him.

  21. Hi as it’s a premium article here is a copy and paste job from the Telegraph following on from the headline above.

    ‘The US fiscal deficit is ballooning at an alarming pace as Donald Trump’s tax cuts eviscerate federal revenues, forcing Washington to borrow epic sums on the global bond market at an increasingly delicate juncture.

    The US Treasury revealed this week that it expects to issue $769bn (£590bn) of new debt in the second half of the year, far higher than expected just months ago.

    The surge in borrowing comes just as the Federal Reserve raises the pace of bond sales to $50bn a month under its policy of quantitative tightening, effectively flooding the Treasury market with supply.

    Reduced stimulus from the European Central Bank and the Bank of Japan is slowly drying up what has until now been an almost inexhaustible source of easy money.

    The US Treasury said the budget deficit this fiscal year will top $833bn. It is on track to blow through $1 trillion by 2020 – nearing 5.5pc of GDP – as the full effects of tax cuts combine with extra spending on infrastructure, pork barrel projects by Congress, and military rearmament.

    It is courting fate for a country to run deficits on this scale so late in an economic expansion when the “output gap” has long since closed and capacity constraints are ubiquitous. The stimulus has largely been wasted since the multiplier effect is blunted so late in the economic cycle. Yet the debt remains.

    “It’s absolutely the height of fiscal irresponsibility at a time of full-employment. Pro-cyclical stimulus at this stage of the cycle will go down in history as one of the most boneheaded policy moves ever. Thank you for further bankrupting the country,” said David Rosenberg from Gluskin Sheff.

    The deficit should be near balance a full nine years into the ageing expansion. Public accounts are massively misaligned.

    Willem Buiter from Citigroup said the sheer scale of debt issuance may ultimately cause global investors to question US solvency. “At some point people could start looking at the financial position and there could be fears of forced monetisation of the deficit,” he said.

    The International Monetary Fund warns in its Fiscal Monitor that US government debt will reach 109.4pc of GDP in 2019, 111.3pc in 2020, and almost 117pc by 2023. This does not factor in a downturn, which is almost inevitable by then. Starting from the current base, a bad recession would send the deficit spiraling through 10pc of GDP.

    Hans Redeker from Morgan Stanley said the US is nearing a crunch point where foreign investors may start to demand an interest premium on US debt, pushing up borrowing costs and curbing appetite for the dollar.

    “The twin budget and current account deficits are heading for 8.5pc of GDP. Who is going to fund this experiment? The world blanket of liquidity is shrinking, and will shrink further,” he said.

    Mr Redeker said the first sign of strain may emerge in the corporate bond market, with contagion then hitting Wall Street equities. Company debt ratios have reached an all-time high. Promiscuous use of cheap debt has flattered profits and driven a surge of stock buybacks rather than raising productivity. It is a Faustian Pact that comes due as rates rise.

    “Corporate balance sheets are deteriorating. They have no buffer to absorb risk and are increasingly vulnerable. Investors may be willing to keep their US exposure if the US economy is outperforming, but that is going to be challenged in the next couple of quarters,” he said.

    Roaring US growth of 4.1pc in the second quarter was misleading. Mr Rosenberg said the underlying rate was half that pace after stripping out lumpy defence spending, a tax windfall, and a surge of grain exports to preempt trade sanctions.

    The US Economic Cycle Research Institute says a “stealth slowdown” is underway. Real personal consumption has been sliding for over three years and is nearing stall speed, much as in 2007. House prices have begun to fall. Foreign investors may be looking at very different growth data by the end of this quarter.

    There are already signs that central banks and sovereign wealth funds are growing wary of US Treasury debt, although it is hard to pin down motives. Russia slashed its holdings from $96bn to $15bn from March to May, although this may have been prompted by worries over US sanctions.

    Investors based in Ireland and Luxembourg – global funds – together cut by $29bn. The “Cayman Islands” has dumped a net $52bn since October, or a quarter of its holdings. This probably reflects fears by hedge funds and pension funds that rising US inflation could trigger a bond rout.

    There has not yet been a rush for the exits. The much-feared spike in 10-year US Treasury yields has not come to pass. The benchmark yield – the price of global money – remains below the psychological threshold of 3pc.

    Investors have few good alternatives given that yields are near zero in Europe and Japan. But that perception could change. The first whiff of US “stagflation” could awaken the global bond vigilantes overnight’

    Looks like a rocky road ahead.

    • Thanks. We’re seeing conclusive proof of commitment to ultra-loose monetary policy at the slightest hint of a problem.

      So trade disputes have put a shadow on the horizon, and the first, instinctive thing that governments and central banks do is monetary loosening. China has abandoned any attempt at tightening, the US is on a sharp upwards trend in borrowing, the BoJ has asssured markets of its unlimited willingness to buy bonds using QE money, and the ECB continues its smoke-and-mirrors approach.

      This can only end one way.

    • ‘This can only end one way’

      I think we’re just waiting for the penny to drop within the global financial community.


    • Can any sentient being still doubt it? I can imagine a visiting Martian, on his first morning on planet ponzi, asking if he can short everything!

      Seriously, though, I’ve worked in capital markets on both sides of the Atlantic. These are some very, very bright people – but thinking outside the box isn’t encouraged by the culture, and the adrenaline rush can often create an ultra-short-term focus.

    • Sorry to mention the ‘B’ word again – but I wonder what would happen to all the negotiations if there’s GFC II before they’re complete.


    • Feel free to mention the B-word. It’s only my fear that “Brexit” is masking all other issues which led me to slant this article as I did.

      If GFC II does happen this autumn, the “Brexit” debate will go into limbo, wholly dwarfed by bigger and more immediate priorities. If/when GFC II does happen, the UK is likely to be in very big trouble. Banking exposure is, officially, 11.3x GDP. It was only 9x GDP in Cyprus…..

  22. Jeremy Warner in the Telegraph thinks we might be in for a turbulent Autumn.- I think he may find this is an understatement.

    • Hi the report looks pretty frightening (sorry for my overuse of that adjective)

      Quote :

      Promotional literature in the field regularly cites as a benefit the fact that supply chain financing – and reverse factoring in particular – can be shown as accounts payable rather than debt. Companies borrow cash while avoiding its inclusion in financial covenants or debt reported on the balance sheet.

      A review of a number of companies with supply chain financing program shows precious little by way of disclosure.

      Oh well you know debt spirals they come – they go…….


    • Thank you Tim – I’ve read all his post (thoughtful guy) and the link to Jeremy’s dismissal of your work.

      Jeremy’s article from 2013 makes no mention of the damaged caused by QE and low interest rates and he must also have thought that there was a tidal wave of cheap oil on the way to fund the economic growth required for future pension /welfare costs.

      But he does say that if future pension promises costs can’t be met then they won’t be but calls you an alarmist for effectively pointing this out. So he sits at home with a private pension but doesn’t care about those relying on the state pension. Excuse me but what a twit.

      He does say that the human spirit will pull us through – but human spirit doesn’t created easily extractable oil.

      So thank you again for the link – I would like to send his article to him when the worst happens.


    • Perhaps you can send him a print of Sodom and Gomorrah by Brueghel if GFC II happens.

      The human spirit is a wonderful thing – but has its limitations in the laws of thermodynamics (as I’m sure you’d point out)


    • Thanks. I should emphasise that, whilst my expectation of GFC II is logic, my suggestion that it might be this autumn is, indeed, just a hunch. But it’s looking likelier as developments unfold.

    • I don’t think anyone’s going to criticise you if it doesn’t happen Tim – just breathe a collective sigh of relief (for now)


    • I’m sure you’re right, but I would certainly criticise myself.

      Actually, it will happen, the only question being “when?”

      I wish I was wrong about this – but I’m sure I’m not.

    • Well I hope that ‘when’ will be after my annual hiking trip to Switzerland in September. (Did I make a similar comment last year? )

    • Thank you for that reminder Dr Tim, Moraymint used to comment here and he always had interesting comments to make. When the money magicians are whispering in my ear ‘you can not time the markets, they always go up over the long haul’ and I am beginning to doubt my sanity, I read ‘The perfect Storm’ which is permanently on my desk top and I am brought back to the real world of Physics. Since asking ‘why did no one see 2008 coming and why are we in so much debt anyway?’ I have been down many rabbit holes and by tracking surplus energy economics and geology (the 2 for me are joined at the hip) I think I can see the big picture and it is not a pretty one. I also sense many more are joining the club. There may not be a true understanding, they have not been studying the situation long enough but there is an instinctive concern.
      Its just a matter of time and advisers are right you can not time the markets and when it is time the doors will be slammed in your face and there are very few doors anyway, its a trap. Money is after all just a token, a claim on future energy, in what ever form that may take, it always has been and always will be and debt is just claiming today on the hope there will be more energy tomorrow in all its forms and it is looking very likely there won’t be.
      Excellent post by Geo at Energy Matters
      This is our real world……..

    • PS this is a very pertinent line in Geo’s post.
      The universe, without exception, is moving from a state of order to disorder.

  23. Tim, perhaps you will allow me to lighten the mood a tad. If a Martian landed on planet earth and touched down in the UK I’m sure their first words to a citizen would be: ‘Take me to your lender’.
    On a more serious note a further financial crash would be set against a background of great ill-temper directed at the ruling class. Trust and faith in the political class has been declining for years, but I think the rate of decline has quickened in the last two decades: sleaze, wars on false pretences, the expenses scandal, a financial crash where the banks and bankers were rescued and the cost placed on the shoulders of those that did not cause the problem, and meanwhile the mainstream economics ‘profession’ is a ‘busted flush’ and for many the national MSM has lost virtually all respect.
    As you say there is now no plausible way out of our current situation.

  24. Adrian Bejan the elder statesman speaks

    I assume most of you are way too busy trying to figure out how to prop up the debt pyramid, or survive the collapse of the debt pyramid, to read this whole article. So let me just call your attention to two items. The first is the leveling off of the engine productivity around 1960. This should give us a clue in terms of declining overall productivity. The second is his concluding paragraph. I won’t quote it here, as you can easily look yourself. But I want to place it in the larger scientific perspective I have previously mentioned. As I see it, the best and the brightest in the scientific universe are now giving Teleology its due. We are moving beyond boxes filled with hot and cold gases which evolve toward the dead state, and are now beginning to look at systems which have a purpose. Some of the examples I have cited are Antonio Damasio, Capra and Luisi, the psychiatrist Daniel Siegel, and the Japanese book on Alfred Adler’s philosophy and psychology.

    I suspect that repaying debts REQUIRES that we confine ourselves to the world of heat engines. Moving into a world of Adler psychology and philosophy probably does not generate the money to repay debts…although it may generate a lot of personal satisfaction. But, as we can see, even with unlimited fuel for the heat engines, we cannot get back on the growth trajectory of the industrial revolution. And then we have the problems which won’t go away (Limits to Growth) to deal with. So we have a Teleology problem: are we trying to keep the debt viable, or are we instead trying to maximize human well-being?

    So an unavoidable consequence of the survival of humans is the destruction of the great majority of the debt pyramid.

    Don Stewart
    PS I don’t think Bejan would exactly agree with my conclusions. He would want to see a scholarly article, which is beyond my capacity.

    • Promises and greed, Don. Nothing special about it. Take it before someone else does. That causes problems with 7 billion + people on a finite planet. Our brains are way too large, we became handy in covering up real issues. Fossil fuels made evolution into revolution. And we all know what revolutions do, don’t we?

  25. Here’s some cheering news from CapX

    Percentage of India’s population with access to a household toilet :

    2015 42.8%
    2018 82.6%

    Now not adjusting for any increase in households over the period I’m taking the latest figure of 248,408,494 households in India.

    That means that either around 98,866,581 new toilets were fitted in 3 years or everyone became really good neighbours.

    Have have CapX got their dates wrong? Perish the thought.

    • The Indian toilet data was no doubt hedonically adjusted, or something…….

      Nonetheless, I shall have a real spring in my step today contemplating this simply fantastic news. Let’s all be more positive.

      Things ARE getting better, Comrades! Have you ever doubted?

    • Yes it’s time to celebrate that a member of the Commonwealth is enjoying a measurable gain in prosperity. Rejoice – rejoice.

    • Just to say this blog post was a response to this whole thread, Dons Teleology point is I think a key matter in understanding the Human Constructs we are dealing with Political Economy is not a Natural given. There is absolutely no reason Debts have to be repaid there are certain expediencies that it is sensible to observe such as Does your Creditor or your Bailee have a bigger Gun, ( See Petro Dollar and US foreign policy for further details).
      In the Post I link to Ezra Pounds ABC of Economics which with very little editing could be updated to today just by changing a few names and dates, nothing else has changed.

  26. Sorry to have come to this party a little late. Some points:-
    The mid westerners conclusion concerning Churchill – Churchill’s drive was to save us from Nazi tyranny and to this end he commended us to do our duty which many did and indeed died doing so. Also the US although helping us stayed out of the fight until much later.
    Paying for later life care – I have worked for over 50 years and paid vast sums in tax and Ni. So what have they done with my contributions. Incompetent politicians during this time have wasted my investment in this country. Why should I have to pay twice for what is my entitlement? The government has broken my contract with them and I have nothing but contempt for them.
    House prices – The government and especially the banks have totally distorted the housing market primarily through lending to the buy to let schemes. An expansion of Social housing provision is required.
    My late Mother was very very happy to see Tony Blair elected. I warned her that underneath that grin was a died in the wool Tory.
    Brexit – As Dr Tim said in a previous article not all of the 17.5 million who voted for Brexit were stupid and easily fooled under educated racists.
    We have a government that does not have a clue about anything at all especially economics.

    Sorry for the rant.

    • Feel free to rant!

      What strikes me increasingly is the importance of the stand-off between an incumbent elite (to which the words “establishment”, “globalising”, “monopolistic”, “liberal”, “censorious”, “complacent”, “monopolistic”, “self-serving”, “puritan”, “unpopulist” and “Davos” all fit) and an insurgency (to which the words “populist”, “nationalist”, “frustrated” and “angry” apply).

      Critically, Mr Trump belongs in the latter category. I cannot imagine Mr T citing Lenin, but he’s actually opposing what Lenin described as the monopolistic, manipulative, globalist and imperialist “highest [and, implicitly, last] stage of capitalism”.

      For good or ill, the insurgents are winning, and 2008 was the missed “last chance” for the incumbency. ‘Reset’ in 2008 would have cost (I calculate) $84tn, led to three to five years of hardship, and bankrupted many of the world’s richest men. When they chose “extend and pretend” instead of ‘reset’, they made an existential mistake.

    • Tim – how would the $84trn played itself out?

      Don’t forget that Trump printed money which has made his elitist friends richer – and he admitted as much – so in many ways he’s as bad as the first set of people you mention.

    • ewaf88:

      On “reset” and the $84tn, value destruction takes the form of things becoming worth a lot less than their owners thought they were worth before the event. So, a lot of the $84tn would have been a slump in the values of stocks, bonds and property. You had assets the market told you were worth $3m – you wake up to find they’re now worth only $1m. That’s an accounting loss, of course.

      This, then. has knock-on, “real” or “cash” effects – mostly defaults on debt secured against inflated asset values.

      So, had “reset” been chosen, asset prices would have slumped, and stayed low (that is, not pumped up again using cheap money). There would have been a lot of knock-on defaults. If these had been, say, half of the $84tn, then we’re looking at about $40tn in write-offs. The authorities could have aborbed that, nationalising banks where necessary.

      When we consider the probable scale of GFC II – my estimate being GFC I x 4 – then “reset”, though painful at the time, would have been much cheaper in the long run.

    • Thank you Tim – I can’t imagine how $800trn would be played out.

      By the way Simon Jenkins (The Guardian) has made this comment :

      ‘Is Northamptonshire Britain’s first banana republic?’ Well it’s how you’ve been describing the UK

    • Paul, sorry but I really feel the need to address your comment.

      “Paying for later life care – I have worked for over 50 years and paid vast sums in tax and Ni. So what have they done with my contributions.””

      When you pay tax and national insurance the money is being spent today on government provided services, or on building things to provide government services in the future.

      “Incompetent politicians during this time have wasted my investment in this country. Why should I have to pay twice for what is my entitlement?”

      It was never a pot that you were contributing to that was being invested for your future.

      “The government has broken my contract with them and I have nothing but contempt for them.”

      Your future “entitlement” is nothing but a promise made to you. At the time these promises were made on the following assumptions:
      1. There will be enough people paying income tax and NI to fund your entitlements.
      2. Enough decent jobs and opportunities will be available to allow people to do the above.

      One thing that has become clear in the past couple of decades, through work like Tim’s and others. Is that these assumptions were inappropriate and that these promises should probably never had been made in the first place. It isn’t anyone’s fault really, collectively we were ignorant of the critical factors that would affect our future surpluses. I don’t think anyone deliberately misled people.

      Nothing had been taken from you, because you never had it in the first place, people who wanted your vote just told you that you did.

      I was angry too, although I am only 25 years in to my working life, but all we can do is try and reach a state of acceptance and bring in some policies that mitigate the resulting issues of peoples expectations not being delivered on.

    • I think ‘2008’ brought the system almost down, central banks and .gov saved it. We were way over the top in 2008 already. We have monetized the kitchen sink, next time we will do it again, trust in fiats will face major problems indeed. In my opinion GFC2 means we will experience the solution we should have back in 2008/9.

      That ‘solution’ won’t save the system though, its way too complex and interconnected to simply “reset”.

      They knew that in 08/09. Look at charts from that period, everything nosedived. Everything. Dissapearing trust means distrust. Trade collapses, jobs dissapear, the complexity goes dark. Everything goes dark. Read “Trade off” and “Tipping Point” by David Korowicz.

      The mess we made was there in 08/09. Thinking about it, we already monetized the kitchen sink. Trust in fiat currencies is fading already. People can’t see it yet because they don’t know what ‘money’ is. They don’t know charts, don’t know its fundamentals.

      Extend & pretend 2.0. Everything goes dark when we pull the plug.

  27. I am finding this discussion fascinating thank you again Dr Morgan. What makes you believe that this Autumn could be crunch time?. Do you foresee a slow motion collapse of multiple events spread across the global economy… or a single big event such as the collapse of a well known bank as the most likely mechanism of collapse ?

    • Ken

      Thanks. I need to draw a clear distinction here.

      On the one hnd, my analysis tells me that GFC II has to happen. I’m not hedging my bets or saying “maybe” about that.

      On the other, the coming autumn is a hunch.

      I divide the process into two streams, using a loose scientific analogy. The crash may be “chemical” (in which case a catalyst is required), or it may be “nuclear” (needing only sufficient critical mass).

  28. If Extend and Pretend hadn’t been implemented, and the bullet had been bitten firmly – deservedly wiping out, as you say, much of the worth of the many of the very richest (who have since then been making hay again) – how deep would the pain have been for the mass of people – in terms principally of high unemployment – in your estimation?

    Wouldn’t it perhaps have been so great that no politician depending on re-election and anxious not to see their party ‘condemned to the wilderness’ for a decade could be expected to take that route?

    Was it ever in any meaningful sense on the table at all?

    As it was, in Spain, for instance, the Socialists who were in power at the time, have been in that sorry ‘wilderness’ state for nearly a decade, and are only now just rising again as real contenders in the polls, being popularly blamed for screwing up the economy in 2008 -although some recall that it was the Aznar conservatives who originally blew up the property bubble.

    Perhaps I am mistaken in considering the politicians rather than the central banks?

    • If I can refer you to my answer to ewaf88, the value destruction at my estimated $84tn – a SEEDS-generated number, not claimed as precise of course, but a good guide to order-of-magintude – would have been the permanent fall in the value of stocks, bonds and property. No cash leaves the system – but carried book values fall sharply.

      Then, second but more tangible, there would have been the knock-on default effects – guesswork suggests a maximum of $40tn (half of the value destruction), which would have been painful, but manageable.

    • By the way, the politicians who had created the mess went AWOL, dropping it into the laps of central bankers. This made CBs into policy-makers – which isn’t their job – as a result of politicians’ abdication of responsibility.

      How often did ministers, when discussing the crisis, use the word “global”? That meant “not here, from overseas, not our fault”…..

  29. From the Daily Telegraph business page – rocky times ahead for China.

    China’s currency slide risks a horrible misunderstanding with Trump

    China’s currency slide is graduating from benign neglect to something more deliberate. Whether or not you deem it currency warfare, it is playing with political and financial fire.

    The yuan has weakened by 9pc against the dollar since mid-April. This is the steepest fall for the micro-managed exchange rate for a quarter century.

    This week’s blow-off to ¥6.84 has been a move too far for Washington. The retort is a cannon shot across the bows. The Trump administration is now threatening to push up punitive tariffs on a further $200bn (£150bn) of Chinese goods, lifting the rate from 10pc to 25pc. It smacks of an embargo.

    Views are split on China’s actions. What is clear is that the weak yuan is no longer just a strong dollar story. The currency has been tumbling against the euro and the Japanese yen, enough to irritate Frankfurt and Tokyo.

    China’s leaders have breached their pledge to hold the country’s currency basket “generally stable”. This is a policy decision. The People’s Bank (PBOC) commands $3.1 trillion of foreign exchange reserves. It has chosen not to use this firepower to stabilise the yuan.

    What we do not yet know is why Beijing has taken this fateful step. Is it in order to undercut Donald Trump’s earlier round of trade tariffs, triggered in early July on the first $34bn of Chinese goods? Or is it because the authorities are losing control, caught between a rock and a hard place as defaults rise and the economy flirts with a hard landing. Perhaps it is both. Either spells trouble.

    “It is a strange mix of a trade war and currency war, and is on the verge of becoming a very unstable situation. It is the biggest topic for global markets right now,” said Jens Nordvik from Exante in New York.

    “China has been hit by several shocks. They still have a few bullets left to fire but they face a tricky balance. They can’t stomach a strong currency. It needs to be even weaker,” he said.

    Mr Nordvig said the pressures pushing down the yuan are obvious: the economy has wilted; interest rates are tumbling. Three-month Shibor lending rates have fallen 165 basis points to 3.12pc since March. The yield spread between US and Chinese five-year bonds – the key driver of currency moves – has shrivelled to almost nothing.

    The Reserve Requirement Ratio has been cut three times this year. VAT has been cut. On Tuesday the Politburo flagged a policy pirouette, effectively suspending its campaign to deflate the credit bubble. It is a return to fiscal stimulus as usual.

    The ferocious crackdown on shadow banking (80pc of GDP) by super-regulator Guo Shuqing had gone too far. It choked a fifth of all fresh financing to the real economy.

    Beijing may have left it too late. “The financial deleveraging campaign since early 2017 has resulted in a severe negative shock to aggregate credit supply. The real economy has begun to feel the pain,” said Wei Yao from Societe Generale.

    The state’s control over the banking system and its unlimited authority to rescue companies preclude a Western-style crisis. “We think that the Chinese government has a good chance of avoiding a financial meltdown in the short-term. The more likely risk scenario, to which we assign a 20pc probability, is an economic downturn that is deeper and more extended than expected,” she said.

    Capital Economics said the pattern from China’s stop-go cycles is that it takes 12 months for fresh stimulus to feed through, and it will be a less powerful dosage this time. The economic mood music will get worse before it gets better over second half of the year.

    China faces a variant of the “Impossible Trinity”.. If it loosens monetary policy in these circumstances to shore up the economy, it risks capital flight and further slide in the currency. Foreign investors have extracted $100bn already through the Hong Kong/Shanghai Connect pipeline.

    Capital controls are tighter than they were during the Chinese currency crisis of 2015-2016, when the country was losing $25bn a week, but they are still leaky. The danger for Beijing is that by letting the yuan fall so far, so fast, it will set off a fresh rush for the exits.

    Kamal Sharma from Bank of America says China is near a critical “tipping point” where it will have to step in to support the yuan or risk capital outflows. “Markets will be watching carefully for this with the release of July foreign exchange reserves on August 7,” he said.

    As this drama unfolds, Washington is in a parallel universe. The Trump administration has seized on the currency warfare hypothesis for the weak yuan. Donald Trump accuses the country of stealing a competitive edge, grouching that the yuan is “dropping like a rock”.

    The White House counter-attack has sharpened this week. Officials are briefing that the threatened rise in tariffs on the next tranche of Chinese exports – televisions, washing machines, clothes, etc – is pitched high enough at 25pc to disarm Beijing’s currency weapon.

    Chinese leaders are struggling to come up with a response to the Trump phenomenon. They have got nowhere trying to fob off Washington with purchases of feedstock grains, oil, or liquefied natural gas – fungible commodities that shift the patterns of global trade without changing anything.

    The suspicion is growing that Mr Trump does not really want a trade deal, but rather wants to provoke China into tit-for-tat retaliation in order to carry out a pre-emptive assault on the country’s technology-industrial complex before China is fully established as a rival superpower.

    Trade policy cannot be separated from the geostrategic clash. The US National Security Strategy Report this year names China for the first time as an adversary that seeks to “challenge American power, influence and interests, attempting to erode American security and prosperity.”

    Tariffs may just be a smokescreen. The fight is over control of artificial intelligence and the technologies of the 21st century. Mr Trump has largely purged the China “doves” in his inner circle, lending his ear instead to the quartet of shock troopers (Mike Pompeo, John Bolton, Jim Lighthizer, and Peter Navarro, the author of “Death by China”).

    Their view is that the Communist Party has been engaged in systematic cyber-theft of Western technology – “unprecedented larceny” in the words of Secretary of State Pompeo – and that its Made in China 2025 blueprint is a hostile attempt to dominate ten strategic sectors from aerospace, to robotics, and G5 networks.

    It relies on “self-sufficiency” quotas that breach global trade rules, and is backed by a nexus of subsidies and cheap state credit, with Communist party officials lodged on the boards of private companies. It is national mobilisation with a war-time structure.

    This was bound to provoke trouble, and it has. “We’re at economic war with China. One of us is going to be a hegemon in 25 or 30 years,” says Trumpian ideologue Steve Bannon. Markets have been assuming that this is bluster. What if it is in fact the Trump Doctrine?

    China is in a difficult bind. Its 35-year phase of catch-up growth is exhausted. It is no longer a particularly dynamic economy. The “middle income trap” looms and it is grappling with a post-bubble hangover. Now it faces Mr Trump.

    Du Wanhua, a grand justice at the People’s Supreme Court, wrote an extraordinary piece for China’s judicial newspaper last week saying the country must prepare for mass insolvency.

    “It’s hard to predict how this trade war will develop and to what extent. But one thing is sure: if the US imposes tariffs on Chinese imports following an order of $60bn, $200bn, or even $500bn, many Chinese companies will go bankrupt,” he said.


  30. Well, I think we can agree then that nothing except Extend and Pretend was ever – realistically – going to happen, highly regrettable as that is. Yes, the politicians are indeed cowards who hid behind the central bankers.

    The large numbers who were, in consequence of this global evasion of reality, not thrown out of work suddenly, have now had a decade of relative stability, let’s hope they enjoyed it to the full! Similarly, my tiny business recovered by 2010 as it would not have done otherwise in any reasonable time- frame, and I am grateful for that even as I am aware of the axe over my head.

    By the way, excellent article by Simon Jenkins in The Guardian about the travails of Northamptonshire County Council; and it seems that Somerset and Surrey (!!) might well be in the same boat. This can only spread.

    Interesting, in that he makes much of rising property values, and argues for higher Council Tax based on that increase (and for Business Rates reductions, which no government will ever implement, we can be very sure: the Treasury won’t let the income go).

    Interesting example of richer residents of Westminster voluntarily paying more tax when asked. All the most expensive streets here are Lib Dem and Labour when elections come around, so perhaps it could be tried in Cambridge and other hotspots?

    I recall some bankers saying in 2006 that Labour was taxing them far too little, and they would easily pay more – incredible as it may seem to some! They saw the trade-off between higher taxes and maintaining social stability.

    Jenkins doesn’t, of course, consider at all the implications of collapsing real prosperity (not alone in that!) and the fact that while the rich might indeed be able to take an 8-fold increase in council tax, as they do indeed pay far too little in proportion to the property value, someone who has seen the value of their very ordinary property increase 5-fold (as here in Cambridgeshire) simply by sitting in a property bubble and not through speculation – a rise also out of all proportion to their real income – cannot afford much of an increase at all.

    I doubt my new neighbours who have bought for £550k a bungalow that was £125 or so in 2001, and are no doubt highly indebted with a mortgage, could afford much more Council Tax. Nor has my income increased in that period, in fact it has declined. Any increase in Council Tax for the masses would affect local consumption, one may be sure.

    Ultimately, the nettle which will have to be grasped in the UK is that the physical and social infrastructure (NHS, elderly care homes, etc) built in the age of Fossil Fuel largesse cannot fully be maintained in the age of energy constraints and collapse, and are an historical anomaly. As a surgeon friend said, ‘Whole disciplines will have to go’ in the NHS.

    • Xabier,
      you make a very thought provoking comment, and it is one which I myself ponder over a great deal.
      There are sayings, “Living within your means”, or “Cutting your coat to suit your cloth” etc, and I do wonder what would the UK really look like of we were to do just that.
      Although I do not reside in the UK, I do spend a great deal of time here and what I see does not impress me. In the town near to my work, there is barely one factory producing something. Everybody else who has a job, is either polishing somebody else’s nails, cutting their hair or doing their cleaning for them. I am also stunned by the number of people who pay somebody to walk their dog for them !
      ( isn’t that the point of having a dog ? so that you can get some exercise ? ).
      In addition, about 50% of the “working “population are employed by local or central government.
      How are all these people going to survive once the free money spigot gets turned off ?
      Few people that I see about town have any marketable skills.

      I think I will take a short break over in Ukraine next week.
      I want to see what a failed state looks like close up, and to see what is in store for the UK.

    • Hi I’ve read the article too. In poor areas extra local based taxes simply wouldn’t be able to be implemented so one way of supporting poor councils would be to implement a wealth tax (I can already hear people wailing in dissent).

      I think this works in Germany were you have to pay extra tax on your savings. Also we’ll have to raise income tax on higher earners (more groans of dissent and claims that all rich people will be forced to leave the country).

    • http://letthemconfectsweeterlies.blogspot.com/2017/05/taxation-for-revenue-is-obsolete.html Xavier and Johan, Dr Tim too, whilst the UK has its problems, (as does Sweden where I live with my Wife and our Two Children who are Swedish Citizens). The problem is not one of monetary measures but, it is one of Resources, particularly Energy in the form of motive energy & food energy. I have just been re-reading Perfect Strom and Dangerous Exponentials and I think Tim gets the distinctions very well but in my opinion, both reports are un-convincing scientifically and technologically regarding future Sources of energy based upon electrical storage of electricity generated from renewables.

      Dr Mc Kay sets out the technology far more convincingly than Tims reports dismiss it. Vaclav Smil is also somewhat more convincing than Tims cursory analysis and then dismissal of prospects.


      I highly recommend Ezra Pound ABC of Economics which states in the same era as Beardsley Ruml how Money is a mere token or Voucher or IOU measures of Debt or part of religious belief system hence the terminology of debt forgiveness Death Pledge (Mortgage) . Plutarch was also on the money as it were as too was Aristotle.


  31. ‘I divide the process into two streams, using a loose scientific analogy. The crash may be “chemical” (in which case a catalyst is required), or it may be “nuclear” (needing only sufficient critical mass).’

    Or, perhaps, one can use a California wildfire analogy:
    Lots of dry, highly flammable material laying about, which only needs a spark.

    The analogies can go further:
    Low heat ground fire
    High heat crown fire
    Wind driven metastatic fire
    Fires so hot they create their own mechanisms (the firenadoes and mushroom clouds)

    And the effects on people:
    Burned the outbuildings but not the house
    Killed the horses and the timber
    Destroyed the house, family living in a shelter
    The Greek analogy: trapped and burned to death or killed by smoke inhalation
    The Hawaiian analogy: fire destroys the dry side, leaves the wet side alone. Fire on the ridge. E.g., is Russia safe because it doesn’t have much debt? Can one be a spectator, or is it strictly a participatory sport?

    Don Stewart

  32. Yesterday I watched a program about the super rich – some spending £2m a year on clothes – cosmetic surgery and how ‘A’ list celebs have to look ‘just right’ for the catwalk.

    This morning in the Guardian there’s an article about children relying on food banks for the summer while they’re away from school. Some contrast.

    The conservative Government has commissioned an analysis to see if austerity is to blame. You can form your own conclusions from this.


  33. I agree, higher income tax for high earners must come, and maybe that German model of wealth tax too: anyone have more details on that? I was under the impression that the Germans are great savers, so it cannot be too harsh a levy?

    I do know one friend will move to Switzerland in that case: not sure he has told his wife yet!

    He has worked like a dog, (I remember the 4.30 am starts when we flat shared many years ago) contributed much in tax to Britain, (and also spent about £2 m on refurbishing his London house) and actually he is quite happy to do so, but there is a point beyond which he will not go psychologically, as far as I can tell.

    In higher taxes for people further down the chain, then there is the real risk of crashing consumption in a service economy.

    Business rates stifle enterprise and thereby kill towns making them vulnerable to the big chains pulling out leaving them as wastelands, but the Treasury will never relax its grip on that revenue stream. Remember, Rome remorselessly drove people into the ground with taxes, as did pre-Revolutionary France.

    • It does seem crazy forcing small businesses out of business and allowing big chains to take over.

      Regarding wealth tax I was wrong about Germany but Wiki has current details – I think it’s a good idea but there would be howls of despair from the super rich.

      Regarding the super rich many can’t spend their wealth in a lifetime and I doubt it’s making many that happy.



    • It is customary to measure tax as a % of GDP. In reality, though, you cannot tax GDP, only prosperity – because anyone below subsistence prosperity cannot pay tax, unless the authorities wish to push them even further below subsistence level. (Though I suspect that’s already happening, by the way).

      This is yet another issue on which policymakers are misinformed by conventional economics. The observation that you can only (sustainably) tax prosperity is something I understand, and I’m sure you understand – but they don’t…..

  34. Quote from Wiki

    In 1999, Donald Trump proposed for the United States a one off 14.25% wealth tax on the net worth of individuals and trusts worth $10 million or more. Trump claimed that this would generate $5.7 trillion in new taxes, which could be used to eliminate the national debt.[17] A net wealth tax may also be designed to be revenue neutral if it is used to broaden the tax base, stabilize the economy, and reduce individual income and other taxes[18].

    How times have changed……………….


    • The game isn’t over till the final whistle.

      At the moment, Mr Trump’s targets are the globalising corporates which, in his opinion, undermine America. He can hardly take on those, AND the wealthiest, at the same time. “Divide and conquer”…..

  35. @ Xabier:
    Germany stopped wealth tax quite some years ago, after a high court decision that it was illegal.
    Switzerland does have wealth tax, ranging from moderate to quite a bit, depending on the canton you live in. Switzerland also taxes you on imputed rental value if you own your house. Once again this is not the case in Germany.
    Your friend needs to inform himself somewhat more before taking the plunge !

    In short : Switzerland is better if you have a income from working, Germany is better if you are a rentier.

    • Interesting, thank you.

      Alas, I have no such worries myself: in fact, if anyone breaks in here, I hope they will leave me something………

  36. Roger – thanks for the link to the video by David Mackay – the best and most honest I’ve seen in quite a while – and it’s 6 years old.


    • David MacKay’s untimely death was very sad, the online version of Without Hot air really is a great resource for anyone wishing to deal with Matters of energy and future provision of energy objectively and scientifically.

      I am busy programming at the moment for the complementary currency App I am developing for local commerce, it is based on the Ethereum Blöockchain and localised blockchains for defined geographical areas, my two pilot areas are Local Seaside resort towns near where I live in Sweden, Ängelholm and Båstad.

      For where the future is headed here are a couple of Windows,


      That political Economy has broken down under the present command and control structures I must say I remain Miserably optimistic. There is something of the rule of the Hammer within all of us and SEEDs is no less exempt from it than Blind Faith in BlockChain, or anything else.

    • Thank you Roger – although a little out of date ‘Without hot air’ does go a good job at setting out what’s required in a clear honest manner so hence the challenges facing us. I’ve read through quite a few of the sections including Nuclear.

      To me it seems like a mixture of renewables and nuclear seem the way to go for the UK at least. I would prefer Thorium reactors to be used but they are still experimental and could have a lead time of 15 years. (China are also investing in them so perhaps they can help us out in the future)

      Fusion could well be pie in the sky – but the pay offs would be big if we can crack it. However whatever mix we decide on we have to get off fossil fuels although currently Germany doesn’t seem to care and is going for coal powered stations as an interim measure.

      I really like David’s writing – honesty and knowledge and the way he debunks prejudice.

      I’ve had a look at the IOTA website – very interesting.


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