#147: Primed to detonate


After more than a decade of worsening economic and financial folly, it can come as no surprise that we’re living with extraordinarily elevated levels of risk.

But what form does that risk take, and where is it most acute?

According to SEEDS – the Surplus Energy Economics Data System – the riskiest countries on the planet are Ireland, France, the Netherlands, China, Canada and the United Kingdom.

The risks vary between economies. Some simply have debts which are excessive. Some have become dangerously addicted to continuing infusions of cheap credit. Some have financial systems vastly out of proportion to the host economy. Some have infuriated the general public to the point where a repetition of the 2008 “rescue” would inflame huge anger. Many have combinations of all four sorts of risk.

Here’s the “top six” from the SEEDS Risk Matrix. Of course, the global risk represented by each country depends on proportionate size, so China (ranked #4 in the Matrix) is far more of a threat to the world economy and financial system than Ireland, the riskiest individual economy. It’s noteworthy, though, that the three highest-risk countries are all members of the Euro Area. It’s also noteworthy that, amongst the emerging market (EM) economies, only China and South Korea (ranked #9) make the top ten.

Risk 01 matrix top

Risk and irresponsibility

Before we get into methodologies and detailed numbers, it’s worth reflecting on why risk is quite so elevated. As regular readers will know, the narrative of recent years is that prosperity has been coming under increasing pressure ever since the late 1990s, mainly because trend ECoE (the energy cost of energy) has been rising, squeezing the surplus energy which is the source of all economic output and prosperity.

This is a trend which the authorities haven’t understood, recognizing only a vague “secular stagnation” whose actual root causes elude them.

Even “secular stagnation” has been unacceptable to economic and financial systems wholly predicated on “growth”. Simply put, there‘s been too much at stake for any form of stagnation, let alone deterioration, to be acceptable. The very idea that growth might be anything less than perpetual, despite the finite nature of the planet, has been treated as anathema.

If there isn’t any genuine growth to be enjoyed, the logic goes, then we’d better fake it. Essentially, nobody in authority has been willing to allow a little thing like reality to spoil the party, even if enjoyment of the party is now confined to quite a small minority.

Accordingly, increasingly futile (and dangerous) financial expedients, known here as adventurism, have been tried as “solutions” to the problem of low “growth”. In essence, these have had in common a characteristic of financial manipulation, most obvious in the fields of credit expansion and monetary dilution.

These process are the causes of the risk that we are measuring here, but risk comes in more than one guise. Accordingly, each of the four components of the SEEDS Risk Matrix addresses a different type of exposure.

These categories are:

– Debt risk

– Credit dependency risk

– Systemic financial risk

– Acquiescence risk

One final point – before we get into the detail – is that no attempt is made here to measure political risk in its broader sense. Through acquiescence risk, we can work out which populations have most to complain about in terms of worsening prosperity. But no purely economic calculation can determine exactly when and why a population decides to eject the governing incumbency, or when governments might be tempted into the time-dishonoured diversionary tactic of overseas belligerence. We can but hope that international affairs remain orderly, and that democracy is the preferred form of regime-change.

Debt risk

This is the easiest of the four to describe, and comes closest to the flawed, false-comfort measures used in ‘conventional’ appraisal. The SEEDS measure, though, compares debt, not with GDP but with prosperity, a very different concept.

Ireland, markedly the riskiest economy on this criterion, can be used to illustrate the process. At the end of 2018, aggregate private and public debt in Ireland is estimated at €963bn, a ratio of 312% to GDP (of €309 bn). Expressed at constant 2018 values, the equivalent numbers for 2007 (on the eve of the 2008 global financial crisis, which hit Ireland particularly badly) were debt of €493bn, GDP of €198bn and a debt/GDP ratio of 249%.

In essence, then, debt may be almost twice as big (+95%) now as it was in 2007, but the debt ratio has increased by ‘only’ 25% (to 312%, from 249%), because reported GDP has expanded by 56%.

Unfortunately, this type of calculation treats GDP and debt as discrete items, with the former unaffected by changes in the latter. The reality, though, is very different. Whilst GDP has increased by €111bn since 2007, debt has expanded by €470bn. Critically, much of this newly-borrowed money has flowed into expenditures, which serves to drive up the activity measured as GDP.

According to SEEDS, growth without this simple spending of borrowed money would have been only €13bn, not €111bn. Put another way, 89% of all “growth” reported in Ireland since 2007 has been nothing more substantial than the effect of pouring cheap credit into the system, helped, too, by the “leprechaun economics” recalibration of GDP which took place in 2015.

Of course, the practice of spending borrowed money and calling the result “growth” didn’t begin after the 2008 crash. Back in 2007, adjusted (“clean”) GDP in Ireland (of €172bn) was already markedly (13%) lower than headline GDP (€198bn), and the gap is even wider today, with “clean” GDP (of €184bn) now 40% lower than the reported number.

Even “clean” GDP isn’t a complete measure of prosperity, though, because it excludes ECoE – that proportion of output that isn’t available for other purposes, because it’s required to fund the supply of energy itself.

Where ECoE is concerned, Ireland is a disadvantaged economy whose circumstances have worsened steadily in recent years. Back in 2007, Ireland’s ECoE (of 6.7%) was already markedly worse than the global average (5.4%). By 2018, the gap had widened from 1.3% to 3.2%, with Ireland’s ECoE now 11.2% (and the world average 8.0%). An ECoE this high necessarily kills growth, which is why aggregate prosperity in Ireland now is only fractionally (2%) higher than it was in 2007, even though population numbers have grown by 10%.

The results of this process, where Ireland is concerned, have been that personal prosperity has declined by 7% since 2007, whilst debt per person has risen by 78%. The conclusion for Ireland is that debt now equates to 589% of prosperity (compared with 308% in 2007), and it’s hard to see what the country can do about it. If – or rather, when – the GFC II sequel to 2008 turns up, Ireland is going to be in very, very big trouble.

These are, of course, compelling reasons for the Irish authorities to bend every effort to ensure that Britain’s “Brexit” departure from the European Union happens as smoothly as possible. If the Irish government really understood the issues at stake, ministers would be exerting every possible pressure on Brussels to step back from its macho posturing and give Mrs May something that she can sell to Parliament and the voters.

There’s a grim precedent for Dublin not understanding this, though – in the heady “Celtic tiger” years before 2008, nobody seems to have batted an eyelid at the increasingly reckless expansion of the Irish banking system.

Risk 02 debt

Credit dependency

As we’ve seen, adding €111bn to Irish GDP since 2007 has required adding €470bn to debt. This means that each €1 of “growth” came at a cost of €4.24 in net new borrowing. It also means that annual net borrowing averaged 14% of GDP during that period. This represents very severe credit dependency risk – in short, the Irish economy would suffer very serious damage in the event even of a reduction, let alone a cessation, in the supply of new credit to the economy.

Remarkably, though, there is one country whose credit dependency problem is far worse than that of Ireland – and that country is China.

The Chinese economy famously delivers growth of at least 6.5% each year, and reported GDP has more than doubled since 2008, increasing by RMB 51 trillion, from RMB37.7tn to an estimated RMB89tn last year.

Less noticed by China’s army of admirers has been a quadrupling of debt over the same period, from RMB53tn (at 2018 values) in 2008 to RMB219tn now. There also seem to be plausible grounds for thinking that China’s debts might be even bigger than indicated by published numbers.

This means that, over the last ten years, annual borrowing has averaged an astonishing 23% of GDP. No other economy comes even close to this, with Ireland (14.1%) placed second, followed by Canada (9.5%) in third, and South Korea (8.6%) a distant fourth. To put this in context, the ratios for France (8.1%) and Australia (7.5%) are quite bad enough – the Chinese ratio is as frightening as it is astonishing.

The inference to be drawn from this is that China is a ‘ponzi economy’ like no other. The country’s credit dependency ratio represents, not just extreme exposure to credit tightening or interruption, but an outright warning of impending implosion.

There are signs that the implosion may now be nearing. As well as slumping sales of everything from cars to smartphones, there are disturbing signs that industrial purchases, of components ranging from chips to electric motors, are turning downwards. Worryingly, companies have started defaulting on debts supposedly covered very substantially by cash holdings, the inference being that this “cash” was imaginary. Worse still, the long-standing assumption that the country could and would stand behind the debts of all state-owned entities (SOEs) is proving not to be the case. In disturbing echoes of the American experience in 2008, there are reasons to question why domestic agencies accord investment grade ratings to such a large proportion of Chinese corporate bonds.

How has this happened? The answer seems to be that the Chinese authorities have placed single-minded concentration on maintaining and growing levels of employment, prioritizing this (and its associated emphasis on volume) far above profitability. Put another way, China seems quite prepared to sell products at a loss, so long as volumes and employment are maintained. This has resulted in returns on invested capital falling below the cost of servicing debt capital – and an attempt to convert corporate bonds into equity was a spectacular failure, coming close to crashing the Chinese equity market.

Risk 03 credit

Systemic exposure

Debt exposure and credit dependency are relatively narrow measures, in that both concentrate on indebtedness. Critical though these are, there is a broader category of exposure termed here systemic risk, and this is particularly important in terms of the danger of contagion between economies.

The countries most at risk here are Ireland (again), the Netherlands and Britain. All three have financial sectors which are bloated even when compared with GDP. But the true lethality of systemic risk exposure only becomes fully apparent when prosperity is used as the benchmark.

At the most recent published date (2016), Dutch financial assets were stated at $10.96tn (€10.4tn), or 1470% of GDP. The SEEDS model assumes that the ratio to GDP now is somewhat lower (1360%), which implies financial assets unchanged at €10.4tn.

As we’ve seen with Ireland, measurement based on GDP produces false comfort, because GDP is inflated by the spending of borrowed money, and ignores ECoE. In the Netherlands, growth in GDP of €82bn (12%) between 2007 and 2018 needs to be seen in the context of a €600bn (32%) escalation in debt over the same period. This means that each €1 of reported “growth” has required net new borrowing of €7.40. Without this effect, SEEDS calculates that organic growth would have been just €8bn (not €82bn), and that ‘clean’ GDP in 2018 was €619bn, not €767bn.

The further deduction of ECoE (in 2018, 10.5%) reduces prosperity to €554bn. This is lower than the equivalent number for 2007 (€574bn), and further indicates that the prosperity of the average Dutch person declined by 8% over that period.

Though aggregate prosperity is slightly (3.5%) lower now than it was in 2007, financial assets have expanded by almost 40%, to €10.4tn now from €7.47tn (at 2018 values) back in 2007. This means that financial assets have grown from 1303% of prosperity on the eve of GFC I to 1881% today.

As the next table shows, this puts Holland second on this risk metric, below Ireland (3026%) but above the United Kingdom (1591%). Japan (924%) and China (884%) are third and fourth on this list.

Needless to say, the Irish number looks lethal but, since Ireland is a small economy, equates to financial assets (of €4.9tn) that are a lot smaller than those of the Netherlands (€10.4tn). Likewise, British financial assets are put at £23.3tn, a truly disturbing number when compared with GDP of £2tn, let alone prosperity of £1.47tn.

The conclusion on this category of risk has to be that Ireland, Holland and Britain look like accidents waiting to happen. Something not dissimilar might be said, too, of Japan and China. Japan’s gung-ho use of QE has resulted in half of all JGBs (government bonds) being owned by the BoJ (the central bank), whilst huge financial assets (estimated at RMB417tn) underscore the risk perception already identified by China’s dependency on extraordinary rates of credit creation.

Risk 04 systemic

Acquiescence risk

The fourth category of risk measured by SEEDS concentrates on public attitudes rather than macroeconomic exposure. Simply put, we can assume that, when the GFC II sequel to the 2008 global financial crisis (GFC I) hits, governments are likely to try to repeat the “rescue” strategies which bought time (albeit at huge expense) last time around. But will the public accept these policies? Or will there be a huge popular backlash, something which could prevent such policies from being implemented?

It’s not difficult to envisage how this happens. If we can picture some politicians announcing, say, a rescue of the banks, we can equally picture some of their opponents pledging to scrap the rescue at the earliest opportunity, and take the banks into public ownership, pointing out that stockholder compensation will not be necessary because, in the absence of  a taxpayer bail-out, the worst-affected banks have zero equity value anyway. Simply put, this time around there could be more votes in the infliction of austerity on “the wealthy” than there will be in bailing them out. It’s equally easy to picture, at the very least, public demonstrations opposing such a rescue.

Even at the time, and more so as time has gone on, the general public has nurtured suspicions, later hardening into something much nearer to certainties, that the authorities played the 2008 crisis with loaded dice. One obvious source of grievance has been the management of the banking crash. The public may understand why banks were rescued, but cannot understand why the rescue included the bankers as well, whose prior irresponsibility is assumed by many to have been the cause of the crisis – especially given the unwillingness of governments to rescue those in other occupations, such as manufacturing, retail and hospitality.

The 2008 crisis was followed by a fashion for “austerity”, in which the public was expected to accept lean times as part of a rehabilitation of national finances after debts and deficits had soared during GFC I. Unfortunately, the imposition of “austerity” has looked extremely one-sided. Whilst public services budgets have been cut, the authorities have operated policies which have induced extraordinary inflation in asset prices. These benefits, for the most part enjoyed by a small minority, haven’t even been accompanied by fiscal changes designed to capture at least some of the gains for the taxpayer.

The word ‘hypocrisy’ has been woven like a thread into the tapestry of post-2008 trends, which are widely perceived as having inflicted austerity on the many as the price of rescuing the few. It hardly helps when advocates of “austerity” seem not to practice it themselves. Policies since 2008 have been extraordinarily divisive, not just between “the rich” and the majority, but also between the old (who tend to own assets) and the young (who don’t).

In short, the events of 2008 have created huge mistrust between governing and governed. This might not have mattered quite so much had the prosperity of the average person continued to grow, but, in almost all Western countries, this has not been the case. Whatever might be claimed about GDP, individuals sense – rightly – that they’re getting poorer. We’ve already seen the results of this estrangement, in the election of Donald Trump, the “Brexit” vote in Britain and the rise of insurgent (aka “populist”) parties in many European countries. Latterly, France has witnessed the eruption of popular anger in the gilets jaunes movement, something which might well be replicated in other countries.

For reasons which vary between countries – but which have in common a complete failure to understand deteriorating prosperity – established policymakers have seemed blinded to political reality by “the juggernaut effect”.

Where, though, is acquiescence risk most acute? The answer to this seems to lie less in the absolute deterioration in average prosperity than in the relentless squeeze in discretionary (“left in your pocket”) prosperity – simply put, how much money does a person have left at the end of the week or month, after taxes have been paid, and essential expenses have been met?

This discretionary effect helps to explain why the popular backlash has been so acute in France. At the overall level, the decline in French prosperity per person since 2007 has been a fairly modest 6.3%, less severe than the experiences of a number of other countries such as Italy (-11.6%), Britain (-10.3%), Norway (-8.4%) and Greece (-8..0%). Canadians (-8.1%) and Australians (-9.0%), too, have fared worse than the French.

Take taxation into account, though, and France comes top of the league. Back in 2007, prosperity per person in France was €28,950, which after tax (of €17,350) left the average person with €11,600 in his or her pocket. Since then, however, whilst prosperity has declined by €1,840 per person, tax has increased (by €1,970), leaving the individual with only €7,790, a 33% fall since 2007.

In no other country has this rapidity of deterioration been matched, though discretionary prosperity has fallen by 28% in the Netherlands, by 24% in Britain, by 23% in Australia and by 18% in Italy. If this interpretation makes sense of the popularity of the gilets jaunes (and makes absolutely no sense of the French authorities’ responses), it also suggests that the Hague, London and perhaps Canberra ought to be preparing themselves for the appearance of yellow waistcoats on their streets.

Risk 05 acquiescence

170 thoughts on “#147: Primed to detonate

  1. @Barry
    Bradford says that real wealth consists of raw resources and finished goods. The rhetorical question then becomes:
    ‘In a high ECoE future, how much will the raw resources we have and the finished goods we have actually be worth in terms of, let’s say, dietary calories?’

    And the disturbing answer is ‘Not very much’.

    Don Stewart

  2. It’s being reported today that the Hunterston reactor in Scotland has 370 cracks in its graphite bricks. The safe operating maximum is 350, roughly one in every ten graphite bricks. EDF apparently wants the safe limit raised to 700 cracks, enabling the plant to be put back into use. These cracks are described as “hairline”, but seem to be up to 2mm in width, which doesn’t sound “hairline” to me.

    As for the Dungeness plant in Kent, I’ve heard somewhere that it’s best not to ask.

    • Hi Tim

      With nuclear and shale it has smacked off desperation recently and naivety from the nuclear start. The sensible thing would have been to have put in place strict planning laws that forced builders to install ground source heat pumps, large sub surface water tanks along with wind and solar for hot water and lighting in addition to constructing very energy efficient buildings. Much cheaper to do all that from the very start of a build rather than retrospectively.

      Modern housing design for the last 30 years could have been so exciting yet all they seem to have produced is ever decreasing boxes which look OK on viewing but silly once furniture is put in place. So many wasted opportunities everywhere because the ‘powers’ that be have no imagination and don’t even understand the scale of the problems we face.

    • The issues here, I think, are different forms of moral cowardice in government (a phenomenon by no means confined to the UK). In Britain, a decision about nuclear replacement needed to be made by 2000 at the latest. This was put off and put off because it might be unpopular.

      Again, governments have run scared of letting property prices fall to affordable levels. You’re right about housing, and this certainly could have been acted upon, given that government has been subsidizing house-builders (as well as shamelessly propping up inflated house prices) through “help to buy”. This really ought to be renamed “help to go hopelessly into debt slavery”, or perhaps “help to keep home-owning, middle-income, middle aged voters on side”. The point is that there could have been strings attached to this, covering some of the issues you mention. Oh well, I suppose it will boost income to the Treasury once a wealth tax is adopted….

      Governments always avoid facing hard truths. We’re now being told that EVs are the answer to climate change emissions (and a future shortage of liquid fuels). But this simply isn’t true, because we do not have, and will not have, enough generating capacity, even if we burn the oil which would otherwise have fueled IC vehicles, and burn more coal as well. The better answers would involve fewer cars, more and much better public transport, shorter journey distances and redesigned work and living patterns – none of this, though, can be discussed “in front of the children”.

    • vis a vis nuclear reactors, this blog post by Adam Curtis includes a short film about them, scroll down to the 2nd video clip, the whole post is worth reading but the section about reactors really caught my attention.


      basically the 60 MW reactors used in submarines were a size where you could ensure 100% confinement of the core if it melted down, but economic and political pressures for vast mega projects created 600 MW reactors, and larger, that just had too big a core to be able to confidently contain it if a meltdown occured.

      I’m rather taken by the floating nuclear power stations the Russians are building using their proven atomic icebreaker reactors, they’re in the 60 MW size range and are intended for the far north where the melting permafrost is making siteing nuclear power stations on land really challenging, they are intended to be towed to a purpose built dock/berth/harbor installation where they hook up and supply the city and local industry with electricity and when due for servicing, overhaul, reactor rod replacement they are towed back to the base port and it’s facilities whilst an overhauled and refuelled one takes it’s place.


      in the UK we have ageing, static, land based, legacy mega/vanity project nuclear reactors approaching end of life cycle, in need of decommisioning, oversized so more vunerable to core escape if it did meltdown and sited on the coast for access to cooling sea water, surely these are also vulnerable to rising sea level in due course, hard to monitor a de commissioned site if it’s slowly being reclaimed by the sea?

      with the mega power station projects a vast amount of electricity is lost as it is distributed around the grid, it starts off in the 10’s of thousands of volts and is stepped down in voltage in stages to counter losses due to resistance over distance.

      we are an island, surely we could put floating power station barges at each coastal city & large town and supply power directly to that distict, we don’t need one vast ‘Krakatoa’ reactor at one end of the country, we need say twenty mobile and appropriately sized ones distributed around the country.

      at end of life you can tow them to a dry dock, decomission them and cut them up , or encase the decommissioned reactor in concrete and scuttle it in the Irish Sea, we dumped God knows how much white phosphorous and Zyklon B out there after WW2 anyway,

      we need to be realistic about what means we may still have available to us for handling retired nuclear reactors in 50 years time, places like Windscale and Dungeness are going to be a real headache in a future with less fossil fuel energy available .

      and what do we do with spent fuel rods?

      well James Lovelock, the scientist credited with the Gaia Hypothesis, wanted a chunk of radioactive waste encased in concrete to bury in his garden with a heat exchanger to heat his home,

      I don’t know why we aren’t using spent fuel ponds for district heating projects, 20 ft of water is all the shielding required and they operate at atmospheric pressure,


      oh and did you know you can heat water directly with a water brake wind turbine?

      no need to generate electricity then heat water with it, just convert the wind energy straight into hot water, a lot less complicated and cheaper.

      the Danish were doing it in the 1970’s


      this Low Tech Magazine website is really fascinating, I think I’ve read the entire site now!

  3. The ECB has indicated that there will be no rate rises until next year at the earliest. Measures are being taken to stimulate lending by making cheap credit available to European banks.

    This follows a softer line on rates being taken by the Fed. The Fed is, reportedly, thinking of treating QE as a day-to-day management tool rather than a measure used only in exceptional/emergency conditions.

    We’re well on the way to trashing the value of currencies as part of the ongoing denial process over deteriorating prosperity.

    “The fate of all the world I see
    Is in the hands of fools”

    • We always knew that absent MMT of similar that QE would become a permanent fixture of the economic landscape. TLTRO etc are all part of keeping the EU banks alive seeing that they have over 880 billion of NPLs, trillions of Non Performing Exposures and trillion in junk rated sovereign bonds lurking on their books. The salient indication recently was that when the ECB announced banking reliefs it was clearly not enough to sway the markets to the upside. Something big is going to change soon but I personally don’t see a collapse in faith in fiat currencies because they are all we have and there are no viable alternatives. Gold, Bitcoin etc are not fit for purpose in contemporary times.

    • As I see it we are now in a late stage of policy madness. As we’ve discussed here before, the ratio between liquidity injections and resulting “growth”, always weak, has now become utterly miserly. An NBER report in the US has suggested that stimulus hasn’t worked at all, because it has downsides which at least counter its theoretical benefits. Yet there is no sign of a return to normality. The Fed is soft-pedaling on rate rises, and considering adding QE to its day-to-day toolkit. This measure from the ECB, accompanied by slashing its forecast for EA growth from 1.7% (as recently as December) to just 1.1% now, is eloquent of utter failure.

      I don’t share your faith in the ability of fiats to withstand this process indefinitely, for three main reasons:

      1. Compounding. If we keep on increasing the rate at which credit is created, the addiction process will take on an internal momentum of its own, which I suspect is already the case – it’s like drugs, where the addict keeps needing ever larger amounts as the effects diminish.

      2. Crash risk. There’s no resilience in the system, and there are no rate or fiscal shots left in the locker. Come GFC II, the required amounts of new liquidity will dwarf anything yet seen. Moreover, deficits would widen to a point where there’s no alternative to ‘printing the deficit’. So the next crisis could trigger exponential money-creation. That’s when inflation spreads from asset prices (as now) to prices and wages. Debt levels already suggest that there is no alternative to an inflationary ‘soft default’. Gaps in pension funding suggest a need to print money to meet obligations.

      3. Energy. This is typified by shales. These have never been ‘profitable’ (meaning positive FCF). But we can try to keep energy supply ‘profitable’ by printing the money to cover its capital costs.

      This latter is critical, and recognized by very few. In SEEDS parlance, we’ll end up printing the money to pay ECoE. That can’t work. Rising ECoEs, by destroying prosperity, are set to destroy money as well. This is a topic I’m working on now. But how can a financial system predicated on perpetual growth survive a cessation (and now a reversal) in growth caused by ECoE strangulation?

      Simply put, rising ECoEs could kill money by destroying its most fundamental assumptions.

    • I think otherwise. All values are metaphysical. They might disappear temporarily only to be reinvented in different ways. We have always been making this up as we go along and we will continue making it up. Things have changed. I remember when QE was first introduced everyone was predicting hyper-inflation. It did not happen much to the central banker’s chagrin because inflation of some reasonable sort was meant to be the point yet we had virtually no inflation. We can obviously disagree about this stuff, but to me it seems we have moved into other realms beyond conventional economic understanding.

    • With respect, we most certainly HAVE experienced hyperinflation – in asset prices.

      The creation of additional money necessarily creates inflation, subject to monetary velocity. After GFC I, velocity naturally slumped as people turned ultra-cautious. In this sense, QE increased the quantity side of the Q-V equation, but was offset by much reduced velocity.

      But WHERE inflation shows up depends on where the money is put in. If QE had been put into people’s pockets, consumer inflation would have risen. What happened, though, is that new money was put into asset markets instead – so that’s where the inflation turned up.

    • I agree there has been some inflation in certain assets but I wouldn’t call that hyper-inflation. Even if you look at certain asset classes it has not been enough to even keep pension funds solvent.

    • This is a matter of opinion, of course, but I have to say that asset price inflation looks quite extraordinary to me, and I can’t reconcile prices to any fundamental metric of valuation. I’d say that it’s only the perpetual injection of cheap liquidity that prevents what is politely called “a sharp correction”.

      High asset prices harm pension funding, because it increases the prices at which inwards fund flows are invested and, critically, crushes returns on capital. Price gains are one-off, but the dynamic, in-out pensions process depends on real returns on invested funds going forward.

      Pre-GFC I, money put into US equities could be expected to earn 8.6% (real) annually over time. The forward-looking number now is only 3.45%. Money put into US bonds now earns only 0.15%, down from 3.6% previously (source: WEF).

    • Well, our ‘money’ system is based on conventional economic thing, formerly known as economic growth. The exponential function in diminishing returns will eventually become our wake up call.

      Btw, dear doc, thanks for your comment, i’m on the same track for several years now. ‘Money’ becomes worth less, and in the end worthless.

      Our monetary system is based on infinite growth, natural growth is gone, and what we have now is a continues effort to keep up the system with ever less tools to use.

      Eventually they will attempt to strike a match during a tsunami.

  4. Hi Tim
    Have you seen this yet

    “The method we have implemented is quite simple, even if with some useful simplification that we have discussed in details in our paper.

    The denominator in the EROI value is the Energy Invested, while the numerator is the Energy Return (how much energy is gained with respect to the investment). Knowing the numerator it is quite simple (we are talking of oil companies) because this value corresponds to the production of a day (or of a year). The issue in different cases was knowing the value of energy cost of that production. It is difficult to know how much energy they use to produce what they produce in a year (or in a day), sitting at a desk without wandering the world knocking on the doors of companies. However… we have found an indirect way to have these data.

    The oil companies are requested to compile a Sustainability Report (SR) yearly. Even if not mandatory many companies have accepted to prepare them probably under the pressure of the public opinion or/and the business branch named CSR (Corporate Social Responsibility), especially after the alarms launched at the last world conferences on climate.

    In these reports, it is possible to find the emissions of their up- and downstream activities expressed in CO2 equivalent. This is good news because we can try to do a mental experiment: to burn all oil that a company produces and convert it in CO2 equivalent, with a simple stoichiometric ratio. In this way, we have the equivalent value in CO2 of production (numerator) and the equivalent value in CO2 of emissions (denominator).”

    This might be a good way to cross check some of your data on EROI.

  5. It seems that there are economic, political and environmental problems all ready to make their presence increasingly felt. If multiple issues come to a head simultaneously it seems likely to cause problems that I doubt our current leaders and structures are equipped to deal with.

  6. If Sterling starts to tank,
    How long until the UK government re-introduces Exchange Controls ?

    • Things would have to be ultra-extreme (or decision-making very much in panic mode) before anyone would try this.

      One reason why is that modern systems make it very hard to enforce such controls – billions can move in fractions of a second. Trying to operate exchange controls would be difficult, too, in terms of implications for trade, which no longer consists, as it once did, of the exchange of goods for cash or near-cash.

      Broadly, though, you are right to think about the elevated risk in the UK situation. Beyond dependency on continuity of credit (and a need to sell assets), the UK’s biggest Achilles Heel is the sheer size of the financial system. It’s possible for a monetarily-sovereign country to plug some gaps using newly-created money, but there are limits to how far you can get away with this without destroying faith in the currency. Even on published data, the UK financial system is 11.3x GDP, so it wouldn’t need too much of a hit before you find yourself doubling the quantity of money in existence. I’ve not expressed this well but I think you’ll see what I mean.

    • Thanks, Dr.Tim, I see what you mean.
      I was thinking more about crossing borders ( ie. UK – EU ) while in possession of a bag of gold coins.
      The risk of confiscation, ( from a highly indebted and both morally and financially bankrupt government ) concerns me.

    • Thanks.

      As we discussed recently, the logic of deteriorating prosperity is that tax revenues fall – but also that governments, not understanding the processes involved, become ever more “imaginative” in collecting tax.

    • ” imaginative ” ?
      I see that your sense of humour is still very healthy, Dr Tim.
      You made me laugh, ( LOL ),
      Even though your implication is that the Government are going to rob us all blind ! Of course, I won’t be laughing then, will I ?

    • This is something that we looked at quite recently. Governments tend to calibrate taxes using the traditional metrics and incomes and GDP, but neither reflects the deterioration in prosperity measured here and very evident to individuals.

      From this divergence, two things follow. First, governments are likely to impose excessive tax burdens without realizing that they’re doing so. Second, plans are likely to be based on an assumed growth in the economy, and therefore in tax revenues, that isn’t consistent with reality.

      This suggests growing resistance, and anger, from taxpayers.

  7. EROI of oil and gas
    Ugo Bardi refers to this paper:

    There are notes about the complexities of interpreting each company’s data. But if we take the numbers as the best we are probably going to get, they are sobering. Particularly if we put them together with Charles Hall’s estimate that it requires an EROI of 10 or better to maintain the world economy as we have known it. Saudi Arabia and Kuwait still have good numbers, but Exxon-Mobil, Shell, and BP are on the brink…as well as the Chinese companies. Rosneft in Russia still looks OK.

    From the perspective of Capitalism, it seems to me that stock market value depends heavily on the ability of the companies to grow production while maintaining EROIs of better than 10. Thus, while Saudi and Kuwait still have good numbers, I do not think that either are capable of growing production very much. In the absence of growth, the stock market value is the discounted cash flow as the company contracts and simply harvests what it already has. In the US, such strategies have been followed by Sears and Kraft-Heinz and Toys R Us. Harvest strategies tend to be hard to execute.

    On balance, and keeping in mind the uncertainties in the data, I would say that the evidence points in the same direction as Dr. Morgan’s data on ECoE.

    Don Stewart

    • I think Charles Hall qualifies this somewhat, pointing to higher required EROEIs. A level of EROEI may be high enough to make (say) crude oil worth producing in energy in/out terms, but not high enough to cover refining and distribution; and on top of this you need vehicles to put the fuel into, roads to drive them on, a plant to build cars, processes for extracting and processing raw materials to make the car, and so on – with each stage pushing required EROEI higher. In other words, there’s huge leverage in the equation.

      My studies seem to be showing that it becomes impossible to keep growing the prosperity of Western countries once ECoE gets into a range between 3.5% and 5.0%. The thresholds in emerging economies are higher, but of course their prosperity starts from a lower base, with less complex economies. Globally, prosperity seems to have ceased growing when world trend ECoE reached about 7.5%.

      The implication might be that Western economies need EROEIs of about 20, but EM countries can keep growing their (lower and simpler) prosperity at ratios down to maybe 14.

      I stress “might be”, because this is very much work in progress. My efforts so far have been concentrated on calibrating prosperity, risk and their connections to energy cost trends.

  8. Tim,
    You may find it fruitful to read Steve Ludlum’s proposals for managing an inevitable hyperinflation of fiat – and unpayable debts – with greenbacks, i.e.., sovereign currency, rather than debt (central bank) currency. Doing so would require overthrowing the political clout of the banks, but the proposal would insure that debt service costs do not increase let alone increase exponentially. Steve proposes it as a means to help manage the decline and buy us more time to adapt because, indeed, if exponential debt service burdens are added to the woes, we will have less time, and less means, because paying amounts to unproductive finance. We would still produce hyperinflation, i.e., rapidly diminishing “purchasing power” of money, but it would be somewhat slower and managed better.

    Check out:
    “It All Falls Apart,” https://www.economic-undertow.com/2015/07/ , where he first introduces the concept in the context of the Greece debt crisis,
    “Ben Franklin’s Revenge,” https://www.economic-undertow.com/2016/02/29/ben-franklins-revenge/ , where he discusses the concept more broadly.

  9. @Dr. Morgan
    I should have added, but failed to think of it, that SRS Rocco has recently done interesting calculations on Exxon-Mobil. The company breaks out results for their domestic US business, upstream and downstream, vs. their international business. The domestic production income has tanked in the last year or so. The declining income domestically coincides with E-M becoming the largest player in the Permian oil and gas shale business.
    Don Stewart

  10. Why did the Americans revolt in 1776?

    ‘Boiled down to its essence, Americans came to appreciate the precariousness of their prosperity, and this led to a deep political split in the populace. Between 30% and 40% of the populace remained loyal to the British Crown/King, and these Loyalists reckoned it a political and economic disaster to separate from the “Mother Country.”

    The majority felt the exact opposite: their prosperity and liberties were all too easily snatched away by a Parliament and/or a Monarch which had little to no regard for their prosperity or liberties.’

    Courtesy of Charles Smith from reading a new book. What percentage of the French do you think consider their prosperity and liberties to be threatened by the EU/ Paris hierarchy?

    Don Stewart

    • 40%: vote for Melenchon and Lepen added. maybe a little more,i don’t know minor candidates position. but more important are % of younger “rebel” than overall population.

  11. China’s debt growth was lower in feb:


    So while today’s data will likely lead to even more bearishness for China’s stock market, which as we noted on Friday plunged after state-owned broker CITIC downgraded a state-owned insurer which had become the poster child of the latest market euphoria, sending the Shanghai Composite tumbling almost 5% on Friday, what does all of this mean for Chinese economy? Here Goldman is slightly below market consensus forecasts in terms of January-February industrial activity growth though even with our forecast, the implied sequential growth would still be a little higher than the level in 4Q 2018. And so while January-February activity data together are still subject to slight downside Chinese New Year distortions on net, Goldman expects March data to be stronger on a year-over-year basis. What happens then will depend on whether Beijing once again open up the credit spigots, or if the current sharp slowdown in credit growth persists indefinitely, further depressing China’s already slowing economy.”

    We shall see indeed.

  12. Alice Friedman on the IEA projections for oil production:

    Some scary declines are forecast. Then a discussion of whether the oil companies will simply put their cash into share buy-backs or spend more money on exploration. A presumption that prices will rise sharply. Which raises the question of whether share buy-backs will work to raise market value, or will be seen as a desperation move and not move market value at all.

    I will just point to the old debate about the conflict between ‘Demand and Supply’ curves which imply higher prices and ‘Thermodynamic’ approaches which imply that the world will be in a Depression and demand will fall and prices will fall because the economy cannot make good use of the high cost oil. (I think of Dr. Morgan’s work as being in the ‘Thermodynamic’ camp.) And, of course, there is the potential for nationalization and forced production. Or the resurrection of official Empires with the oil producing areas being reduced to servants of the Imperial masters.

    Somebody, I forget who, once recommended that times like these are appropriate for putting in a good supply of Scotch whiskey.

    Don Stewart

    • As an additional thought. Check our SRS Rocco’s analysis of Exxon-Mobil and how their move into Permian Shale is gutting the income statement for their domestic business.
      Don Stewart

    • This takes us into some very interesting areas, some of which might form the subject of an article here before too long.

      For technical reasons which I needn’t go in to here, US shale oil has never been profitable, in that it has never generated positive free cash flow (FCF+). By definition, that means that it’s always been subsidized.

      There are three main sources (leaving aside tax-breaks) of this subsidy:

      – Oil companies’ other, FCF+ activities
      – Capital from investors, who ultimately lose some of their investment
      – Cheap capital, made available by ZIRP (etc)

      Shale isn’t alone in this, of course – much subsidy has gone into renewables, and it’s at least arguable that the same is true of nuclear.

      Let’s think about this subsidy broadly. Even at $100/b, shale isn’t FCF+. Equally, though, we need this oil. A barrel of oil, converted via BTU into kwh then into hours of human labour at (say) $10/hr, is “worth” about $230,000.

      So you could argue that society has an interest in enabling this non-FCF+ production. Shales have lost money for investors but, without them, there would have been less energy (oil) available to the economy, and prices might well have been a lot higher.

      What I’m inching towards is a thesis that energy production may need to be subsidized ‘for the broader economic good’. This said, though, govts can’t provide this subsidy from tax revenue, which isn’t remotely sufficient, and will anyway trend downwards in line with falling prosperity.

      How, then, can society provide this subsidy? The answer, I expect, is through money creation.

      If I’m right, this ties the prospects of fiats to ECoE – which should come as no surprise to any of us here..

    • “What I’m inching towards is a thesis that energy production may need to be subsidized ‘for the broader economic good’. This said, though, govts can’t provide this subsidy from tax revenue, which isn’t remotely sufficient, and will anyway trend downwards in line with falling prosperity.

      How, then, can society provide this subsidy? The answer, I expect, is through money creation.”

      The two roads I see are a. helicopter money / UBI to inflate demand and thus drive the price of commodities and oil upwards and b. nationalization of some oil companies, probably under the guise of “national security interests” rather than admitting it is being done out of economic necessity.

  13. Dr. Morgan

    Some food for thought. Let’s look at food.

    Exhibit 1:

    If one chooses to subsidize oil and thus transportation and chemical production, and if the Food System is a giant energy hog, then we are choosing to continue to prop up an insane food system. I’d bet against success.

    Exhibit 2:

    Dr. Wendy Taheri explains exactly how the Green Revolution has destroyed much of our Earth’s natural fertility…and what we can do about it. Hint: using more fossil fuels is not part of the solution.

    So this very large industry, which is currently operating insanely, would be propped up by a straightforward subsidy of fossil fuels.

    I would argue against it, but I wouldn’t bet against governments doing it.

    Don Stewart

  14. And look at Chronic Disease

    So…a great deal of our chronic disease (17 percent of the GDP of the United States) is accounted for by eating too much of the food made available by the Green Revolution, and Food Science which increases mouth feel and concentrates calories and strips nutrients.

    Is it not insane to subsidize that process…which could not survive in the world portrayed by the IEA graphs.

    Don Stewart

  15. Nail hit firmly on the head, I think, by our host.

    One might, then, compare our increasingly distressed economies to an institution or business which cannot afford to pay a living wage to the staff it needs, but which also cannot function without them, and is also deemed to be essential.

    So, the wages of a majority of the staff are supplemented by welfare additions, subsidies housing, etc, making up the wages short-fall, enabling them to provide the essential service.

    ‘Print’ to pay the wages, and run the risk of eventually making the currency one would not wish to touch with a barge-pole.

    On the subject of being robbed by governments, when the Mughals ran into difficulties collecting taxes – the villagers were also being plundered by bandits – they blasted the villages down with cannon (quite expensive I should have thought?) and pursued the poor devils into the forests.

    It has not been at all uncommon for pre-industrial governments to lay waste whole districts in tax-collecting endeavours.

    When the English Crown faced a shortfall in taxes levied per capita after the Black Death (and also in hock for the wars in France) it simply raised the per capita rate, regardless of the real productivity of the economy (land had fallen out of use with the consequent lack of manpower, ploughland reverting to woodland, etc). The excellent book ‘England Arise!’ is worth reading on that exciting time of rebellion and betrayal.

    In times of acute fiscal stress for themselves, governments, ancient or modern. are rarely seen to be helpful or sympathetic to the governed. Quite often, utterly indifferent. And if not indifferent, blind to likely unintended consequences, and slow to see the damage they have done.

    This will of course be modified by representative democratic systems, for so long as they last, which may not be so very long a time.

    I think the point about policy-setters following misleading metrics and inappropriate models, and therefore unlikely to understand the processes at work in the decline , is very well-made. And alarming.

  16. Without disagreeing one iota about food issues, the energy problem as I see it is this.

    On the one hand, energy (taking oil as our example) is costing more to produce. Marginal production could only be made ‘profitable’ (FCF+) by prices rising to prohibitive levels where consumers are concerned.


    We need that marginal production, even though it’s not ‘profitable’ in business terms. We’re in a situation where each unit of energy ‘lost’ (because it’s not ‘profitable’) has a big multiplier effect on economic activity other than energy supply – with 12x a not unreasonable estimate of the multiplier. In other words, losses from not subsidizing would cost a lot more than the cost of subsidies.

    This is why some sort of ‘subsidy’ (for want of a better term) might be needed. We’ve already been practicing this when, for instance, we hand investors cheap capital to put into (and lose in) shale producers.

    This is actually part of a much bigger ‘subsidy’ situation – we’ve been subsidizing borrowers ever since 2008, not least in keeping alive zombie companies. Without these ‘subsidies’ – if we’d left rates at, say, CPI +200bps – we’d have seen lower oil production, but we’d also have seen massive corporate and household defaults, and asset prices would have collapsed.

    So, having abolished the laws of the market in our responses to GFC I, we’ve been living in a ‘subsidy economy’ ever since.

    I just think this isn’t – yet – recognized.

    • Tim,
      Couldn’t agree more. Money printing is subsidizing energy production, among other things. Private capital is becoming disenchanted at prospects of investing capital into shale OilCos, and the banks will likely also cease or significantly cut back on extending credit. Eventually, central banks will have to purchase OilCo bonds directly to finance the fossil fuel industries, pursuant to an ECB LTRO-type program. The ECB has already purchased corporate bonds directly from companies instead of through the secondary market, itself a sign how very bad things are in Europe. Once the Fed joins this game we will truly be in the endgame.

      The money printing cannibalizes existing purchasing power of fiat and financial assets by expanding the money supply far in excess of real growth (which is probably already negative in most developed nations). This is a stealth subsidy, and takes from everyone, but is more punitive on the poor and middle class (a greater percentage decrease for them) because they are starting from a low net asset value to begin with. It affects the wealthy less because they have a much larger starting pool of assets.

      This works, however, only so long as there is still enough trust and confidence in that the currency still has some purchasing power. In fact, as you have already calculated, we have far too many excess claims against the real economy and real assets already, i.e., we will be (further) diluting “wealth” that does not in fact exist.

      Steve St. Angelo calls fiat currency and financial assets “Energy IOUs,” because their value depends on future energy to produce the goods and services to be purchased with them. At some point, likely in the next 2 – 5 years as we pass “peak shale,” it is going to become obvious to professional money managers that our fossil fuel extraction industries are in permanent decline. Even if oil prices increase because of shortages (due to lack of capital investment to find replacement sources now), the price increase will not mask the reality of decreasing volumes. At that point, many “investors” and wealthy people will realize that (i) the consumption life-style and business model is coming to a fast end, and (ii) the projected cash flows from their wealth are not going to materialize, and are imaginary, because founded on an assumption of sufficient energy. I tend to think it will be this dawning realization that will produce the crisis of confidence that will bring down the financial system, not the mere fact of money printing, especially because as long as the CBs can target the money printing to zombie companies to subsidize their costs, or bail them out and prevent contagion (as they seem to be somehow managing with Deutsche Bank), instead of helicopter money to the public at large, they should be able to keep inflation from getting out of hand.

    • Investors aren’t what they used to be. Now its clever money managers that try to frontrun devaluation of currencies by ‘investing’ in financial assets, as they (almost all of them) are in the know central banks cannot stop printing. They know the Fed cannot drop the hammer on shale. The spice must flow, the ponzi must grow.

      Its not the oil waves they surf, they try to frontrun the CB currency spigots.

      They’re not investors, that period is way behind us. Retail is managed money being used for profits.

      Small players will burn their faces on shale, they’ll bail out the rest with printed ‘money’.

  17. Dr. Morgan
    To go back to some basics, before money, may clarify my own thinking and help me to explain my concerns.

    Assets are productive resources (e.g., fertile, well watered land), claims on those resources (e.g.,my children and I farm the land, and our agreement is that I will retire at the age of 60, help out on the farm, but they will be responsible for feeding the entire family), or useful manufactured items (tools). Assets only have value in certain circumstances (e.g., a pick-up truck is only valuable if there is affordable fuel to operate it, repair parts are available, there are roads to drive it on, and there are useful jobs to be done with it). That last business about ‘useful jobs’ precludes jobs which are actually destructive, such as delivering corn (maize) to a processing plant which turns it into ethanol or confined animal feed or high fructose corn syrup while destroying the soil and polluting the water. As an oversimplification, we might expect that hand tools will retain their value, while half million dollar harvesting equipment will be worthless.

    We could also consider knowledge and relationships both business and social as assets…but the same environmental considerations apply. E.g., knowing the sharpest lawyer in the City may no longer be much of a plum. Marrying a socialite may be a boulder one tries vainly to carry. Maybe Britain has to, horrors, get rid of their royalty.

    So far, it seems to me, and as you have talked about, the main source of the subsidy has been the steady erosion of the promises of future benefits: e.g., pensions. One could also say that financial assets have been sucked into financial markets which cannot ever return even the invested capital, much less future benefits: e.g., Lyft, Uber, shale oil and gas.

    It seems to me that printing money is likely to be a very short lived expedient. We will, in your words, ‘destroy the currency’.

    What needs to happen, in my estimation, is to directly face that ‘useful jobs to be done’ angle. We did that in the mobilization for WWII. Bob Hirsch looked at rationing a decade ago and concluded that it would be a nightmare. I see it as our only way forward. But maybe we don’t need coupons at this stage. Maybe the first thing to do is simply stop subsidizing things which don’t make sense…such as the corn disaster I described above. Maybe we eliminate crop insurance and flood insurance, which discourages people from planting monocultures and building in flood plains. Maybe we stop treating diabetics over decades and more or less force them to use diet…or else die. Maybe we tax industrial food, but eliminate any taxes on unprocessed food.

    Maybe we need to take a look at videos from VietNam about 10 years ago and calculate how much less oil it would require to run all those scooters.

    Don Stewart

    • In developed rural economies, feudal or otherwise, knowing the sharpest lawyer has always been useful – and being one even more so.

      What was the old American saying: ‘Don’t have Germans for neighbours, they are too litigious’?

      I have family records going back to the early 16th century, and the most trivial of rural events, for instance the borrowing of a mule, gathering of dead wood for faggots, seems to have ended in a court case, let alone dowries, grazing rights over the smallest parcel of land, etc.

      Why? Because in such a world, which is a very ruthless one in many ways, if sometimes kinder in others, if you neglect your rights and don’t expand them at every possible opportunity, you may lose social prestige, or even fall down the social scale ending up among the landless and the right-less.

      Alas, we can’t get rid of the lawyers until we end civilisation.

      When there is no TV, suing people is fun. Litigating against your own family even more so, as a feud between cousins in my village illustrates!

    • Lots of excellent points, Don.

      I suppose my feeling is: If human beings are doing so many things now which are obviously not sensible – and have committed themselves to immense mal-investments (emotional, as well as financial) accordingly – how can we possibly expect them to come to their senses, on a civilisation-wide scale?

    • @Xabier
      Subject to changing my mind tomorrow, today I am in favor of letting it all crash down. That is a Life Boat strategy. Just accept that no political majority is going to act rationally. Seek to avoid taxes as much as possible…throw sand in the gears. Set up local systems of trade. Etc.

      I don’t really like it, but I tend to agree with you that the record does not support rational political action. I mean, look at the Brexit debacle. My view from across the Pond is that Theresa May is doing a very fine job of ‘baffle them with bullshit’ while knowing full well that the end of it all is staying in the EU.

      Don Stewart

  18. The ‘crisis of confidence’ aspect as the trigger for the great fiat crisis, raised by Tagio, is interesting, as it depends really on clear-sightedness: but is Man really a clear-sighted animal, except by fits and starts?

    Frankly, the older I get the more delusion (and wish to be deluded) I see around me – above all in financial matters, the ultimate repository of human delusion and wishful-thinking.

    Aren’t there clever people who assure us the very structure of the brain colludes in this, hiding many aspects of reality from us, a vulnerable mammal, so that we can function in a bewildering and dangerous world?

    At the moment, its seems to be the poorer members of society (the ‘Hi-Viz’ Frenchies, etc) who see most clearly that the consumer lifestyle is disintegrating before their eyes, but then make the understandable error of simply thinking that they are being screwed by the rich, as they ever have been.

    • @Xabier
      I have thought about one strategy to force rationality. Some decades ago Newt Gingrich, a politician from Atlanta, came up with some ‘anti-government’ slogans which won elections…but the slogans were not implemented. One of them was a balanced budget amendment to the Constitution. (Another was term limits for Congress…not adopted either.)

      If we could get a balanced budget amendment, I think some of the nonsense would be forced out of our budget. But it would be a brutal battle between lobbying groups.

      I can just imagine it now. The Billionaires in Miami Beach strongly arguing that the Federal Government should somehow stop the oceans from rising, or at least give them subsidized flood insurance. Why??? Because ‘we are the first line of defense in case Cuba attacks us!!!’

      Don Stewart

  19. Xabier,

    I understand completely, at times there seems to be no amount of reality that can overcome the self-delusion. The financial system only works as long as most financial assets stay in the system, it cannot survive a run out of financial assets into the real economy. The power of narrative must be deployed to keep the assets penned in, where they benefit from the illusion that nominal wealth/numerical size and account balances = real wealth. I wonder how well CBs and Wall Street will be able to manage this when the oil production decline begins in earnest. (The 2017 HSBC Global Oil Supply Report predicted declines of 5-7% per year following peak. To your point, instead of setting off alarm bells, this report was quickly consigned to the memory hole. However, at some point there are going to be actual graphs with actual declining production amounts.)

    Meanwhile, in other news of the shape of things to come, the Rand Corporation produced and just released a report claiming that in every war game scenario imaginable, the US gets its ass handed to it by Russia and China. (See yesterday’s Zerohedge for a link or just google it.) Not to worry, though, the brain trust at Rand Corporation assures us this can be rectified for the low, low price of $8 billion per year more per branch of the military (i.e., $32B per year MORE). Wonder of wonders, today, Donny releases his new budget for next fiscal year, proposes increasing spending on the military, cutting everything else.

    So the plan, so far as there is one, is to destroy demand abroad by rubble-izing countries and creating failed states, crush demand here with austerity at home, and wrest control of resources abroad so we can continue the non-negotiable American way of life in the bubble zones along the East and West US coasts (opioids for the rest!). All at risk of nuclear annihilation.

    • @Xabier
      The Rand exercise is just an excuse to put more money into the Defense budget. Neither China nor Russia has any likelihood at all of launching an attack on the US, at least deliberately. Accidents are a very different, but very serious matter.

      From Russia’s perspective, the important thing is Mutual Assured Destruction…if the US attacks Russia, then the US will be totally destroyed (as Russia would also be). Putin has made this very clear, and Russia’s budget priorities clearly reflect it. The US sees the Russian strategy as a threat, because in the late 90s the US adopted the strategy of ‘complete domination of the world’. Rand says nothing about MAD (at least as far as I know)

      China is a different matter. The Chinese have long treated the military as good jobs for young people. Putin’s directions to increase the MAD weapons but not to increase the military budget makes no sense to the Chinese. The last thing the Chinese want is a bunch of unemployed young people roaming around, and the military is a good way to prevent that. But I don’t see any attempt by China to achieve a first strike capability against the US. I haven’t heard them use the MAD language, but I think it boils down to the same thing.

      One of the things which was interesting about the RAND report was the admission that all those US land bases around the world and the aircraft carrier navy are sitting ducks. Exactly what the US will do to try to regain ‘total domination’ remains to be seen.

      Don Stewart

    • Excellent thoughts Tagio. I do wonder whether a failing US striving futilely to maintain an impossible global dominance will drive us into nuclear war.

      There’s an telling story from the very end of the Roman Empire illustrating how bad things can get before comprehension fully sinks in.

      A unit manning a small fort realised that their pay was late. After a further wait, they sent one of their number off to the regional HQ to see about it.

      A few days later he was back: floating down the river, bloated and headless. There would be no more pay coming from HQ.

      Our equivalent of that moment will be when the figures and charts declare unmistakably what is afoot, and irreversible……

  20. @Xabier
    Bush the Seconds Defense Secretary visited China. He asked, ‘Why do you have so many men in the military?’ Which tells you a lot about how clueless the US was about China. In my opinion, the US continued to see China as some sort of backwater for a long time. I think it was the Belt and Road that got Washington alarmed. There was talk about ‘the Belt and Road is a hostile act against the US’. Of course, the Chinese had offered the US a role as a partner, but not as a dominant partner. To the US, having recently adopted the policy of Total Domination, the Belt and Road was a clear and present danger, as well as an insult….How dare they have a parade and not invite the Mayor? And you see how that has all played out. Whether the US can exploit the debt bubble in China, plus their running out of oil and coal, into reducing China to essentially colonial status, remains to be seen.

    Don Stewart

    • I think the wake-up call might have come a little earlier, over oil from Kazakhstan – before the West had even finished planning a pipeline to take this from the Caspian to the West, it transpired that China had bought up all this oil and completed a pipeline all the way to China.

  21. It would appear to be a myth that total CAPEX spending on oil and gas has in some way collapsed in recent years. The graph in the petroleum review in the link below shows that whilst expenditure has declined from its 2011-2014 excesses; it is still four times what it was in 2001. I don’t know if these figures are inflation adjusted or not, but making that adjustment, CAPEX is still 2.5 times higher now than in 2001.


    In the meantime, world crude and condensate production has increased by about 20% (from 67mbd to 81.5mbd) since 2001.


    This suggests to me that oil and gas production is simply less profitable now than it was at the turn of the century. The world has to spend four times as much in absolute terms and twice as much in inflation adjusted terms, to maintain each marginal barrel of production as it had to in 2000. Given that the underlying energy intensity of the global economy hasn’t shifted that much since 2000; it is strongly suggestive that some portion of society must be getting poorer to make up for the extra portion of global wealth that is now diverted into energy production.

  22. Condolences from the Colonies
    While those of you in Britain are probably distressed by the Brexit debacle, I caution you not to wish that your ancestors had taken a ship to the Colonies.

    Yesterday, the Guardian featured clickbait showing the ‘most popular articles in the US’. Number 1 was some advice to the lovelorn. A young man writes that he has fallen for the perfect woman. She takes him to meet the family. At the dinner table, he recognizes that he had sex with her father during his 5 years of bisexual orgies. The father warns him never to talk to his daughter again. Deeply in True Love, the young man seeks advice from the Guardian.

    The second most popular article was some boring stuff about Brexit.

    The third most popular article was a story about a plane which had to turn around when a woman passenger informed a flight attendant that she had forgotten her baby and left it in the terminal.

    So, you see, things would still have been hopeless even if your ancestors had taken the ship to the Colonies.

    Don Stewart

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