#152: Stuffed


The global financial system has come to rest on a single complacent assumption, one which is seldom put explicitly into words, but is remarkably implicit in actions.

This assumption is that the authorities have, and are willing to deploy, a monetary ‘fix’ for all ills.

Accordingly, the system has come to be seen as a bizarre casino, in which winning punters keep their gains, but losers are sure that they’ll be reimbursed at the exit-door.

So ingrained has this assumption become that it’s almost heresy to denounce it for the falsity that it is.

The theme of this discussion is simply stated. It is that the complacent assumption of a monetary fix is misplaced. The authorities, faced with a crash, might very well try something along these lines, and might even adopt one or more of its most outlandish variants.

But it won’t work.

The reason why no monetary expedient can provide a “get out of gaol free” card is that the economy and the financial system are quite different things.

The complacent rush in  

You can see financial manifestations of mistaken complacency wherever you look.

It emboldens those who have lent most of the $2.9 trillion that, over the last five years, American companies have ploughed into the insane elimination of flexible equity in favour of inflexible debt.

It informs those who pile into the shares of cash-burners, or queue up to buy into overpriced IPOs.

It reassures those long of JPY, despite the monetization of more than half of all outstanding JGBs by the BoJ.

It tranquilizes those who, unable to see the contradiction between gigantic financial exposure and a stumbling economy, remain long of GBP.

It blinds those to whom the Chinese economic narrative remains a miracle, not a credit-fueled bubble.

The aim here is a simple one. It is to counter this complacency by explaining why economic problems cannot be solved with monetary tools, and to warn that efforts to do so risk, instead, the undermining of the credibility of currencies.

A casino which hands back losers’ money belongs in the realm of pure myth.

The secondary status of money

Money has no intrinsic worth. Someone adrift in a lifeboat in mid-Atlantic, or stranded in the Sahara, would benefit from an air-drop of food or water, but even a gigantic amount of money descending on a parachute would do nothing more than allowing him or her to die rich.

Conventionally, money has three roles, but only one of these is relevant. Fiat money has been an atrociously bad ‘store of value’, and money is a very flawed ‘unit of account’. Money’s only relevant role is as a ‘medium of exchange’.

For this to work, there has to be something for which money can be exchanged.

This means that money has no intrinsic worth, but commands value only as a claim on the products of the economy. If you build up a structure of claims that the economy cannot honour, then that structure must – eventually, and in one way or another – collapse.

Conceptually, it’s useful to think in terms of ‘two economies’. One of these is the ‘real’ economy of goods and services, its operation characterised by the use of labour and resources, but its performance ultimately driven by energy.

The other is the ‘financial’ economy of money and credit, a parallel or shadow of the ‘real’ economy, useful for managing the real economy, but wholly lacking in stand-alone substance.

To be sure, the early monetarists oversimplified things with the assertion that inflation could be explained in wholly quantitative monetary terms. The price interface between money and the real economy isn’t determined by the simple division of the quantity of economic goods into the quantity of money.

Rather, it’s the movement or use of money that matters. The quantitative recklessness of Weimar would not have triggered hyperinflation had the excess been locked up in a vault, or in some other way not put to use. It’s not hair-splitting, but an important distinction, that Weimar’s true downfall was not that excess money was created, but that it was created and spent.

The process of exchange, which really defines the role of money, makes the interface dynamic, and, as such, introduces behavioural considerations. The creation of very large amounts of new money needn’t destabilize the price equilibrium if people hoard it, but a lesser increment can be extremely destabilizing if is spent with exceptional rapidity. This is why the simple quantitative interpretation needs to be modified by the inclusion of velocity, making Q x V a much more useful monetary determinant.

Behaviourally, velocity falls when people turn cautious – they did this during and after the 2008 global financial crisis (GFC), a tendency which reduced the inflationary risk of the loose money responses deployed at that time.

Even so, claims that the monetary adventurism unleashed at that time did not trigger inflation are simply untrue, unless you accept a narrow definition of inflation. To be sure, retail prices haven’t surged since 2008, but asset prices most certainly have, the truism being that the inflationary effects of the injection of money turn up at the point at which the money is injected.

Additionally, inflation is influenced by expectations – which have been low in an era of ’austerity’ – and by the performance of the economy. An economy which is performing weakly puts downwards pressure on inflation.

What it does not do, though, is to eliminate latent inflation. Any erosion of faith in the reliability of money would cause velocity to spike, as people rush out to spend it whilst it still has value.

Fiat fallacy

One of the analytically adverse side-effects of monetary manipulation is that it inflates apparent activity. Globally, and expressed in constant 2018 PPP dollars, the $34tn increase in recorded GDP since 2008 cannot be unrelated to the $110tn escalation in debt over the same period. According to SEEDS, most (67%) of the “growth” recorded over that period was nothing more than the simple effect of spending borrowed money.

This matters, first because a cessation in credit injection would undermine supposed rates of “growth” and, second, because a reversal would put much prior “growth” into reverse.

By falsifying GDP, this ‘credit effect’ also falsifies any relationships based on it – so the ‘comfortable’ 218% global ratio of debt-to-GDP masks a real ratio which is nearer to 340%, and higher by more than 100% than it was ten years ago (236%). It also distorts the measurement of financial exposure, so lulling us into misplaced insouciance about those countries (such as Ireland and Britain) whose financial assets stand at huge multiples to the real value of their economies.

Behind the mask of ‘the credit effect’, global economic performance is at best lacklustre, growing at about 0-9-1.3% annually whilst population numbers are growing by 1.0%.

Moreover, these numbers disguise regional disparities – whilst the average Chinese or Indian citizen continues to become more prosperous (for now, anyway), the average Westerner has been getting poorer for at least a decade.

Of course, there’s a countervailing ‘wealth effect’, giving false comfort to those whose assets have soared in price – and few, if any, of them appear to wonder what would happen if there was a rush to monetize inflated values.

But the drastic distortion in the relationship between asset values and incomes has real downsides exceeding its (illusory anyway) upside. Policymakers and their advisers may remain ignorant of the deterioration in Western prosperity, but to voters it is all too real, something which has been a major contributor to those changes in voter responses which have informed “Brexit”, Mr Trump’s ascent to the White House, and the rolling repudiation of established political parties across much of Europe.

The decline of “stuff”

The weakness of the underlying picture has now started showing up unmistakeably in weakening in demand for everything from cars, domestic appliances and smartphones to chips and drive-motors. Logically, deterioration in the economy of “stuff” will extend next into commodities because, if you’re making less “stuff”, you need less minerals, less plastics and, critically, less energy with which to make it.

Whilst all of this is going on in plain view, markets and policymakers alike are failing to recognize the risks implicit in the widening gap between a stumbling economy and escalating financial exposure. As well as borrowing an additional $110tn since 2008, we’ve blown a not-dissimilar-sized hole in pension provision, because the same low cost of capital which has incentivized borrowing has also crippled the rates of return on which pension accrual depends.

Additionally, of course, the prices of equities and property have reached heights from which any descent into rationality would have devastating direct and collateral consequences.

When the next crisis (GFC II) shows up, the complacent expectation is that everything can be ‘fixed’ with even looser monetary policy. Some of the more bizarre suggestions aired in 2008 – including ‘helicopter money’, and NIRP (negative interest rate policy, with its implicit need to outlaw cash) – will doubtless come to the fore again, accompanied by a whole crop of new ‘innovations’. The authorities are likely, in the stark despair which follows protracted denial, to act on at least some of these follies.

The trouble is that it won’t work.

You might as well try to rescue an ailing pot-plant with a spanner as try to revive an ailing economy with monetary innovation.

The form that failure takes need not necessarily involve massive inflation, though this is the only non-default route down from the debt mountain. Authorities capable of believing that EVs are “zero emissions”, or that we can overcome the environmental challenge with some form of “sustainable growth” (rather than degrowth), are perfectly capable of also believing that we can fix economic problems with monetary recklessness.

If inflation doesn’t spoil the party, two other factors might. One is credit exhaustion, in which massively indebted borrowers refuse to take on yet more debt, irrespective of how cheap the offer may be.

The other factor might well be a loss of faith in money, which might also be accompanied by a ‘flight to quality’, perhaps favouring the dollar (as ‘the prettiest horse in the knackers’ yard’), whilst hanging weaker currencies out to dry.

However it pans out, though, we know that an economy whose prosperity is faltering cannot indefinitely sustain an ever-growing burden of financial promises. By definition, whatever is unsustainable eventually fails, and this is as true of monetary systems as of anything else.

263 thoughts on “#152: Stuffed

  1. SRS Rocco with statistics on US oil imports and exports
    Search on

    The graphs tell the story that the flood of very light shale oils are not that useful for the US domestically. We blend some of them with Canadian very heavy oils (and from Venezuela also back in the day). Half of them we export to countries with refineries set up for light oils. The exports also include natural gas liquids, which, along with the natural gas, are by products of the ‘oil’ wells. The net result, in my amateur’s mind, is that the LTO is not useless, but it doesn’t have the quality of the legacy oil. Therefore, Dr. Morgan’s assertion of a trend increase in ECoE is probably a pretty good description of what is going on. If LTO never breaks even financially, it will be evidence that there are thermodynamic limits on the efficiency with which current oil supplies can be burned in ICEs and turned into economically viable products and those limits are making LTO a non-starter in terms of keeping BAU going.

    It’s also an explanation for the various maneuvers by the US in the Middle East.

    Don Stewart

    • Agreed Don. Conventional peaked in 2005. Now we have horizontal drilling, depletion rates and mismatches in crude.

      Opec already peaked, supply now is up to fracking in the US, monetized hamsterwheels.

  2. It all sounds like the best things I could buy myself before money loses its value :

    Sleeping bag
    Bow and arrows
    Swiss army knife
    Survival guide for the wild
    Books the best of Gryll Bears and Ray Nears
    Somewhere where no one else is going to go (difficult)
    Warm waterproof clothes

  3. From Matter to Life; Origen of Life; Evolution

    I keep talking about the role of fiat money as a signal which directs the allocation of resources (as opposed to increasing the physical level of resources). Just a few tidbits from the book From Matter to Life, beginning on page 86:

    ‘As (Gregory) Bateson recognized, what is needed is a pathway to making a difference—the processed correlation must be potentially utilized so as to make a difference.’….’for semantic information about the environment to exist and be causally effective, mechanisms to sense and respond need to have evolved first’…’minimal conditions necessary for an entity to possess agency were that it should be an autocatalytic system, be able to carry out thermodynamic work cycles and thereby detect and measure free energy and to construct constraints to release that free energy so as to do work, in other words, to release it into a few degrees of freedom as opposed to releasing it as heat into the maximum number of degrees of freedom’…’An autonomous agent must be able to make a choice between at least two actions, in the sense of exhibiting different and appropriate behaviors under different circumstances’.

    ‘The key to autonomous choice is not in equilibrium physics but in that the agent must be in a far-from-equilibrium system, poised in such a way that the internal states corresponding to different actions being initiated are reliably inhibited yet able to be triggered by essentially tiny signals that bear some correlation with a relevant aspect of the environment. Tiny because it is not the energy or magnitude of the signal that produces the effect, but the specificity of a pattern that can be interpreted as meaningful.’

    ‘The bow-tie’ motif in complex systems…many inputs, few processes, many outputs.

    Now for my explanation of our current predicament. The PTB think that they are firmly in control of the ‘bow tie’…the system of money and debt which allocates resources. They also, if they are ethical, think that the bow-tie they control is the best bow-tie ever evolved. If they are not ethical, they simply understand that their fate is strictly linked to the continued existence of the bow-tie.

    Any data which would indicate that the global bow-tie is malfunctioning must be prevented from turning into information…differences which make a difference. Thus, data must be manipulated and those who leak embarrassing data must be harshly prosecuted and those who attempt to take a look at the data and draw unfavorable conclusion about the operation of the current bow-tie must be marginalized so that information (differences which make a difference) does not emerge.

    Three examples which happened yesterday:
    The United Nations issued a report stating very plainly that Agroecology must be the food production system of the future and that it must be localized. Some of the organizations dependent on the Gates Foundation promptly dismissed the UN paper as nonsense…it is all about bigger and better and more and more.

    The climate scientist James Hansen was asked about Guy McPherson’s theory of Near Term Human Extinction. Hansen said it is ridiculous…we have all the tools we need to have plenty of energy to thrive and also maintain our economy well into the next century. McPherson responded that Hansen knows nothing much about biological limits. Tad Patzek would likely respond that Hansen also knows nothing about thermodynamics and the workings of our current economy. Dr. Morgan would likely predict the collapse of the Elites’ particular bow-tie as currencies fail.

    The UK ambassador to the United States resigned, after telling the truth as he sees it.

    Don Stewart

    • Much food for thought….

      On one point, the UK ambassador didn’t resign because he gave an honest view, but because somebody made that private view public, with the further likelihood that the government wouldn’t back him up.

      The person who leaked this, I think, if caught, could get up to two years in prison for breach of official secrets laws, but more likely just a slap on the wrist. If he/she is a government employee, he’ll probably get to keep his gold-plated pension.

      I feel very sorry for the ambassador, who was just doing his job – and I remember Sydney’s definition of an ambassador as “an honest man, sent abroad to lie for his country”.

      I’m sure the ambassador is a bright and decent man. But that doesn’t help much, if you’re employed by cretins.

    • Craig Murray—another former UK ambassador—doesn’t share Tim Morgan’s positive assessment of Kim Darroch. Craig does have personal knowledge of Kim and very probably a personal grudge, but I doubt he is making any of the following up.

      Kim Darroch is a rude and aggressive person, who is not pleasant at all to his subordinates. He rose to prominence within the FCO under New Labour at a time when right wing, pro-Israel foreign policy views and support for the Iraq War were important assets to career progress, as was the adoption of a strange “laddish” culture led from No. 10 by Alastair Campbell, involving swearing, football shirts and pretending to be working class (Darroch was privately educated). Macho management was suddenly the thing.

      At a time when news management was the be all and end all for the Blair administration, Darroch was in charge of the FCO’s Media Department. I remember being astonished when, down the telephone, he called me “fucking stupid” for disagreeing with him on some minor policy matter. I had simply never come across that kind of aggression in the FCO before. People who worked directly for him had to put up with this kind of thing all the time.

      Most senior ambassadors used to have interests like Chinese literature and Shostakovitch. Darroch’s are squash and sailing. He is a bull of a man. In my view, the most likely source of the leaks is a former subordinate taking revenge for years of bullying, or a present one trying to get rid of an unpleasant boss.


    • Thanks, that’s an interesting point of view.

      For me, though, the issue isn’t Mr Darroch himself, or his opinions on the President, but the leaking of his confidential report, especially in the immediate aftermath of considerable efforts made during Mr Trump’s visit to strengthen Britain’s relations with the administration. I cannot understand why anybody with access to this would leak it. It is hugely damaging to the UK national interest.

      It causes embarrassment, of course, but it also makes the UK authorities look like idiots. How on earth could this happen – and will appropriate action be taken?

  4. More Bow-Tie

    Max and Stacey are sitting in an AirB&B high above Malibu, talking with Nomi Prins. The US Constitution prohibits the states from printing paper money. Yet, somehow, we have turned that project over to the Wall Street Banks. Nomi, who has a new book on the subject, says that the breaking of the link to Gold was a pet project of the Wall Street Banks. They understood that IF the link to gold was broken then the sky was the limit in terms of what they could financialize and make exorbitant profits.

    In the language of From Matter to Life, the bankers had figured out how to get control of a Bow-Tie, and with the backing of a State willing and ready to use deadly force to enforce financial contracts.

    In a way, it is also what Donella Meadows was talking about in her little book on dealing with complex systems: find a leverage point. The money-center commercial banks found a way to control the leverage point. They have unlimited ability to print money, and ‘reform’ laws in the 1990s opened the door to financialize virtually all activity, and students cannot escape their student loans no matter how unrealistic they are.

    It is possible that crypto-currencies may pose a threat to the Bankers and their Bow-Tie. Or it could be that the whole thing will collapse a la 2006-2008. Or it could be that the creaky real economy will finally diverge so far from the financial bubble that governance will fail. Or it could be that the serfs will revolt…in another recent broadcast Stacey develops the story that half of Americans are living paycheck to paycheck and are having trouble buying essentials…they are effectively serfs.

    Don Stewart

    • Don it must be very worrying living from paycheck to paycheck.

      Ok so due to current energy constraints the economy cannot produce anymore goods to give them a pay rise.

      So is enough being produced in the US so that everyone can have a decent standard of living.

      Of course I’m talking about redistribution of goods to even things out.

  5. I’m grateful to you Don for introducing me to the Keiser report you linked to.

    I was not aware of the “Cantillon Effect” and I’m not clear what conventional economics make of it today or what, if any, political baggage it has.

    The episode I watched was about poverty or as they describe it serfdom in America https://www.rt.com/shows/keiser-report/463886-poor-survive-avocado-poverty/

    It sets out clearly how the prosperity of American’s has been going down for some time and they suggest why.

    They say it’s to do with debit, they say that it’s easier to fund war making and America’s Global empire with debt than with a gold based currency.

    I’m sure that’s true to an extent but the role of energy and in particular surplus net energy is key to that too.

    So was it the need for debt to fund the Vietnam War and subsequent wars or the 1973 Oil embargo and energy crisis where the crises for ordinary working people of “peak prosperity” set in?

    As a very good friend of mine who comes from France say’s in situations like this, c’est compliqué.

    To me we have a terrible energy situation which we have masked for some time by debt but the mask is slipping because it’s becoming to heavy to cover up what’s behind it. Our problem is that we thought there was an energy crisis behind the mask. Now that the mask begins to slip we see not only an energy crisis but an environmental crisis too!

    Can the predicament be postponed by replacing a mask made of newly created debt with a mask made of newly created currency. It’s sure is complicated. Thanks to Dr Morgan for helping me to find my way to my current level of awareness of the situation.

    • Perhaps one tiny bit if good news us a proposal for a plant in the UK to convert all types of waste plastic into hydrogen.

      If working all year round the plant could save over 9000 tonnes of plastic waste from landfill a year.

      “Waste2Tricity is set to apply for planning permission to build the £7m facility later this spring, after parenting with developer Peel Environmental, which has agreed to host it on its Protos site near Ellesmere Port.

      The proposed facility will span 54 acres and have the capacity to treat up to 25 tonnes of waste plastic each day, generating one tonne of hydrogen and 28MWh of electricity in the process. Waste2Tricity claims that it would be capable of processing almost all kinds of plastics, including packaging, rigid plastics and used tyres.

      The process which will be used at the proposed plant is called Distributed Modular Gasification (DMG) and was developed by clean energy firm PowerHouse Energy at the nearby University of Chester Energy Centre. It involves placing the plastics into a sealed chamber, where they are heated to ultra-high temperatures in order to remove carbon and convert the solid matter into a synthetic gas called “syngas”. The syngas is then modulated in a separate chamber to produce road-fuel quality hydrogen”

    • Hello Ladydog70,
      I am also a fan of Max & Stacey, I have been watching them for several years. But, getting on to your open question, “Can it be postponed ?”, well maybe it can but what is inevitable, cannot be put off for ever.
      The major problem that I can see for any kind of “solution” is its social acceptance.
      I really do not see any acceptance forthcoming.
      Nobody wants to give up their lifestyle, nobody wants to get poorer, nobody wants to have less.
      As we head into decline, a great many people will need to make some great changes.
      However, people today are simply not capable of facing the challenges that lie ahead, ( snowflakes ). A great many people also suffer from a lack of the basic skills which will be necessary, ( eg Gender Studies graduates who don’t know one end of a screwdriver from the other ).
      I also predict the end of “Feminism” as women will start to look for men who can protect them and provide for them.
      Society is going to change in so many, and in some unpredictable, ways.
      Dr. Tim’s excellent analysis tells us what is happening in economic terms, but the real determining factor is always going to be,
      “How are people going to react to it ?”

  6. For Extra Credit
    Listen to this interview by Dr. Kara Fitzgerald with the research Dr. Szyf at McGill University:

    The subject is epigenetics…why and how gene expression changes. For example, why the gene expression of obese people favors fat storage rather than fat burning, or why most genes change expression in cancer, or why some people exposed to trauma exhibit resilience but some develop inheritable dysfunction.

    This is just about the opposite of the ‘one gene, one disease’ model which everyone now knows is obsolete, but which both professionals and the public continue to fall back on. Dr. Szyf proposes that looking at gene mapping (such as 23and Me) is not worth very much and simply distracts us from the real issues.

    Epigenetic changes can happen because someone eats a high sugar meal, or suffers the loss of electricity in an ice storm. Near the end of the interview, Dr. Szyf describes the changes in children whose mothers experienced a multi-day ice storm in Quebec with the loss of electricity anywhere from a few hours to more than a week. The more stress (defined as longer time without electricity) the mother experienced, the more chronic disease afflicted her children.

    This is relevant, I think, to our thinking about the effects on public health of the issues discussed in this blog. Everything from declining prosperity to the potential for physical challenges as systems collapse. Oversimplified, it is an example of a Seneca effect…the deterioration will not simply be proportional to the loss of prosperity. Many people (but not all, the resilient) will have suffered a change in their epigenome which is deleterious and will exaggerate the problems. I should also note that an ice storm a hundred years ago when rural people did not have the electricity service to lose probably would not have had the same outcome. It is the loss and the structure of the family and larger society which creates the stress.

    Don Stewart

  7. Not too far from where I live a much delayed project is now about to go ahead.

    Costing £5bn and spread over 535 acres the Paramount amusement resort is now due to open in 2024.

    Quite apart from the fact that our local infrastructure cannot possibly cope (roads- trains are already at full capacity) this must represent a colossal waste of energy and resources.

    By 2024 many families might not be able to afford to visit anyway.

    By 2030 it could well be closed and slowly rotting away

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