#154. An autumn nexus


If you’ve been following our discussions here for any length of time, you’ll know that the main focus now is on the need for energy transition. This is a challenge made imperative, not just by environmental considerations but, just as compellingly, by the grim outlook for an economy which continues to rely on energy sources – oil, gas and coal – whose own economics are deteriorating rapidly.

These, of course, are long-term themes (though that’s no excuse for the gulf between official and corporate rhetoric and delivery). But the short term matters, too, and an increasing number of market participants and observers have started to notice that a series of significant stress-lines are converging on the months of September and October, much as railway lines converge on Charing Cross station.

The context, as it’s understood from an energy economics perspective, is that a fracture in the financial system is inevitable (though ‘inevitable’ isn’t the same thing as ‘imminent’). Properly understood, money has no intrinsic worth, but commands value only as a claim on the output of the ‘real’ economy of goods and services. Whilst the mountain of monetary claims keeps getting bigger, the real economy itself is being undermined by adverse energy economics.

Ultimately, financial crises happen as correctives, when the gap between the financial and the ‘real’ economies becomes excessive.

This is what happened with the 2008 global financial crisis (GFC), which followed a lengthy period of what I call “credit adventurism”. A sequel to 2008, known here as “GFC II”, is the seemingly inevitable consequence of the “monetary adventurism” adopted during and after 2008. This, incidentally, is where the parallels end because, whilst credit adventurism put the banking system in the eye of the storm in 2008, the subsequent adoption of monetary recklessness implies that GFC II will be a currency event.   .

An understanding of the inevitability of GFC II doesn’t tell us when it’s likely to happen. All that I’ve ventured on this so far is that a ‘window of risk’ has been open since the third quarter of 2018. Whether that window has yet opened wide enough to admit GFC II is a moot point. But the converging stresses are certainly worthy of consideration.

Chinese burns

Three of the most important lines of stress originate in China.

As we’ve seen – and with the country’s Energy Cost of Energy (ECoE) now in the climacteric range at which prosperity growth goes into reverse – there’s no doubt at all that the Chinese economy is in trouble. After all (and expressed at constant 2018 values), China has added debt of RMB 170 trillion (+288%) over a period in which reported GDP has expanded by RMB 47 tn (+114%), and no such pattern can be sustained in perpetuity.

This is complicated by Sino-American trade tensions, and, given the huge divergence between Chinese and American priorities, there seems little prospect that these can be resolved in any meaningful way.

The third and newest component of the Chinese risk cocktail is unrest in Hong Kong. Few think it likely that Beijing would be reckless enough to make a forceful intervention there, but it’s a risk whose relatively low probability is offset by the extremity of consequences if it were to happen.

In this context, it’s interesting to note that markets initially responded euphorically to Mr Trump’s delaying of new sanctions, seemingly interpreting it as some kind of ‘wobble’ on his part. It looks a lot more like a Hong Kong-related cautionary signal, seasoned with a twist of gamesmanship and soupçon of characteristic showmanship.

Whilst I’m not one of Mr Trump’s critics, it does seem undeniable that he makes too much of the (actually very tenuous) relationship between economic performance and the level of the stock market. This adds his voice to the chorus of those advocating ever cheaper money.

When the next crash does, come, of course, this chorus will rise to a crescendo, but central bankers will in any case have started pouring ever larger amounts of liquidity into the system in an effort to prop up tumbling asset prices. This, in turn, is likely to lead to a flight to perceived safe havens, one of which is likely to be the dollar, whilst other currencies come under the cosh.

But this is to look too far ahead.

“Brexit” blues

The focus in Europe, of course, is on “Brexit”. I’m neither an admirer nor a critic of Boris Johnson, any more than I’m a supporter or an opponent of “Brexit” itself (a subject on which I’ve been, and remain, studiously neutral).

This said, Mr Johnson is surely right to assert that you’ll never get anything out of negotiations if you start off by committing yourself to accept whatever the other side deigns to offer. This does indeed look like brinkmanship on his part, but it’s remarkable how often negotiations, be they political or commercial, do go “right down to the wire”, being settled only when time presses hard enough on the parties involved.

I’ve said before that the EU negotiators worry me more than their British counterparts in this process. The British side has, of course, mishandled the “Brexit” situation, but this can have come as no great surprise to anyone familiar with Britain’s idiosyncratic processes of government.

Unfortunately, British floundering has been compounded by remarkable intransigence on the EU side of the table. The attitude of the Brussels apparatchiks, all along, has been ‘take it or leave it’, and this seems to have been based on two false premises.

The first is that the British have to be ‘punished’ to deter other countries from following a similar road. This is a false position, because influencing how French, Spanish, Italian and other citizens cast their votes in domestic elections is wholly outside Brussels’ competence.

In any case, ‘punishment’ should not be part of the lexicon of any adult participant in statesmanship.

The second false premise is that Britain attends the negotiating table as a supplicant, because a chaotic “Brexit” will inflict far more economic harm on the United Kingdom than on the other EU member countries.

My model suggests that this is simply not true. The country at single greatest risk is Ireland, whose economy is far weaker than its “leprechaun economics” numbers suggest, and whose exposure, both to debt and to the financial system, is as worrying as it is extraordinary.

Ireland is followed, probably in this order, by France, the Netherlands, Italy and Germany. The French economy looks moribund, despite its relentlessly-increasing debt, and the prosperity of the average French person has been subjected to a gradual but prolonged deterioration, a process so aggravated by rising taxes that it has led to popular unrest.

Though its economy is stronger, the Netherlands is exposed, by the sheer scale of its financial sector, to anything which puts the global financial system at risk.

Germany, whose own economy is stuttering, must be wondering how quite much of the burden of cost in the wider Euro Area it might be asked to bear.

Moreover, the European Central Bank’s actions endorse the perception that the EA economy is performing poorly. The ECB has made it clear that there is no foreseeable prospect of the EA being weened off its diet of ultra-cheap liquidity.

This makes it all the more remarkable (in a macabre sort of way) that none of the governments of the most at-risk EA countries have sought to demand some pragmatism from Brussels. What we cannot know – though it remains a possibility – is whether the ever-nearer approach of ‘B-Day’ will energise at least, say, Dublin or Paris into action.

Madness, money and moods

Long before the markets took fright at the inversion of the US yield curve, the financial system (in its broadest sense) has looked bizarre.

In America, the corporate sector is engaged in the wholesale replacement of flexible equity with inflexible debt, whilst investors queue up to support “cash burners”, and buy into the IPOs of deeply loss-making debutants. The BoJ (the Japanese central bank) now owns more than half of all Japanese Government Bonds (JGBs) in issue, acquired with money newly created for the purpose.

Around the world, more than $15 trillion of bonds trade at negative yields, meaning that investors are paying borrowers for the privilege of lending them money. The only logic for holding instruments this over-priced is the “greater fool” theory. This states that you can profit from buying over-priced assets by selling them on to someone even more optimistic than yourself. There’s something deeply irrational about anything whose logic is founded in folly.

The same ultra-low interest rates that have prompted escalating borrowing have blown huge holes in pension provision – and have left us in a sort of Through the Looking Glass world in which we’re trying to operate a ‘capitalist’ system without returns on capital.

Until now, markets seem to have been insouciant about the bizarre characteristics of the system, for two main reasons.

First, they seem to assume that, whatever goes wrong, central banks will come to the rescue with a monetary lifeboat. To mix metaphors, this attitude portrays the system as some kind of kiddies-fiction casino, in which winners pocket their gains, but losers are reimbursed at the door.

If, as seems increasingly likely, we’ve started a ‘race to the bottom’ in currencies, this should act as a reminder that the value of any fiat currency depends, ultimately, entirely on confidence – and central bankers, at least, ought to understand that excessive issuance can be corrosive of trust.

The markets’ second mistake is a failure to recognize the concept of “credit exhaustion”. The assumption seems to be that, just so long as debt is cheap enough, people will load up on it ad infinitum. What’s likelier to happen – and may, indeed, have started happening now – is that borrowers become frightened about how much debt they already have, and refuse to take on any more, irrespective of how cheap it may have become.

A measured way of stating the case is that, as we look ahead to autumn, we can identify an undeniable convergence of stress-lines towards a period of greatly heightened risk.

This perception is compounded by a pervading mood of complacency founded on the excessive reliance placed on the seaworthiness of the monetary lifeboat.

I’m certainly not going to predict that a dramatic fracture is going to occur within the next two or three months at the nexus of these stress lines. We simply don’t know. But it does seem a good time for tempering optimism with caution.


281 thoughts on “#154. An autumn nexus

  1. Just reading a book about the real old shepherds of Sussex, with many interviews with shepherds born in the 1850’s : it refers to the distortions introduced to a well-planned and efficient, robust, ancient system by the ‘money-hungry’ farmers of the 1920’s.

    Love of money might not be the root of all evil: but it is the root of ‘innovative’ short-sightedness and short-term profit-taking, and has long been so.

  2. Max and Stacey on the collapse of fiat currencies
    With Dr. Morgan reminding us regularly about the potential for collapsing currencies, Max and Stacey review the evidence that it is happening as we speak:

    I’m not smart enough to sort it out. I’m just talking about the general idea of currency crisis. Note the noise coming from Trump.

    Don Stewart

    • There is a report on Wolf Street that China is imposing capital controls.

      My own interpretation is that there are many reasons why they might do this. I believe that China has been trying to engineer a “soft landing”, tweaking liquidity injection up and down in pursuit of managed deceleration. Capital controls might (I stress “might”) be to prevent capital flight ahead of further falls in the value of the RMB. There are, of course, many reasons why further devaluation might happen.

      Anyhow, I think all of us here have known for quite some time that China is one to watch.

    • I think you’re right about the Autumn Tim – there is a strange atmosphere around.

      In the Telegraph there are still insults being traded between the Brexiteers and the Remoaners.

      Interestingly the economist Jeremy Warner feels there is going to be disruption (but had only suggested rate reductions and QE to offset a downturn) . He has of course now been accused of being part of project fear by part of his readership.

      It seems that the Brexiteers feel that leaving will allow us to enter into an economic paradise and they will not take any logical advice that things could get bumpy.

      Again I hope that commonsense prevails and a deal goes through. A clogged M20 will pay havoc with my local traffic but that could be the least of many people’s worries.

      I’m wondering what sort of conversations we’ll be having in November.

    • I agree entirely about the strange atmosphere, and think we should keep a close watch on the period starting late September through October. If China really is introducing credit controls, it can’t be just because the economy is weakening and the RMB/USD rate has fallen. Logically, there has to be another reason – and a strong one – for credit controls.

      QE and cheap money are treated as ‘magic bullets’ and, if you talk to bankers about excess risk, default risk and so on, I’m pretty sure they’d tell you that, if it came to the worst, they’d be bailed out.

      But I’m by no means sure of this – unless CBs actually WANT to create an inflationary surge in order to deflate away debt. However you look at it, rapid money creation in a stagnant economy is trouble.

      BTW, SEEDS now says that German prosperity peaked in 2018. Most other Western countries peaked at least 10 years ago, but the Euro system has helped Germany enormously.

      I don’t take sides on “Brexit”. But I do believe that Mr Johnson’s negotiating strategy is the only way to get a deal. If “no deal” is taken off the table, Brussels won’t need to concede anything, and won’t – and the UK won’t get a deal that it can accept.

      My guess is that the extreme “remainers” know this. If so, their real aim is to stop “Brexit”, with “stopping no deal” simply camouflage. That’s OK for Lib Dems etc, but both Labour and Tory MPs are, as I see it, bound by 2017 manifesto commitments to enact the result of the referendum.

  3. @Dr. Morgan
    Some have speculated that Mark Carney’s references to a crypto currency or some other monetary system not relying on the US petro-dollar are a way to renege on debts denominated in dollars and euros and pounds. The new crypto-currency, or whatever, would be in place to smooth the transition. Those holding the old debts would be left holding the bag. Presumably, governments would also walk away from pension responsibilities. In other words, have a parallel system in place so that there is a monetary collapse, but perhaps a bumpy but ultimately successful transition in terms of physical production.

    Don Stewart

    • Another thought: would Exxon-Mobil be able to finance it’s move into shale if it had to pay with bitcoin or gold? Would China’s Silk Road projects be possible if they had to be paid for with bitcoin or gold? Could wars be prosecuted if suppliers had to be paid in bitcoin or gold (the US civil war was ultimately paid for with ‘greenbacks’).
      Don Stewart

    • Putting a fall-back position in place makes a certain sense, but only academically. Once you start to think it through, the practicalities become very difficult.

      Were I in Mr C’s shoes, I’d start with the vast excess of debt in the system. It can’t be repaid, so it either gets rolled over (but for how long?), and the lenders ultimately lose. After all, ‘can’t pay’ inevitably means ‘won’t pay’.

      Given that, the choices (either of which might be forced on you by events with very little prior warning) are (a) default and (b) inflation. The latter, whereby you ‘repay’ debt but in money greatly reduced in value, has almost always been the preferred choice.The 1970s exemplify this.

      So, then you’ve ‘solved’ the debt problem, but have runaway inflation. You can try to ‘do a Volcker’ on it, but it might not work. That’s where an alternative comes in as a fall-back position.

      They might, though, want to reflect on what happened when India abolished just large denomination notes. Complete replacement of a currency would cause vast anger and huge suspicion.

  4. @Dr. Morgan
    Suppose that a few economists have actually had a Come to Jesus moment and figured out that this guy Morgan was right all along and that the economy is a physical system based on energy…not a fiat money system. Then:
    *even though there are large debts which will never be repaid, and promises to pay which will never be kept (e.g., social programs)
    *the economy can continue to function provided there is ‘hard money’ to facilitate trade and investment
    *it probably requires the destruction of the current attitude toward government (e.g., government will provide what I need when I get old and infirm)
    *nevertheless, it is worth doing to prevent the collapse of the fiat system from totally destroying the real production system

    I recently read that Britain suspended elections for almost a decade during WWII. I wasn’t around at that time, but I suspect it was because there was a dawning recognition that survival depended on winning the war, and everything else was secondary. If the situation is as dire as some suspect, then surviving the collapse of the fiat system is the only thing that matters.

    On the other hand, perhaps your thought that we can stabilize somewhat by rapid deployment of wind and solar is correct.

    I submit that making the correct choice (or stumbling along with our usual lack of foresight and somehow finding the way) is probably existential.

    Don Stewart

    • However…
      if my suspicion is correct that our thermodynamic system is bankrupt, then it is almost impossible to imagine how a hard money system is going to save much of anything. Hard money cannot save a food system which requires 10 calories of input to produce 1 calorie of output.
      Don Stewart

    • This is one of the many subjects that I need to address, and one of the more important ones at that. You’ve just helped push it nearer the top of the pile.

      First off, I see no rational reason why anyone would doubt that the economy is an energy system. Even if we didn’t know that before, the climate debate must have made it clear.

      There’s a widening divergence between the ‘financial’ economy of money and credit and the ‘real’ economy powered by energy. When these gaps emerge, there can only be one outcome – a financial crash, reset or whatever. A leading UK scientist has said this week, reference the environment, that we need to get used to consuming less. The economic outlook points in the same direction.

      Even the politics of that are huge. It will turn demands for redistribution and greater equality up to a deafening volume.

      There are what we might call educational (or even ‘spiritual’ or ‘moral’) challenges in changing our value systems away from wealth and consumption.

      The financial part is that, as things stand, we’re likely to destroy fiat currencies. At the next crisis they’ll turn to the (metaphorical) printing presses. They must also be aware that inflation is the only way out of our debt predicament.

      This suggests we need preparedness to create something new. But can you imagine one of our current billionaires talking to his grandchild in 30 years from now?

      “I used to be worth a billion dollars, you know”

      Grandchild: “Granddad – what was a dollar?”

    • It would be horrible to find that everything you’ve worked hard for is taken away.

      However if there’s not enough energy to produce goods then that’s it.

      I expect many will wish they’d gone out more and bought that special car they wanted.

  5. My equivalent of buying that fast car is putting a lot of time and money in to painting, which time and circumstance and earning my daily bread have marginalised until now: even if they don’t sell, why not?!

    As the system disintegrates, there will be loud demands for the redistribution of what does not in fact exist anymore – or certainly not in sufficient quantity to satisfy all ‘needs’.

    The Left and the Neo-Marxists may, at last, come in to their own as Capitalism collapses: but they will attempt to build their Utopia of Equality and (always implied) Plenty on a fatally depleted, over-mined planet, discovering to their surprise that the end of Capitalism is also the end of viable industrial civilization…..

  6. Thanks to our host, and a few other clear-sighted commentators, we have been warned: what is now clearly in the air tells us it is time to arm ourselves – with prudent savings and stores (in the case of Britain, most certainly the latter!)

    • Even canned food doesn’t last long.

      I remember when due to bad weather there was a shortage of bread. Fights broke out in supermarkets.

      Imagine that relating to all foodstuffs- medicines etc.

      I’ve always enjoyed a series where Ben Fogle visits people living in remote places.

      I liked the trip to a remote part if Alaska. Perhaps there you could be relatively safe and live off fish – berries and any vegetables you were able to grow.

      It would be helpful to have some solar panels- wind turbines (plus spares)

      You would also have to have knowledge of medicine plus stock up with antibiotics – Asprin- Paracetamol- vitamin pills – antiseptic cream etc.

      Unless you were unlucky enough to go down with something serious you would be able to life out the rest of your life.

      Problem is though would millions try and escape to the Wilderness?

      Siberia could be a better bet.

      You could use wood for heating

  7. what needs to happen is what the powers that be don’t want to happen and have been desperately trying to head off since 2007/8

    we need the everything bubble to burst, hopefully in stages and not in all sectors at once,

    we need to see the end of bail outs and prop ups, we mustn’t let hedge funds buy failing companies and asset strip them whilst making the still functioning parts pay off the aquisition costs that were covered by loans,

    failed companies need to be exposed to the creative destruction of bankruptcy where unpayable debts get written off and viable parts of the companies are able to be rescued by token management buyouts unhindered by inherited debt.

    a domestic and commercial property crash would be a chance to escape gross over valuations that have led to unbearable rental rates and business rates,

    I’m sure a lot of businesses would become viable again if you halved their rents and rates,
    I’m sure a lot of workers would be a lot more prosperous on the same wages if their housing costs were halved,

    if asset values dropped markedly then a portion of the inequality gap would evaporate as it was partly based on overvaluations anyway.

    if you express unpayable debts as losses then you don’t need to use inflation to fizzles those debts away, they’re just gone, written off.

    if growth has ended, we don’t have the energy to create growth and growth is deemed undesirable because we’re hitting it’s physical limits then there can’t really be inflation in the future economy anyway?

    neo-liberalism should really be called rentierism, we need to go back to capitalism.

    I’m moderate Lefty and I’m quite happy with honest capitalism, I don’t want wealth redistribution, I just want people to be able to receive a decent return on their effort and show a profit at the end of a working week once all their costs have been covered.

    I don’t want to see wages increased, I want to see the cost of living reduced so British workers can live decently whilst still remaining competitive in the wider world market.

  8. EU; Politics; Lies; Damned Lies, and Statistics
    From just about a year ago, the EU adopts a Bolsonaro-like policy…but without the threats from Macron and others:

    North Carolina, where I live, is an active supplier of the wood pellets to Europe. It is a factory operation on extensive acreage which bears only a faint resemblance to a mature forest…about like calling a field of industrial corn a ‘grassland’ because maize is technically a grass. Incidentally, the land in North Carolina where the pellets are produced would have burned periodically for centuries. The Long Leaf pine which is native to much of the US from Virginia to Texas required fire to regenerate. What those forests needed did not require a crown fire which destroyed mature trees…just ground fires which opened the cones and spread the seeds.

    As I see it, the narratives being spun are:
    *Bolsonaro, Trump, Putin, and some others are right wing reactionaries who will enslave the world unless we stop them
    *Liberals, meaning those who follow the lines of thought laid out in places like the New York Times and the Washington Post and much of Hollywood, will enslave the hard-working class of conservatives with family values and religious inclinations, unless we stop them.
    *There are ‘green progressives’ who actually know how to generate more prosperity for everyone while also curbing CO2 emissions.
    *There actually is such a thing as free money (MMT and the like) and more debt is ‘pro-growth’
    *Surplus energy isn’t a concept worth wasting time on.

    What I see is a bunch of chickens who have lost their heads running around in one last frenzied dance. What I don’t see, 50 years later, is a mature contemplation of what to do about Limits to Growth. This is not so much a complaint about the people who run the pellet factories in North Carolina, the EU which considers the pellets ‘green’, the farmers and ranchers who set the fires in the Amazon, the people in the US who line up at the drive-throughs to get their fix of expertly engineered junk food enabled by the people burning the Amazon…as it is just a meditation on how an ape (please note that the Chinese just recently produced a chimera, a cross between a human and a chimp as a way of providing socially acceptable replacement parts for human organs) managed to achieve dominance over other species and the ability to destroy a world that most of them think God created.

    Don Stewart

  9. Don – your mention of drive thru junk food restaurants.

    A couple of years ago McDonalds got permission to build one not too far from where I live.

    Result clogged roads and roundabouts just to enable people to poison themselves and pollute the local area.

    It’s beyond madness

  10. Extra Credit

    This is an excellent discussion of how energy production is the bedrock of health in a human body (actually, in any living body). You will think of all sorts of parallels to our economic malaise. For example, if we see each individual, or each family, as analogous to a cell, and we look at the capacity of that individual or family to produce optimum energy, then we are looking at the same phenomenon as the mitochondria in the cell producing the energy needed for the cells and organs to function smoothly.

    The emphasis by this speaker on pollution and exercise is also instructive. For example, if the human must make a living by generating pollution, we have the same destructive outcome as we experience of pesticides and air and water pollution and chemicals at the cellular level. And by using fossil fuels as energy slaves, we enable the sedentary behavior which results in surplus free radicals doing their damage. Similarly, the fossil slaves enable us to produce more food than we need, and the free radicals again do their damage. On the other end of the spectrum, the fossil fuels enable our medical establishment and the central banks to vigorously pursue ‘symptom suppression’, which over time destroys our resilience., partly by suppressing the free radicals which prompt the genesis of more mitochondria.

    As a matter of curiosity, it is instructive to think about how much we have learned by studying athletes and others exhibiting non-ordinary behavioral adaptations. For example, free divers can stay under water for much longer than the novice would think possible…13 minutes I think is the current record. A free diver’s body changes as much as a bear entering hibernation. What we don’t do very well is live with a plethora of energy slaves.

    Don Stewart

  11. Alasdair MacLeod’s latest essay, “Negative Interest Rates and Gold,” at GoldMoney.com, currently cross-posted on Zerohedge as “Check-Mate for Central Banks: Negative Interest Rates and Gold,” explains how negative U.S. treasury rates could put the whole commodity market in backwardation and rapidly lead to the collapse of all fiat currencies. Essentially, increasingly negative rates will drive people out of dollars into commodities; the preference will be to hold commodities instead of dollars. To me, this sounds like another way to describe hyperinflation: people far prefer having the physical commodity in hand over dollars, with the result being that it takes more and more dollars to prise current possessions out of hand in a free exchange.

    “We must not forget that markets anticipate events where they can, so with a recession threatening to turn into a slump and with a looming credit crisis in the wings the prospect of negative rates will be increasingly priced into the relationship between commodities and fiat dollars. Assuming economic prospects darken because of the coincidence of American tariffs and the emerging crisis stage of the credit cycle, it will be check-mate for central banks. They were never appointed nor are they technically equipped to save the currency at the expense of widespread bankruptcies, not just in the private sector, but of their governments as well. And that is what markets will be faced with.

    The current situation has striking similarities with the 1930s, and the prospects for the global economy are driven by the same broad factors. With the gold standard then and not now the price effects are already showing differences. Nor was there a bubble of hundreds of trillions of outstanding derivatives then as there are today. This time, the monetary sins since the ending of the Bretton Woods agreement seem set to come home to roost all of a sudden, even if dollar rates are lowered towards zero and only stay there. But if they go negative and the more below zero that they go, the greater the backwardation on the whole commodity complex. The more rapidly commodities will be bought so the dollar, taxed with negative rates can be sold, and the quicker market actors will devalue the currency.

    With all other fiat currencies referenced to the dollar, it will mark the start of a process that is likely to collapse the entire fiat currency system. Bullion banks which are too slow to recognise the change and have not shut down their gold obligations will be forced to steal their customers allocated gold, or go to the wall, adding to the disruption. All commodity derivatives will face a period of rapid contraction of open interest, in lockstep or one pace behind those of gold.

    Instead of central banks stabilising the system by monetary easing, the easing itself will guarantee the crisis.”

    Well worth a read.

    • Thanks Tagio but perhaps not this evening as I’m busy watching a Science fiction fantasy film which is bring successful in taking my mind off all the economic problems we face.

      However I must learn to stop checking my mail inbox

  12. Dr Tim,
    You have consistently constrained your comments to within the context of economics, as we understand the term, and have kindly allowed other contributors considerable scope to widen the discussion according to their experience and opinion. I for one am fascinated by the collective wisdom and am grateful to you, and all others, for sharing it: albeit somewhat appalled by the prospects that unfold.

    Following is a distillation of thoughts that I have had to set down to rationalise for my own benefit. I shall be grateful for all (gentle) critical comment.

    I acknowledge the many discussions and links on this site giving rise to the following musings.

    Dr Tim, by firmly (and to me convincingly) linking economic activity to energy flows, you have established economics as an activity the study of which should properly be expanded beyond a social science and be included emphatically within the other natural and physical sciences. This is not an original thought: I recall a comment attributed to an unidentified biologist in a book by Robert Ardrey, about “energy being the ultimate currency”, also a number economic studies post the 1970’s oil shocks looking at agricultural efficiencies in terms of energy input/output. (It is interesting to recall that New Guinea highlanders were about the most efficient of any studied).

    Economics as a study of energy allocation and return then becomes not just legitimate and necessary, but given your analysis of rapidly diminishing surplus returns to fossil fuels, essential and urgent. Incidentally, and given acceptance of such linkage to the other sciences, should we not also consider fossil fuels as just another group of “energy carriers”, (whose exploitation has been of brief duration, but great consequence) rather than “energy sources”, thus acknowledging the fundamentals of but one solar source and the initial primordial and continuing transformative processes of photosynthesis, and our total dependency, past, present and future on its function.

    This brings the ecology of ‘everything’ into your nexus of effects: what level of resilience remains in the vital natural systems of the world and what level of depletion can they sustain before they lose the capacity (by destruction from whatever cause) to provide the resources we require for our existence. How may we allocate resources to best prolong their function? Is a monetary system appropriate for allocating energy resources?

    My understanding is that the energy flow associated with productive activity, upon which we all depend, while conserved in total, is dispersed and dissipated as it moves through the system, and is eventually lost to space. How is this compatible with a financial flow, which when allocated to any productive activity (energy flow), moves along the system and not only increases, through the concept of profit, but accumulates and is carried forward to subsequent production cycles. This may work as long as energy resources are abundant or are apparently increasing in some accord with money supply. However, if such accord is absent, or when energy effectively becomes scarcer, as you point out Dr Tim, surely any chance of financial/energy compatibility disappears. Is this not the root cause of monetary inflation, and periodic financial collapse?

    And here I recall considerable discussion on this site about the merits or otherwise of currencies such as Fiat money or the alternative of attributing value to some quantity of physical good, (ie gold etc). Perhaps the Quanta would be best, fluxing in a quantitative and relative association with productive activities? No chance of inflation! Necessities would come first, (and possibly last also).

    But back to the social science roots of economics. How do societies prepare for a transition to a vastly reduced energy availability? This is a task still to be determined. The prospect is not yet even widely recognised. Presumably some form of rationing and allocation would occur, but whether managed by agreed process, or simply by anarchic chaos and force is open to conjecture. My small experience in the study and application of economic development over the past fifty years does not imbue me with any great faith in Homo s’ socio/political skills. The crisis generally comes before the understanding, by which time it is rather too late, especially in the present context.

    And I haven’t even touched on the unknown affects of micro plastics in the environment!

    • I thank you for your comments. You have raised some very pertinent issues, some of which I need to address in an article here.

      This is on a ‘to do’ list which keeps getting longer as the heatwave here in the Med limits what I can get done! I am (to quote the title of a Don Henley song) “praying for rain”.

      I share your appreciation of the insights which readers bring to our discussions here. I also appreciate their courtesy to others, which is an absolute precondition for the advancement of understanding through the reasoned exchange of ideas, knowledge and opinions.

      I think you’ll find that some of these issues are addressed in my book Life After Growth (hardback 2013, paperback 2016).

      As a general point, I think we’re heading for a crisis – financial, economic, ecological, social and political – whose scope very few understand, and which I’m reluctant to spell out.

    • Tim regarding the ecological argument there’s a good video on Guardian – featuring an Alan Cookson – who has announced he’s stopping picking up plastic from UK beaches because it’s become an impossible task.

      I do put all my recyclable litter into the appropriate bin but even then it could end up in a landfill over the other side of the World for burning.

      I have also reduced my car usage and make far more use if trains and buses.

      But my efforts need to be multiplied across the whole of the UK.

      If there is an energy crisis with petrol and diesel being allocated to haulage firms and other essential services away from households will our network of trains and buses be able to cope.

      The Government has wasted 3 years over Brexit which could have been far better spent making changes to our infrastructure.

      It’s taken the Conservative council in my area 9 years to implement monitored yellow boxes to stop a local roundabout getting jammed.

      We it did get jammed cars – buses couldn’t get in our out of the local town creating chaos.

      There seems to be a sort of collective madness affecting Politicians

    • Perhaps the Quanta would be best, fluxing in a quantitative and relative association with productive activities? No chance of inflation! Necessities would come first, (and possibly last also).
      View at Medium.com

      I shall also show that only a quantity of energy (not to be confused with a quantity of oil, or electricity or food or work etc.), and NOT a weight of gold, can provide the purely objective reference quantity needed to form the basis of a universal Money-of-Account definition, against which all other goods (and services) may be referenced to assess and express exchangeable values. While my primary objective in this reply is to address the RS paper, I shall also take this opportunity to introduce my proposal for a new Unit-of-Account, which I have named Quanta.

      VALUE IS A NUMERICAL RELATION. Alexander Del Mar, The science of Money. #TheGrubStreetJournal #GrubStreetJournal #ConquestofDough

      If you can keep your head when all about you
      Are losing theirs and blaming it on you,
      If you can trust yourself when all men doubt you,
      But make allowance for their doubting too;
      If you can wait and not be tired by waiting,
      Or being lied about, don’t deal in lies,
      Or being hated, don’t give way to hating,
      And yet don’t look too good, nor talk too wise:
      kIPLING , iF.

  13. Dr Tim,
    Thank you for your response. I too fear that we are heading for an enveloping collapse: no path that I am able to visualise ends well. A small comfort is that my horizon of awareness is not extensive, and the possibilities beyond, out of sight, may be expanding – but the limits imposed by physics appear to be impossible to evade.

    Ecologists understand the dynamics of ‘natural’ populations pretty well. When a population overshoots the resources within its environment, its numbers can continue to expand for a time as it consumes the natural capital present and degrades the environment. This eventually results in the population collapsing way below any previous sustainable level due the now greatly impoverished environment in which it has to exist.

    Homo s’ has moved way beyond any ‘natural’ sustainable numbers, due to us discovering the keys to the energy larder, and feasting therefrom for several centuries. So we face a double whammy. The larder is effectively almost empty, and in the course of prolonged feasting we have damaged our natural environment to an unimaginable extent, and there remains the real possibility of a final frenzied fling which will inflict even further damage.

    I suspect that we here in Australia will be amongst the first to demonstrate just how low our numbers will need to fall to in moving to a new environmentally sustainable equilibrium.

    I am not just reluctant to discuss this: I have found it impossible to do so with my family and friends, all of whom have children, grandchildren, even great granchildren. If I could identify a plausible course of action, I would happily promote it. Alas, I cannot. My personal deepest remorse is for the degradation and extinctions that have already occurred due to our greed? ignorance? indifference? and even now are now proceeding at an accelerating pace.

    Identifying a practical and useful and accepted ‘store of value’ other than fiat currency could ameliorate the situation for some, but if there exists any such item, I am not aware of it.

    • I’m thinking this through and might – stress, might – write something about this before long.

      I share your horror over species degradation and loss. Our intrinsic greed might be why we won’t be able to adapt.

  14. ‘Able to Adapt’?

    By chance, I happened to be rereading Valter Longo’s book The Longevity Diet this morning while attending the regular Sunday morning concert at our food co-op. And…yes, we had sunshine and babies and puppies in abundance.

    Longo’s special interest is in healthy old age. He believes that ‘The healthy human lifespan is much more complex than a Mozart symphony. It took billions of years of evolution for it to reach the current state of near-perfection. We cannot expect a simple supplement to make something that’s almost perfect even better, so we cannot expect that we will live healthier and longer lives just by drinking orange juice.’ Longo’s comment distinguishes him rather sharply from ordinary medical advice, which assumes that the body is broken for one reason or another, and drugs need to be administered to quell the symptoms.

    Now I want to mention the case of Angelina Jolie and her breast removal surgery. She was told that she had an 87 percent chance of developing breast cancer, based on genetics. What she probably wasn’t told is that the risk has tripled over the last few decades. Which tells us that while genes are definitely involved in cancer, they are not the whole story and not even the main story.

    So what is the main story. And that brings us to the very recent emergence of Epigenetic studies. Briefly, we evolved a set of markers which are ‘above the gene’ (epi in Greek). These markers are placed as a result of our experience…our environment. The net effect is that we can survive more flexibly in varying environments as epigenetics turns genes on and off based on the perceived situation. The basic problem is that we are no longer living in the world we are best adapted to live in. We have modified the world to an extent which would probably be unimaginable to our ancestors of 10,000 years ago. And so Angelina Jolie is told a story which is not exactly a lie, but certainly is not the whole truth.

    So what can science tell us about changing our environment in such a way that human life is enhanced, even under stress? And here there is no definitive answer, but there are clues. For example: ‘we showed that a selfish group of microorganisms–in this case the baker’s yeast that had been genetically manipulated to invest in their own protection and live as long as possible–would eventually become extinct, whereas shorter-lived microorganisms willing to sacrifice themselves and die early would seed future generations. In other words, the genetic alterations that make the organism act selfishly and live longer decrease its chances of generating healthy offspring.’

    And: ‘To maximize the chance for everyone to make it to 110 healthy, it is important to consider these evolutionary theories and take advantage of the programs that have evolved to extend longevity in response to changes in the environment’.

    In my own words: We have to jointly create the environment which maximizes epigenetic expression favoring long life: healthy food, good sleep, purposeful exercise, social relationships, meaningful work, and so forth. There is no place for the ‘me first’ politics of Margaret Thatcher or Bush II.

    Now about that lawn populated with proud parents, babies, and puppies at my food co-op. No, it is not possible for it to survive in its exact present form if fossil fuels disappear. But let’s take a less drastic hypothetical. If every billionaire in the world were to disappear, it would go on pretty much as it is, even perhaps with some threats removed. No billionaire contributes anything to what our co-op and the people who shop there and the people who come there for concerts and other events have been able to create. It has occurred to me that I practically never see a crabby child. Not at all like a child stuck at home. I hypothesize that they are getting the optimum stimulation both mentally and physically and emotionally and socially. That happy space is a result of cooperative human endeavor.

    Don Stewart

  15. You probably know this old proverb already, Don:

    ‘Dr. Quiet, Dr. Diet, and Dr. Merryman.’

    Pretty much encapsulates things: note, no ‘Dr. Drugs’………

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