#174. American disequilibrium


At a time when tens of millions of Americans are unemployed, with millions more struggling to make ends meet, it‘s been well noted that the response of the Federal Reserve has been to throw $2.9 trillion in financial subsidies, not at the economy itself, but at a tiny elite of the country’s wealthiest. Another astute observer has set out reasons why Fed intervention couldn’t – even if so intended – pull the US economy out of its severe malaise.

The discussion which follows assesses the American situation from a perspective which recognises that the economy is an energy system. It concludes that the US has responded particularly badly to the onset of de-growth, something which has been induced, not by choice, but by a deteriorating energy equation.

An insistence on using financial manipulation as a form of denial of de-growth has increased systemic risk whilst exacerbating differences between the “haves” and the “have-nots”.

De-growth has, of course, been a pan-Western trend, one which has now started to extend to the emerging market (EM) economies as well. But few if any other countries have travelled as far as the US down the road of futile and dangerous denial.

Whatever view might be taken of Fed market support policy on grounds of equity, the huge practical snag is that this approach has created a dangerously unsustainable imbalance between the prices of assets and all forms of income.

If the Fed withdraws incremental monetary support to the markets, the prices of stocks, bonds and property will crash back into equilibrium with wages, dividends and returns on savings. If, on the other hand, the Fed persists with monetary distortion of asset prices, the resulting inflation will push nominal wages and other forms of income upwards towards the re-establishment of equilibrium.

Either way, the apparent determination to sustain asset prices at inflated levels can only harm the US economy through an eventual corrective process that cannot escape being hugely disruptive.

The irony is that, whether the outcome is a market crash or an inflationary spiral, the biggest losers will include the same wealthy minority whose interests the Fed seems so determined to defend and promote.

At a crossroads

Critics have spent the best part of two centuries writing premature obituaries for the United States, and that certainly isn’t the intention here. Along the way, various candidates have been nominated as potential inheritors of America’s world economic, financial and political ascendancy, but the latest nominee, China, looks no more credible a successor than any of the others, having severe problems of her own. These lie outside the scope of this analysis, but can be considered every bit as acute as those facing the United States.

This said, it would be foolish to deny that America faces challenges arguably unprecedented in her peacetime history. The Wuhan coronavirus pandemic has struck a severe blow at an economy which was already seriously dysfunctional. Anger on the streets is a grim reminder that, 155 years on from the abolition of slavery, and half a century after the civil rights movement of the 1960s, American society continues to be blighted by racial antagonism. In the political sphere, party points-scoring continues to be prioritised over constructive action, whilst even the most inveterate opponent of Donald Trump would be hard-pressed to name any question to which “Joe Biden” is an answer.

The focus here is firmly on the economy, and addresses issues which, whilst by no means unique to the United States, are perhaps more acute there than in any other major economy. By way of illustration, the last two decades have seen each additional dollar of manufacturing output dwarfed by $11.60 of increased activity in the FIRE (finance, insurance and real estate) sectors. Moreover, each dollar of reported growth has come at a cost, not just of $3.80 in new debt, but of a worsening of perhaps $3.40 in pensions provision shortfalls.

Most strikingly of all, America’s economic processes no longer conform to any reasonable definition of a market economy. Nowhere is this more apparent than in capital markets, which have been stripped of their price-discovery and risk-calibration functions by systematic manipulation by the Fed.

Another way of putting this is that America has been financialised, with the making of money now almost wholly divorced from the production of goods and services. There are historical precedents for this financialization process – and none of them has ended well.

The economy – in search of reality

What, then, is the reality of an economy which, in adding incremental GDP of $7 trillion (+51%) since 1999, has plunged itself deeper in debt to the tune of $27tn (+105%), and is likely to have blown a hole of about $25tn in its aggregate provision for retirement?

To answer this, we need to recognise that economies are energy systems. They are not – contrary to widespread assumption – monetary constructs, which can be understood and managed in financial terms.

For those not familiar with this interpretation, just three observations should suffice to make things clear.

The first is that all of the goods and services which constitute economic output are the products of energy. Nothing of any utility whatsoever can be produced without it.

The second is that, whenever energy is accessed for our use, some of that energy is always consumed in the access process (a component known here as the Energy Cost of Energy, or ECoE).

Surplus energy (the total, less the ECoE component) drives all economic activity other than the supply of energy itself. This surplus energy is, therefore, coterminous with prosperity.

The third is that, lacking intrinsic worth, money commands value only as a ‘claim’ on the output of the ‘real’ (energy) economy. Creating ‘new’ money does nothing to increase the pool of goods and services against which such claims can be exercised. If, as has been the case in the US, newly-created money is injected into capital markets, the result is the creation of unsustainable escalation in the prices of assets.

Once these processes are appreciated, the mechanics of economic prosperity become apparent, as does the futility of trying to tackle them with financial gimmickry. This understanding provides insights denied to ‘conventional’ economic thinking by its obsession with money, and its treatment of energy as ‘just another input’.

The faltering dynamic

Ever since their low-point in the two decades after 1945, worldwide trend ECoEs have been rising exponentially, a process reflecting rates of depletion of low-cost energy from oil, gas and coal. SEEDS analysis indicates that, in highly complex advanced economies, prosperity ceases to grow, and then turns downwards, at ECoEs between 3.5% and 5.0%. By virtue of their lesser complexity, emerging market (EM) countries are more ECoE-tolerant, hitting the same prosperity climacteric at ECoEs of between 8% and 10%.

These trends are illustrated in the following charts, each of which compares economies’ trend ECoEs with prosperity per capita, calibrated in thousands of dollars, pounds or renminbi at constant (2018) values.

A1 Fig 6

In the United States, prosperity has been deteriorating ever since ECoE hit 4.5% back in 2000. A similar fate overtook the United Kingdom in 2003 (when ECoE was 4.2%), and – pre-crisis – was expected to impact China during 2021-22, when ECoE was projected to reach 8.8%.

Critically, there is nothing that can be done to circumvent this physical equation. Prosperity can, of course, be managed more effectively, and distributed more equitably, but it cannot be increased once the energy equation turns against us. Though their development is highly desirable, renewable energy (RE) sources are not going to restore overall ECoEs to the ultra-low levels at which then-cheap fossil fuels powered prior increases in prosperity.

Technology, such as the fracking techniques used to extract oil and gas from US shale formations, cannot overturn cost parameters set by the physical characteristics of the resource. The idea that we can somehow “de-couple” economic activity from the use of energy is a definitional absurdity, and efforts to prove otherwise have rightly been described as “a haystack without a needle”.

For these reasons, the onset of “secular stagnation” in the Western economies from the mid-1990s had a perfectly straightforward explanation, albeit one wholly lost on those who, having coined this term, were unable to understand the processes involved.

The narrative over the subsequent twenty-five years – in the United States as elsewhere – has been one of trying to manufacture “growth” where the capability for continued increases in prosperity has ceased to exist.

Struggling in a trap

The situation from the mid-1990s, then, was that theory and reality were pulling apart. Conventional thinking stated that growth could continue in perpetuity, but this thinking had never taken into account the energy basis of economic activity. Hitherto, ECoE had been small enough to pass unnoticed within normal margins of error, and only now was it starting to act as an insuperable block to expansion. In their contention that the world would never ‘run out of’ oil, opponents of the ‘peak oil’ thesis had supplied the right answer to the wrong question.

This, moreover, was a period of remarkable hubris. The collapse of Soviet communism seemed to demonstrate the final victory of the ‘liberal’ economic model over its collectivist rival, so much so that some even opined that history was now ‘over’. “De-regulation”, it was argued, could be equated with economic vibrancy and, together with enlightened monetary policy, could prolong, in perpetuity, the “great moderation” which, in a brief sweet-spot in the early 1990s, had seemingly combined robust growth with low inflation.

Those who remained critical had, in any case, another target for their invective – globalisation. This was indeed a faulted model, and was always bound to use cheap credit to fill the gap between Western production (which had been outsourced), and consumption (which had not). But globalisation remained a symptom, whilst the malaise itself, which was a deteriorating energy dynamic, went almost wholly unnoticed.

Accordingly, ‘solutions’ to the problem of “secular stagnation” were sought in monetary and regulatory policy. From the late 1990s, the Fed embarked on a process of credit adventurism, keeping rates low, and making credit easier to obtain than it had ever been in living memory.

Between 1999 and 2007, American GDP grew at rates of close to 3%, which seemed pretty satisfactory. Unfortunately, borrowing was growing a lot more quickly than recorded output. Through the period between 1999 and 2019 as a whole, when US growth averaged 2.1%, annual borrowing averaged 7.8% of GDP, whilst aggregate debt increased by $27tn to support economic growth of just $7.1tn.

Along the way, de-regulation weakened and, in many cases, severed altogether the necessary linkages between risk and return. Risk became both mis-priced and increasingly opaque, leading directly, of course, to the global financial crisis (GFC) of 2008.

This presented the authorities with two alternative courses of action. One of these, which was rejected, was to accept a ‘reset’ to the conditions which preceded the debt-fuelled boom of the pre-GFC years. The other, adopted enthusiastically by the Fed and other central banks, was to compound credit adventurism with its monetary counterpart.  As well as slashing policy rates to all but zero, QE was used to bid bond prices up, and thus force yields downwards. The result was ZIRP (zero interest rate policy), effectively negative (NIRP) in ex-inflation terms.

Remarkably, nobody in a position of authority seems to have thought it in any way odd that people and businesses should be paid to borrow.

A2 Fig 8

The result, inevitably, has been increasing financial and economic absurdity. The necessary process of creative destruction has been stymied by the supply of credit cheap enough to keep technically defunct ‘zombie’ companies in being, whilst investors and lenders have seen merit in using ultra-cheap capital to finance ‘cash-burners’, confident that any losses will be handed back to them by a beneficent Fed.

Another, barely noticed consequence has been the emergence of huge gaps in the adequacy of pension provision. In a report appropriately dubbed the Global Pension Timebomb, the World Economic Forum calculated that the shortfall in US retirement provision stood at $28tn as of 2015, and was set to reach a mind-boggling $137tn by 2050.

Though other factors have been involved, a critical role has been played by a collapse in returns on invested capital. The WEF stated that forward real returns on American equities had slumped to 3.45% from a historic 8.6%, whilst bond returns had crashed from 3.6% to just 0.15%. On this basis, we can calculate that a person who hitherto had invested 10% of his or her income in a pension would now need to save about 27% to attain the same result at retirement, a savings ratio which, for the vast majority, is wholly impossible.

Faking it

Analytically, though, by far the most important aspect of US economic mismanagement has been the manufacturing of “growth” by the injection of cheap credit and cheaper money. The direct corollary of this process has been the driving of a wedge between asset prices and all forms of income.

This process goes far beyond the simple “spending of borrowed money”, which creates activity that could not have been afforded had consumers’ expenditures been limited to their own resources. Since asset prices are, to a very large extent, an inverse function of the cost of money, revenues in all asset-related activities, most obviously in financial services such as banking, insurance and real estate, have been inflated, directly and artificially, by ultra-loose monetary policies. Even the few who have not been sucked into this borrowing binge are almost certain to have benefited from employers or customers who have.

Using the SEEDS model, the following charts illustrate how monetary manipulation has driven a wedge between reported GDP and underlying or “clean” levels of output. In the absence of this manipulation, growth between 1999 and 2019 wouldn’t have averaged 2.1%, but just 0.8%.

At the household level, this means that increases in the average American’s income have been far exceeded by an escalation in his or her liabilities. These liabilities embrace not just personal credit but the individual’s share of corporate and government indebtedness, and include the pensions gap as well.

A3 Fig 7

This process helps explain why mortgage, consumer, auto and student loans have soared, and why cheap (but inflexible) debt has been used to destroy costlier (but shock-absorbing) equity in the corporate sector.

The popular notion that these increases in liabilities have been offset by rises in the values of homes and equities is wholly mistaken, because it ignores the fact that these are aggregate values calculated on the basis of marginal transactions.

An individual can sell his or her home, or unload a stock portfolio, but the entirety of the housing stock, or the whole of the equity market, cannot be monetised, because the only possible buyers are the same people to whom these assets already belong.

By applying the ECoE deduction to the ‘clean’ level of output (C-GDP), we can identify what has really happened to the prosperity of the average American over the past two decades. In 2019, prior to the current pandemic crisis, his or her annual prosperity stood at an estimated $44,385, which was $3,660 (8%) lower than it had been back in 2000. Over the same period, taxation per capita increased by $3,485, so that the average person’s discretionary (‘left in your pocket’) prosperity is lower now by more than $7,100 (22%) than it was in 2000.

Meanwhile, each person’s share of America’s household, business and government debt has risen from $94,000 to more than $160,000 (at constant values), and nobody has yet proposed a workable solution to a rapidly rising pension gap which probably stands at more than $35tn, or $107,000 per person.

This predicament, which is summarised in the final set of charts, is beyond uncomfortable – and even this, of course, preceded the economic hurricane of the coronavirus pandemic.

A4 Fig 9

The lethal disequilibrium

As well as understanding what these circumstances mean in practical terms, we need to note another consequence of using financial adventurism in the face of deteriorating prosperity. This is the way in which the relationship between incomes and assets has been bent wholly out of shape.

It’s an essential prerequisite of a properly functioning economy that there is a stable and workable balance between, on the one hand, all forms of income and, on the other, the valuation of assets, including equities, bonds and property. The problem facing anyone trying to calculate this relationship is that financial adventurism has falsified some forms of income in much the same way that it has distorted GDP. This is where prosperity, calibrated using an energy-based model such as SEEDS, is particularly important.

Essentially, equity prices need to be low enough to give stockholders a satisfactory real return on their investment, with much the same applying to bonds. Meanwhile, if typical property prices become too high in relation to median earnings, the market becomes dysfunctional, because it prices out new buyers, leaving owners vulnerable to any weakening in monetary support.

When – as has happened in the United States and elsewhere – monetary manipulation distorts these relationships, one of three things must happen. First, the authorities need to carry on, indefinitely, making incremental additions to their monetary largesse. Second, and if ever they cease to do this, then asset prices must correct downwards into equilibrium with all forms of income. Third, nominal incomes must be increased to restore equilibrium, something which, with prosperity no longer increasing, can only happen through rising inflation.

For as long as a disequilibrium between asset prices and incomes continues, the effect is to benefit asset owners to the detriment of those depending on incomes (which may be wages, dividends, profits, pensions or returns on savings). Accordingly, a wealthy elite becomes the beneficiary of processes whose outcomes are negative for those with little or no ownership of assets.

Put another way, inequalities will continue to widen – even if the authorities don’t adopt policies aimed deliberately at such an outcome – until a financial pendulum effect restores equilibrium.

What now?

From the foregoing, it will be apparent that America’s current predicament is by no means wholly a function of the coronavirus pandemic, or of the latest upsurge in racial tensions. Rather, the US is at the culminating point of a series of adverse trends:

First, the energy dynamic which determines prosperity has turned down, and a failure to recognise this climacteric has driven the authorities, in the US as elsewhere, into a chain-reaction of mistaken policies.

Second, the financialization of the economy has hidden underlying fundamentals from view, whilst simultaneously creating enormous systemic risk.

Third, failed monetary policies have driven a wedge between those who own assets, and those who depend either on wages or on other forms of income.

Fourth, and most dangerously of all, policy has created a dangerous disequilibrium between asset prices and incomes. It is no exaggeration to say that this disequilibrium is poised over the US economy like the Sword of Damocles.

Along the way, America has allowed market principles to be over-ruled by financial engineering, something typified by the way in which markets have become extensions of monetary policy.

The danger implicit in the latter point, in particular, is that monetary manipulation will be relied upon to resolve issues that lie outside its competence. There are strong reasons to believe that the US has reached a point of ‘credit exhaustion’, after which households refuse to take on any more debt, however cheap and accessible it may become. That is the point at which monetary policy becomes akin to “pushing on a string”.

This futility implies that either (a) the authorities give up on monetary stimulus, at which point asset markets crash, or, and more probably, (b) they ramp up injections of liquidity to a point at which dollar credibility implodes.

This creates a very realistic possibility that deflationary pressures push the Fed into the creation of new money on such a scale that inflation accelerates.

It is particularly worrying that a combination of self-interest and the polarisation of opinions prevents the adoption of pragmatic policies which, even at this very late stage, might manage the economy back into equilibrium.



76 thoughts on “#174. American disequilibrium

  1. There will be no rescue from inside the system. We will hit against the wall of reality!
    Prepare mentally!

  2. Thank you for another interesting post Dr Morgan, but haven’t you said all this before? Does SEEDS allow analysis of particular sectors of an economy? I think that could be very informative.

    • Some of the main principles, yes, though quite a time ago. But this reflects more recent trends, uses more stats detail which can now be provided by SEEDS (n.b. the charts), and puts new emphasis on the assets/incomes relationship, which I now regard as the main weakness in the US economy.

      Also, I think it’s particularly important now to understand what’s happening to the prosperity of individuals and households. People who are doing OK tend to be tolerant of others doing better, but if their own prosperity lurches downwards, and their insecurities worsen…….

      We can certainly see which sectors are going to pull through, which are going to struggle and which very probably are toast. But that would be a different and/or longer article.

  3. Thanks, Tim, this is a really great presentation on the U.S. and its predicament.

    • I agree, an excellent survey of what is going on. Personally I am not cognisant of the basic economics as tricked up today. My interest in the economy is around the basic lies put a.bout to engineer all this dysfunction in what Michael Hudson calls the FIRE sector. I now know that economics is too important to leave to politicians. They really do not understand. Modern Monetary Theory could enlighten them, not that it answers all that is misfiring, but the Pension problem can only be addressed by referring to the monetary sovereignty of federal governments. They will be payers of last resort.They cannot go bankrupt untill resources are exhausted.
      The profligacy of the FIRE sector will make totally impossible any notion of paying back loans. As Hudson said.; Debts that cannot be repaid Will not be repaid. Money will degenerate into coupons.

  4. Dear Tim,

    As you know, the US – as the leader of the Occidental World – is in competition with China and Russia for planetary dominance and for access to the remaining positive EROEI fossil fuel reserves of Gaia.

    Hence, in order to be in a better position to assess the wisdom of decisions made by the respective leaders of these countries, would it not be useful to present a comparative analysis of the evolving situation of the above mentioned countries using your methodology while keeping in mind the fact that they are essentially following a « Last Man Standing Scenario » ?

    Best regards,


    • Thanks John, that’s a great idea, and ‘Last Man Standing?’ could be a pretty good title!

      As I mention in this article, China’s circumstances don’t look any better than those of the US.

  5. As you and others have noted, a lot of effort went into this and the calculations behind it in SEEDS. The last man standing “game” could look like an erratic toy horse or car race, with leadership and laggards changing spots along the way. That is, unless a major war is started, which risks global nuclear winter, or another black swan comes along.

    For those lucky enough to have assets for current or future retirement, I think it makes sense to spread your bets by not owning investments reflecting only one country, region, or currency. I think having some precious metal(10-12%) and some commodity linked investment also makes sense. I have a small % in the food sector via DBA (Deutsche Bank Agricultural) It is all edible stuff, not cotton, lumber… I’m trying to get down to 50% $US tax free bonds and cash, with physical coins and DBA around 15%, and 35% non-$US Sovereign bonds. (Some short term BWZ, some longer term but infl. adjusted in WIP.)

    Note, this fits me as a US resident and taxpayer, and I offer the info so those in a similar bind can research alternatives themselves. I hope this is not out of line on this blog.

  6. An interesting article. The UK economy, with its focus on financial services, banking and real estate, would appear to be particularly exposed to an asset price collapse. Were interest rates to increase, a large part of the UK economy would presumably collapse.

    • Indeed so. Moreover, exposure to the global financial system (for which a good measure is financial assets) is far higher in the UK, at over 1100%, compared with about 465% in the US.

      As I see it, the UK economy is in very big trouble (and the real downturn is much greater than the reported -20% for April, by the way). Nowhere seems to be handling current events as badly as the UK and the US.

    • “Nowhere seems to be handling current events as badly as the UK and the US.”
      That’s because we’re both exceptional nations, Tim. As the old Mac Davis song goes, “Oh, Lord, it’s hard to be humble, when you’re perfect in every way. I can’t wait to look in the mirror, I get better looking each day..”

    • If I was picking a song for the UK and the US, I think it would be Guy Clark’s “Fool in the mirror” – though “Past the point of rescue”, by Hal Ketchum, might be in there somewhere……

  7. Dr. Morgan
    An excellent post as usual. One additional thought. From Shadow Stats:
    “Early Inflation-Danger Signal: Monthly May Producer Price Inflation for Goods Spiked at a Record Pace, Reflecting Shortage-Induced 44% Surge in Meat Prices”

    Now I would like to propose that the world in 2021 and after may feature permanently high costs as we change the way we do business. For example, it may not be possible to return to the gruesome meat packing practices of the past. If so, the cost of producing feed-lot meat will have increased significantly and permanently. Similarly, all of the grocery stores around here are now doing a booming business in on-line ordering and curbside delivery. Which means that rather than operating shopping carts for themselves, people are ordering on-line and the store hires someone to go around and fill a cart. Meanwhile, the store has to continue to maintain a store which was designed for self-service. Another example of permanently higher costs. One can multiply examples of permanently higher cost of doing business. Doctor’s offices, for example, have virtually eliminated the waiting room in favor of ‘just in time and not very many at a time’. The cost inflation will necessarily lead to price inflation, as well as some examples of shortage…as with the meat.

    The net result is a permanently lower standard of living…regardless of whether we call it inflation.

    In addition, and relative to the US, you did not mention the possibility of loss of the Reserve Currency status for the US. The order of magnitude number I have heard for that is a 40 percent decline in standard of living. Permanently higher costs plus trying to run a cash-flow economy could be a very serious threat to sanity.

    Don Stewart

  8. Thank you, I think this may be your best essay to date.

    I have for many years felt that central banks are incompetent and/or malfeasant but lately I’ve wondered if there might be a contrarian view.

    What if central bankers are actually good people trying to do the best they can in a difficult situation? The hard constraint they face is that our debt backed fractional reserve monetary system requires the money supply to continually grow or else the system will collapse. Low cost energy depletion (and now the virus) are forces tending to contract the money supply. This means central banks are forced to inject new trillions somewhere, but where?

    If central banks gave the printed trillions to the poor and middle class they would tend to spend the funds on living expenses which would inflate the cost of essentials like food and energy, which in turn would require the central banks to increase the interest rate to cool inflation, which in turn might set off a cascade of defaults requiring even more money printing leading to a self-reinforcing collapse.

    If instead they use the printed trillions to inflate the stock and bond markets, as they’ve chosen to do, then they avoid over-inflating the cost of living at the social cost of increasing the wealth gap.

    Perhaps they’ve rationally calculated that social unrest from a widening wealth gap is less bad than a monetary collapse?

    Do you think this view has any merit?

    • Even though the Fed is skirting existing law by purchasing corporate bonds (via a Special Purpose Vehicle “intermediary” they created), it is still far easier for the US central bank to pour money into bonds and other financial assets than into the pockets of ordinary people.

      The Fed would probably say that their remit is to look after the financial system and it’s up to Congress to decide whether to support Main Street businesses and their employees (as Congress has been doing with $1200 per adult payments and PPP loans from the SBA).

      If Congress wants to go into debt to continue or expand that Main Street support, the Fed would be glad to buy the debt, but “helicopter money” has to be dropped via government fiscal policy, not central bank monetary policy.

    • A very interesting point, Rob. Maybe the reason that quantitative easing did not result in inflation is that much of the money was used for stock buybacks and fixed asset investment and did not find it’s way into the real economy.

      It is a shame that governments do not have a better handle on what is really going on. Putting that extra money into fusion power research and new nuclear reactors, might offer some hope of slowing or even reversing the trend of rising ECOE. Instead, low energy prices caused by collapsing consumer demand, are likely to discourage such investments.

    • Rob, Joe, thanks both.

      As I see it, where we start from is a situation (de-growth, and prolonged falsification of ‘business as usual’) that neither our systems nor our leaders could cope with, even if they understood it.

      There are no votes – and certainly no party funding – in ‘humanely- and equitably-managed retreat’.

      In the US, and indeed elsewhere, the political ‘high command’ is resolutely opposed to redistribution. One expects this of conservatives, but self-styled ‘liberals’ are just as intransigent on this issue. They’re prepared to support any and every ‘liberal’ cause, except redistribution, from ‘the rich’ to ‘the poor’ or ‘the not-yet-poor, but struggling’.

      I get the point about the Fed protecting the financial system, but that hardly describes the way they’ve inflated asset bubbles over twenty years and counting. Any such brief should include ensuring the proper functioning of markets, which includes slumps when markets are over-inflated, and includes investors losing as well as making money, and failing companies going bust. Trying to turn markets into ‘all winners, no losers’ defeats the purpose of markets.

      ‘Helicopter money’ would be avowedly inflationary – it would create inflationary expectations, which would become self-fulfilling prophecy, as people rushed to spend money before it loses its value. It’s long become the norm to exclude asset price rises when we talk about ‘inflation’.

    • This is exactly right from a macro perspective, the money system must grow or collapse. Sending money to everyone would be inflationary due to the real economy of things not growing as quickly as it once did due to rising ECOE, high grading of any and all resources, etc.

      The economic question then becomes political because we only know the “growth forever” system, the entrenched powers can’t even conceive of this notion due to their extensive training.

      Just my opinion I guess in the end. Don’t ask me how it all works out, though I think things are going to get quite messy.

    • I have my tin foil hat on this morning. Does it lean to heavily on the idea of national interests acting rationally and with forethought, to think that western central bankers actions over the last decades and even now are about maintaining control of a global economic system that provides a disproportionate share of resources to the United States, Europe, Japan, etc.? That the choice of asset price inflation and inequality versus currency devaluation and eventually currency destruction, was and is nested within the larger choice: allowing gradual economic decline as easy-to-extract domestic energy resources deplete away, versus continuing economic dominance until oil begins its terminal decline globally.

      Attributed to Kissinger, but probably a modification of what he actually said. Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world.

      A less conspiratorial explanation. The “system” established after WWII, with the U.S. at the center, has worked over the past decades to maintain its structure. A few years back I heard Dennis Meadows (of LT Growth) say something to the effect that systems work hardest to maintain themselves in their current structures when the external forces working against that system are at their highest. That would be now? In this systems explanation, individual elements of the system don’t have to fully understand how the individual decisions they are making are contributing to maintaining the systems stability. Central bank institutions are fighting the fire they know how to fight with the tools they have. Maybe for a little while longer we get to live in the system initially established ~75 years ago.

    • I think a real turning-point might have been 1971, when the gold standard, and hence the Bretton Woods system, was abandoned by Richard Nixon. Since then we’ve had a wholly fiat monetary system.

    • Fiat Money; Systemic Dysfunction
      Consider the conundrum of why a barrel of oil which contains the energy of 4.5 years of human labor can no longer be produced for a profit….i.e., the producer can’t get prices high enough and the consumers can’t afford to pay the price that producers need.

      IF we had continued with a gold backed money, or some other form of ‘sound’ money, then we would have been forced to change the way we assemble the economy to account for the steady erosion in net energy. Fiat money allowed us to ‘extend and pretend’. Governments around the world are united in their opposition to any rearrangement which threatens the incumbents. So, instead of having a series of small earthquakes, the governments are insisting on one big 10.0 shaking.

      I have two grandchildren who will start the fall session at college soon. I wish I knew how to give them good advice…even assuming that they would pay any attention.

      Don Stewart

  9. Dr Tim, I think every post would benefit from including hyperlinks to a “Energy Surplus Economics 101” for new readers. You have this in post #148, #149 and at http://www.surplusenergyeconomics.com/.

    For example, links from here would be useful:

    // “The discussion which follows assesses the American situation from a perspective which recognises that the *economy is an energy system*. It concludes that the US has responded particularly badly to the onset of de-growth, something which has been induced, not by choice, but by a *deteriorating energy equation*.” //

    While long time readers take it for granted, it’s often mentioned in the comments “why do people / politicians / commentators etc not understand this fact, why don’t they get it?” (that the economy is an energy system).

    I would suggest that this is so important for people to grasp that is worth a quick review of how that information is presented on this site. I think it is one thing to grasp that, yes, we need raw materials plus energy to produce useful things from roads to buildings to machines and so on, but it remains difficult enough for people to understand what money & debt is (Frog says to passing fish, “how’s the water today?” Fish responds, “What is water?”) and the relationship between expandable debt and finite resources. Everyone has probably experienced a personal shortage of money at some point, but few the unavailability of something. (We could also say that people have also only ever experienced ‘finite’ resources expanding through exploration & technological development.)

    But while I think there might be an awareness of resource depletion in general, I think there is a shocking ignorance of the % depletion rates of different resources, and what that means in terms of cost year on year, and availability in the coming years.

    And then it becomes a very, very confusing conversation for the layman to understand all the questions that come from that: why we need a certain amount of surplus energy to have the society we do, and why that is under threat; how ECOE is different for different countries/regions and what broadly kind of research it takes to calculate it; what really is prosperity (“put colloquially, how prosperous you feel depends on where you live, and where you started from”) and why & how does ECOE affect prosperity; and what affects ‘affordability’ of energy. All of this is further blurred and reduced by the noise of politics and media narratives that fail ever to mention this.

    Perhaps others here think differently, but I restate that this blog would benefit from a page with a short restatement of the predicament of declining energy supplies that underpins all of the incredible depth of analysis presented on this blog.

    • “Perhaps others here think differently, but I restate that this blog would benefit from a page with a short restatement of the predicament of declining energy supplies that underpins all of the incredible depth of analysis presented on this blog.” YES, DEFINITELY!!!

  10. It will be interesting to see what happens in 1st-world countries when this socio-economic reset which will be conveniently blamed on a virus, (vs years of financial manipulation) makes it clear that pensions, savings and income from employment or investment are going to evaporate for all but the elite. Once the masses realise only two classes are going to be left in the return to feudalism, the question is will they lie down and die quietly like after the collapse of the Soviet Union, or revolt and slide into never-ending war, even if they have resources like Libya.

    • Thanks, much appreciated.

      One of my planned projects is to look at what this is actually going to mean, to the categories that you mention. The predicament of the elites isn’t going to be as great as many (themselves included) might imagine.

      Pensions provision for the vast majority is ceasing to be viable, barring huge changes of priority. That was the real lesson (as I read it, anyway) of the WTF Timebomb report.

      As incomes weaken (albeit unevenly), the elevated level of asset prices becomes even more unsustainable. As simplification kicks in, whole sectors will either be downsized, or eliminated altogether.

      This will bring opportunities, albeit far exceeded by downsides.

      There’s also the question, raised previously, of ‘last man standing’ (which, on purely economic grounds alone, looks most likely to be Russia).

  11. Thanks for an excellent post Tim. One of your best as previous commentators have noted. There’s quite a lot to it so I’ll have to reread it a couple of times to digest it all. I note your comment on how the UK and US are emerging as the most dysfunctional economies you’ve examined so far in the post CoVID environment. My observations from Ireland are that we are close contenders for the top spot in terms of dysfunctionality. We are in the unenviable position of being closely tied economically to our dysfunctional neighbour while also bound to equally dysfunctional polices of the European Central Bank. You offered some telling observations on the Irish economy about a year ago, if you have any post CoVID observations on our current situation that would be welcome. Keep up the good work BM

    • Thanks! Do come back with thoughts once you’ve pondered it.

      I don’t think the markets (or, perhaps thankfully, the public) have realised quite how bad things are for the UK and the US. The situations of both are looking increasingly chaotic.

      The Euro system is deeply flawed – particularly in its separation of monetary and fiscal processes – and, if it had been proposed in a student’s essay, would have been marked F.

      It’s been said that a camel is “a horse designed by a committee”. The Euro is a currency system designed by politicians………..

    • Ireland’s past offers another clue in possible reactions to brutal societal collapse on an apolcalyptic scale from the famine when Britain chose to export food ensuring the ‘natives’ starved en masse. In the continuing reset, I wonder if people elsewhere will similarly give up weakened and unable to fight back against the hired thugs suppressing them or if they have nothing to lose and have a go. Back then, over-populated countries were flooding America with their unwanted ‘surpluses’ , but that pressure-release valve is not available now, as evidenced by this US demonstration of blow-back from bigotry.

    • The English treatment of the Irish really was quite shocking. The potato famine coincided with a bumper grain harvest, yet nothing was done (other than by Quakers) to alievate their plight. Tenants who could no longer pay rent were evicted. When they sheltered in their former homes, some landlords pulled the roofs off their own properties. When people sheltered in the ruins, they knocked down the walls. I’ve never understood why, of all places in the Empire, the Irish seem to have been treated worse than almost anyone else.

      It’s been said, of Anglo-Irish history, that:

      ‘The trouble with the Irish is that they never forget. The trouble with the English is that they never remember’.

    • The 1840s were known as ‘the hungry forties’ in England. My understanding of the potato famine, was that it coincided with a food shortage that effected all of Britain, but Ireland worst of all. The problem was made worse by the corn laws that prevented the import of agricultural produce, keeping food prices high. So the English (and Welsh and Scottish for that matter) didn’t have much surplus to share with Ireland. Have I got this wrong?

    • My understanding was that the 1840s were only dubbed “hungry” in retrospect, from the more prosperous (and post-Corn Law abolition, 1846) 1850s, and were no hungrier than previous decades (certainly 1815 to 1840). The 1840s were years of revolution in Europe, though the Chartists never got very far in Britain. Much of the hardship in Britain was caused by the Corn Laws, a price-fix implemented, after the Napoleonic Wars, to benefit landowners.

    • This pdf provides historical data on UK arable food produce.

      Click to access Agprice.pdf

      Prices were generally stable throughout the 1830s and 1840s, with only a slight increase in 1847. The implication is that the famine was largely confined to Ireland. One wonders what sort of brain wasting incompetence the British government must have been suffering from, to allow this to happen. It isn’t as if it occurred in some far off corner of the empire – millions starved on their own doorstep.

      Reading the wiki page on the great famine, it occurs to me that Britain never really escaped from feudalism. The modern plutocracy that runs Britain, grew naturally from feudal roots; the Norman occupation of Britain never actually ended. In the years since WW2, the plutocracy has been infiltrated by globalism, with the most powerful people in Britain no longer white English and Scottish landowners, but international (heavily Jewish) businessmen. Yet the power structure of Britain seems to be vulnerable to this sort of Plutocracy. Britain remains a class society. It is ruled by an arrogant officer class, that is essentially a nation within a nation and do not even see themselves as being from the same stock as the greater British public. It is not very surprising that today they find it easy to sell out their own people to globalist plutocrats or that they could stand by and let the Irish starve over a century ago. It is time for Britain to finally end the Norman conquest and become a republic with a bill of rights.

  12. @Dr M, re: the Irish, yes, the attitude of the Celts towards their English overlords always perplexes me, I could not be so forgiving, I mean was the eradication of the Highlanders during the clearances any better than the Irish culling really?

    Your latest dissertation indeed has so many points to think about, it will take more than one comment. On the ability of the masses to fight back, it is intriguing. I was in a neighbouring country in the period covering the transition of South Africa from apartheid to majority rule and nobody there at the time saw that coming, we were convinced the extremists would get their war. However the elite were eventually convinced of mutual destruction (accurately in my opinion) and cut a deal, with the clincher being that the resistance wasn’t petering out, they were really all-in to the death.

    Until recently I wouldn’t never have thought the English would do that, but now I’m not so sure. When the middle classes wake up to the fact that they’re joining the poor and it’s irreversible, they may not be convinced that opposing each other and reshuffling the ruling pack currently in the deck as usual is still the answer. In my lifetime, the only time I’ve seen sustained resistance that paid off and ignored scapegoating opportunities was back against the poll tax, when unemployment was also rife and hope fizzling out, so maybe, just maybe.

  13. ‘liberals’ are just as intransigent on this issue. They’re prepared to support any and every ‘liberal’ cause, except redistribution,

    I wonder why you make this assertion?

    When I think through the history of many leftist (‘liberal’) priorities such as universal health care, minimum wage as living wage, strengthening unions, family leave policies, early childhood education programs, housing for the poor, all of these examples involve redistribution of tax dollars.

    There are plenty of other liberal “social justice” priorities as well, but the core tenants of American style liberalism are generally in support of programs intended to reduce inequality by making life better for the poor with money raised through progressive taxation (increasing the top rates being another redistibutionist liberal priority).

    In fact, I would say that redistribution has always been the biggest spanner in the liberal toolbox, used in the pursuit of ending poverty and promoting equal opportunity, liberalism’s defining goals.

  14. London has fallen.

    ‘Protesters often faced no intervention in London as they defaced public art and later London Mayor Sadiq Khan announced that he would yield to demands to take down statues of imperialist figures and create a commission to “review and improve diversity.” In his statement, Khan said that he no longer wanted to see “statues, road names and public spaces reflect a bygone era.” He declared “The Black Lives Matter protests have rightly brought this to the public’s attention, but it’s important that we take the right steps to work together to bring change and ensure that we can all be proud of our public landscape,” To that end, he said that the city would replace historic statuary with black and Asian minority ethnic communities, as well as women, the LGBTQ community and disability groups’

    This is what happens when you invite the entire third world to colonize your country. They colonize your country. Then they elect a third world dob of grease as mayor, who tares down everything that belongs to your once proud civilisation. I fear that the story of Albion is drawing to a close. The barbarians are within our gates. We let them in.

  15. We are watching the American Civil War -II taking place. The present turmoil may only be a small skirmish, but I am sure that things will hotten up. Especially as we approach November, and in November we are going to see all Hell break loose. Regardless of who wins this election, neither side will accept the result.
    To date, we have seen the radical left rampaging through cities. They have been allowed to do so by the authorities. The police have been demoralised due to lack of backing from the state, so they will take a back seat, after all, why risk injury to yourself if it is not appreciated by anyone.
    The radicals will plunder and destroy their own cities, but they dare not cause any damage or harm in any Red states.
    To date, we have seen no retaliation from any quarter. That does not mean that it will stay that way.
    I do not support BLM, I support ALM – All Lives Matter, and it’s true the American police are out of hand. ( with the British police not too far behind either ).
    I am a white male from the Boomer generation. I studied hard and worked hard all my life and I will not bend a knee to anyone. Especially to someone who has done nothing with their life, yet seem to think that I owe them some kind of respect.
    The “White Backlash” will come, and it will be bloody.
    The USA will rapidly turn into Ukraine on steroids.
    This will be a signal to foreign investors to bail out of the US Dollar, and US assets in general.
    The American Dollar as the world reserve currency will crash, and it will pull down the Euro and Sterling in its wake.
    I can confidently predict that we will have a spectacular fireworks display at the end of 2020.

    • While things may heat up as you predict, and the $US is likely to weaken, currencies are priced in relation to other currencies. Hence, the Euro and Pound will likely rise relative to $US. The Yen might be stronger than all three (contrary to fundamental analysis expectations). Think of a horse race with staggered results, with the buck running last and flagging.

    • I used to think that too Steven, but now I see the US$ as the lynch-pin for all Fiat currency.
      The Dollar can fail against Gold.
      As soon as the US$ fails, the others will crash with it.
      The UK and GBP is a basket case already, and the Germans, ( once they figure out that Angela has sold them out to the French ), will not tolerate picking up the tab for southern Europe.
      Hello Deutschmark mark-II.

    • My statement is correct. Ask any currency pro. Gold is a commodity, and it can rise/fall against any currency. But the *rate* of its decline will vary as the currencies ratios vary to each other. This isn’t a matter of “think.” It is mathematical fact.

    • Thank you for that clarification, Steven.
      You are indeed correct.
      It did however come as no surprise to me, to hear that Fiat currencies float relative to each other.
      Please forgive the poor formulation of my post.
      When I said that the US Dollar will crash, what I intended to communicate was that the US Dollar will crash with respect to its purchasing power.
      As you also quite correctly point out, Gold is a commodity, and as such it does rise and fall relative to all currencies. It’s just that you seem to be needing ever increasing quantities of Fiat currency to buy the same amount of Gold.
      That would suggest to me, that Gold has an additional purpose other than that of being a simple commodity.

      ( As far as £, $ , € being horses at Ascot, I think they are horses at the knackers.)

    • Funny stuff Johan…..you come off as Limbaugh/Fox News guy with no concept of the benefits you have received from being a white, male, “hard working” Boomer. You also seem to lack any understanding of history, but that is not unusual for our cohort.

      Crime has declined for the past 30 years in America and across the globe and now all cops predominately do is bust people for drugs and DUIs which exacerbates the problems within the communities.

      I live in a Red State and these mouth breathing gun toters were convinced bus loads of Antifa Supporters were showing up and even the corrupt Atty Gen Billy Barr said it was Antifa causing the problem. In reality two cops were shot dead in California by a right wing Boogalo supporter that was a SGT for the Air Force and three other veterans that were also Boogalo supporters were arrested in Las Vegas for planning a race war. White supremacysts have infiltrated the police as well as military as the FBI has noted but for some reason no one does anything? Probably because this makes voters like Johan happy as they enjoy watching poor people get shot and beat as they “deserved” it.

      Johan the lifestyle you have was built on the backs of brown people abused and discarded by white anglo saxons and that’s the fact jack. Indians, Africans and Mexicans were screwed so you can blast your self righteous crap. I hear all the time that “right” with all the arms will win this 2nd Civil War, but I have my doubts. The people with guns cannot get out of the way of their gut as they fall out of their pick up truck, while the left has stayed in shape. If you think those on the left are not armed then you have another lesson to learn. I honestly hope it does not come to that, but based on your blather I see very little way out.

      Have a Blessed Day.

    • Wow !
      Thanks for that Greg,
      and here was me going through life thinking that I was quite a nice guy !
      Burns had it right:
      ” O wad some power the gifttie gie us, to see oursels as others see us “

  16. @Dr M, this blogger’s analysis dovetails with yours on many levels and most interesting is his prediction of an inevitable reversion to simplicity (like more manual labour even) as opposed to the unstoppable automation in all things that the mainstream media bludgeons us into believing is unavoidable: https://consciousnessofsheep.co.uk/2020/05/26/two-money-tricks/

    He uses the example of car washes in the UK to show the process is well under way and accelerating: https://consciousnessofsheep.co.uk/2019/04/09/an-unlikely-simplification/

    • “He uses the example of car washes in the UK to show the process is well under way and accelerating: https://consciousnessofsheep.co.uk/2019/04/09/an-unlikely-simplification/

      Hand car washes are an example of the foolishness of Tax Credts, not simplification of the economy. The “business” only exists to facilitate the claiming of Tax Credits and would not exist without them. To double down on the foolishness, these non-contribution based state benefits are often claimed by so-called “economic migrants”, who might be more accurately described as “uneconomic migrants”.

  17. What is noteworthy is just how long this has ben going on – back in 1997 I was thinking of buying a property in the UK and noted that house prices were even back then beginning to decouple from salaries. How long can this go before correction I pondered – maybe five years at most before a correction, but then a series of factors including government interventions, low interest rates, a lack of new build, a high level of immigration has meant that small blips aside the market has just continued to decouple well pat the point of absurdity – one bed flats I was looking at in south London that were around £33,000 in 1997 are now £300,000.

    • When I bought in Canada 13 years ago I had a mortgage @ 5.5% locked in thinking that it was pretty low. Rates continued to drop for the entire term of the mortgage.

  18. ”If, on the other hand, the Fed persists with monetary distortion of asset prices, the resulting inflation will push nominal wages and other forms of income upwards towards the re-establishment of equilibrium.”
    I’m not so sure QE and low interests rates will trigger the inflation that you expect. The eq. you refer to existed during the growth phase of industrialisation and up to 1970 or thereabouts. The way I see it is that we are moving back to “relative prices” reassembling the situation pre industrialisation and fossil fuels (or rather the relation between assets, i.e. stocks, and incomes, i.e. flows).
    For example, people will have to do with less and spend a greater share of their income on basic necessities like food and home. It will be more difficult to accumulate wealth during a lifetime – it will be inherited within families. This is the way it used to be. Am I missing something?

    • “I’m not so sure QE and low interests rates will trigger the inflation that you expect.”
      You may be right. However,
      here: https://mailchi.mp/8f126f390556/which-economic-thoughtcomes-out-best-from-the-last-decade-1336071?e=260ed9002a
      is someone who sees a relationship between increases in M3 and inflation?

      “Particularly in the USA, and to a lesser extent elsewhere, governments have ballooned their budget deficits and financed them from banking systems, creating extra money balances. QE exercises have also been undertaken, with further additions to the quantity of money over and above those due to monetary financing of the budget deficit. The fiscal and monetary sprees have been so huge and permissive that broad money growth rates {M3} have risen to extraordinary levels. As I have pointed out above, and about which I have in fact been hinting for some weeks, the USA now has the highest annual growth rate of the quantity of money in its peacetime history. So – unlike late 2008 and early 2009 (and indeed for a few years thereafter) – I am very worried about a sequel in which annual inflation takes off into the double digits, at least in the USA. The chart above speaks for itself.“

    • postkey,
      perhaps inflation will be higher than I think but I still do not see that wages will increase as much, i.e. real wages will not grow as fast and the eq. will not be the same.


    Earlier this year, I had to apologise to those whose comments had been held in moderation – for reasons unknown to me, WP had stopped notifying me of comments awaiting approval.

    It now turns out that the same has been happening to contacts, which, over an extended period, have not been forwarded to me by email.

    I can only assume that notification settings have been altered – but not by me.

    If you have tried to get in touch through the contacts page, please accept my apologies for the lack of a reply.

    I’m going to do my best to work through the backlog – and please don’t be put off using the contact form.

  20. Where the monetary debate is concerned, there’s an air of unreality around at the moment which we need to factor in to our calculations. This might be likened to Sherlock Holmes’ ‘dog that didn’t bark in the night-time’, except that this one will bark – and bite.

    Right now, the economy is ticking over on government/CB support, and forebearance. For example, British GDP fell by ‘only’ 20% in April, but the government injected borrowed money, in a single month, at a rate exceeding the prior expectation for the whole year. This typifies a global situation. Likewise, lenders aren’t – yet – foreclosing on non-performing household and business debt, but the point will come, inevitably, at which that happens. It’s realistic, rather than alarmist, to anticipate financial carnage – in the shape of cascading defaults – in the not-too-distant future.

    At that point, CB activity will move into overdrive, indeed there will be no other choice open to them. Meanwhile, planning seems still to be predicated on a ‘full recovery’, i.e. a V, even if it’s a longer and flatter V than was assumed previously. But there are compelling grounds for believing that many businesses and jobs simply won’t come back.

    The immediate outlook is deflationary, as is to be expected in such a severe downturn. CBs will certainly create huge amounts of new money to shore up the banking system, and we can expect them, deny it though they will, to monetise a lot of government debt by using QE to buy bonds.

    Thereafter, though, what happens to the incomes that have been lost, by employees and business owners? If goverrnments decide on long-term support programmes, there will be pressure for CBs to monetise the resulting deficits. When it becomes apparent that millions are being paid far more than whatever they’re producing, inflationary expectations will rise. When that happens, inflation could well become self-fulfilling prophecy.

  21. Re: inflation taking off. There is a weird disconnect in these predictions about QE and inflation taking off. They must mean “official” inflation or pretty high inflation because acc to shadowstats and the chapman index, we’ve had annual inflation of 10%+ for many years now all without loss of faith in fiat. These predictions need to be more precise in their conditions for me to jump on board. Similarly there was some ridiculous article on zerohedge the other day arguing that if we get negative real rates of inflation it will be very bullish for gold. Really? Because we have had sizable negative real rates for years now. If inflation is 10% and the banks are paying .25% on deposits we’re already at -9.75% negative real rates. You mean it has to be official negative rates for this to get real? If people are that easily diverted from the evidence of their own senses and only respond to “official” statistics then i see no reason why the current game cannot continue for years upon years.

    Please excuse the rant

  22. A good explainer on how de-growth is underway globally, albeit using UK examples in this article (which references this particular site in doing so):


    Impoverishment generally through reduced ability to afford energy is corroding quality of life and driving the decline of industrialised countries, the speed at which this occurs being the only difference between them. As the commentariat here accepts, we have to adapt to a new way of living whether we like it or not, and relatively quickly.

    • @Dr M, indeed, I noted in brackets above that the author acknowledged your work. I’ve just finished refreshing my memory with your Project Armageddon report and am curious as to your feelings on it now with the benefit of hindsight, given your concluding wish was for the insidiously creeping bully-state surveillance to be rolled back and small businesses aided. I can imagine that back in the day that report must have caused an outcry and the exceptionalist denialism would have caused most to think it doom-mongering.

      What strikes me immediately on finishing now is how surreal our current situation is, the extent that it’s been possible by those in power to kick the can down the road seems gravity-defying. We truly seem to be living in a Wil-e-coyote world.

  23. Whither the US?
    Charles Smith has a cogent explanation of our financial situation in his current blog. An excerpt:

    “If the Fed ends up owning most long-term Treasury bonds, most corporate debt, most of the mortgage backed securities (MBS), most of the stock market, etc., then what’s left for the tens of trillions in private-sector capital that sold all its risky assets to the Fed? What’s left to invest in that’s low-risk and high-yield?

    The answer is: nothing. Simply put, inflating asset bubbles is not a substitute for low-risk, high-yield investments such as Treasuries, and buying the guaranteed-to-default sewage of corporate junk bonds doesn’t make new junk bonds any less risky or any less prone to default.

    The Fed has backed itself not into a corner but to the edge of a precipice. It cannot allow interest rates to rise enough to offer institutions low-risk alternatives to gambling in asset bubbles, and it can’t goose the insanely over-valued asset bubbles it’s inflated any higher without triggering political blowback as the Fed’s asset bubbles are the primary driver of soaring wealth inequality.

    Buying stocks directly won’t create low-risk, high-yield returns for institutions; all it will do is bury the risk in the Fed’s ballooning balance sheet while stripping insurers and pension funds of the returns they need to remain solvent.

    Yields will remain near-zero while all the asset bubbles implode, destroying tens of trillions of dollars in phantom capital. The Fed’s grand bargain–offering inherently risky asset bubbles as a substitute for low-risk, high-yield bonds–has collapsed. Everyone with a stake in an asset bubble is about to have a Wile E. Coyote realization that the risk they thought had vanished has emerged as gravity.

    It’s a long way to the bottom of the canyon, and the impact will be devastating. This impact is the dreadful price of avoiding healthy business-cycle recessions in 2000, 2008 and 2016 that would have cleared the economy of speculative deadwood and toxic zombie companies.”

    The only thing I might quibble about is whether letting the business cycle take its toll in 2000, 2008, and 2016 would have actually solved the problems. My suspicion is that what is required in the face of increasing ECoE is STRUCTURAL changes in the way our economy and society operate. I think that economy and society are interdependent, and cannot operate independently. Furthermore, I suggest that they must EVOLVE together. A feudal economy and a hierarchical religion were a way to solve a problem following the collapse of Rome. Neo-liberalism with unstable social structures (e.g., anything goes) MIGHT have made sense post ‘swinging London’ IF the ECoE had not started its relentless climb. But now, we need to get about re-inventing the economy and the social structures which we should have been working on for the last 20 years…along with periodic pandemics arising largely out of the way we feed 8 billion people. All the while the Trump administration insists on letting aging nuclear power plants continue to operate into infinity while cutting inspections and claiming that the seas won’t rise (see Alice Friedemann’s current post).

    And, I would wryly note…with no political organization capable of selecting credible candidates to run for office.

    Don Stewart

    • Redeveloping Europe and America’s manufacturing base would be a good way of dealing with the problem of inequality in the developed world. Manufacturing has positive effects on wage distribution, precisely because it pays good wages to blue collar workers. It can do this because it relies on patented technology and embedded skills that competitors cannot easily emulate.

      Whilst Trump’s tariffs demonstrate sentiment in the right direction, the most effective tool for rebuilding the manufacturing sector is to ensure that the workforce have the right skill base. That means an overhaul of the education system, with an emphasis on technical education: mathematics, the sciences and engineering. If the population have a high education quotient in these areas, then a manufacturing revolution will occur spontaneously, as clever people start new companies. Given that wages are what ultimately pay taxes, this is really the only way of fixing the deficit problem.

      Personally, I believe that there are technical solutions to the problem of rising ECOE. There are other ways of transporting goods, that don’t rely on trucks. We are all aware of the potential for rail. There are also options that involve pipeline transport, both hydraulic and pneumatic. Not a drop of diesel would be needed to make these things work. We can generate electric power and synthetic fuels using Gen 4 nuclear reactors, with an ECOE that will rival fossil fuels at the height of their abundance.

      But the population must have the right skill base to be able to develop those solutions and society must be wealthy enough to afford them. Everything starts with the education system: having a workforce that knows how to build and make things and can do this better than any other nation on Earth. That was the real driving force behind the expansion of the British Empire. It was also what allowed the US to grow into a world dominating economic power. They had some of the best engineers and scientists on the planet. And for a long time, they had a technically skilled blue collar worker base as well.

  24. You may have noted that the Bank of England has decided to limit QE to “only” £100bn.

    To put this in context, UK GDP is just over £2tn annually, or £545bn per quarter, or £180bn per month.

    In the single month of April alone, when GDP fell by an official 20%, the government ran a deficit of about £65bn (in a £180bn a month economy). What on earth would have happened to the ‘normal’ £180bn figure without that £65bn of borrowed money?

    In other words, activity was propped up with income support funded by government borrowing, whilst the B of E is prepared to support government borrowing through QE.

    This doesn’t mean that Britain is particularly out of line. The US, our subject here, is an even more extreme example of such mechanisms.

    We just need to be clear about the extent to which economies are being propped up by credit injections and the supportive monetising of debt.

  25. Art Berman on US Energy Dominance

    Art notes that if the Fed succeeds in goosing the economy leading to higher oil products consumption, then the crude oil for those products will have to be imported, leading to a worse balance of payments. I won’t try to trace the impact of China apparently deciding in favor of ‘at least sounder money’ while the US is ‘all in on fiat’…while both are importing about the same amount of oil. Or on the notion that what we are losing is basically gasoline, while the heavy lifting is done by diesel and equivalents.

    Don Stewart

  26. Smart nod to previous prognosticators, who also had good cases for insurmountable problems and imminent demise. It causes me to wonder if this madness could go on much, much longer. Any of the “bad” numbers could probably double, and there’s still no guarantee anything much would happen.

    • “If you try and take a cat apart to see how it works, the first thing you have on your hands is a non-working cat.”

      –Douglas Adams
      But we need to try….Don Stewart

    • My view is that no, probably it can’t.

      However, the next article here is likely to be – as requested – an overview of theory and an assessment of where we are now on the evolution of the ‘real’ (energy) and the ‘financial’ economies – perhaps that will be a good point at which to take up this debate.

      Meanwhile, I’d suggest another look at the UK April numbers. These monthly figures are sketchy, and are given in percentages, not money amounts. As an indicator, though:

      Monthly UK GDP is c£180bn
      Reported GDP fell by 20%, = -£36bn
      Government ran a deficit of £67bn, used to support incomes (demand)
      If they’d not done this, the decrease might have been -£103bn, or -57%, which is consistent with loss of activity across the economy during lockdown.

      This is fine for a few months. If it became continuous, even at lower (but still substantial) levels, govt debt would increase exponentially. The CB can create money to buy up this new debt. But that is full-blown monetisation.

      Can that, or something like it – in the UK, or anywhere else – go on for long without destroying the purchasing power of currencies?

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