#177. Poorer, angrier, riskier

MODELLING THE CRUNCH

It became clear from a pretty early stage that the Wuhan coronavirus pandemic was going to have profoundly adverse consequences for the world economy. This discussion uses SEEDS to evaluate the immediate and lasting implications of the crisis, some of which may be explored in more detail – and perhaps at a regional or national level – in later articles.

Whilst it reinforces the view that a “V-shaped” rebound is improbable, this evaluation warns that we should beware of any purely cosmetic “recovery”, particularly where (a) unemployment remains highly elevated (there is no such thing as a “jobless recovery”), and (b) where extraordinary (and high-risk) financial manipulation is used to create purely statistical increases in headline GDP.

The bottom line is that the prosperity of the world’s average person, having turned down in 2018, is now set to deteriorate more rapidly than had previously been anticipated.

Governments, which for the most part have yet to understand this dynamic, are likely inadvertently to worsen this situation by setting unrealistic revenue expectations based on the increasingly misleading metric of GDP, resulting in a tightening squeeze on the discretionary (“left in your pocket”) prosperity of the average person.

Exacerbated by crisis effects, the average person’s share of aggregate government, household and business debt is poised to rise even more rapidly than had hitherto been the case.

These projections are summarised in the first set of charts.

Fig. 1

#177 Fig 1 personal

Consequences

The implication of this scenario for governments is that revenue and expenditure projections need to be scaled back, and priorities re-calibrated, amidst increasing popular dissatisfaction.

Businesses will need to be aware of deteriorating scope for consumer discretionary spending, and could benefit from front-running some of the tendencies (such as simplification and de-layering) which are likely to characterise “de-growth”.

The environmental focus will need to shift from ‘big ticket’ initiatives to incremental gains.

Amidst unsustainably high fiscal deficits, and the extreme use of newly-created QE money to monetise existing government debt, we need also to be aware of the risk that, in a reversal of the 2008 global financial crisis (GFC) sequence, a financial crash might follow, rather than precede, a severe economic downturn.

Methodology – the three challenges

Regular readers will be familiar with the principles of the surplus energy interpretation of the economy, but anyone needing an introduction to Surplus Energy Economics and the SEEDS system can find a briefing paper at the resources page of this site. What follows reflects detailed application of the model to the conditions and trends to be expected after the coronavirus crisis.

Simply put, SEE understands the economy as an energy system, in which money, lacking intrinsic value, plays a subsidiary (though important) role as a medium of exchange. A critical factor in the calibration of prosperity is ECoE (the Energy Cost of Energy), which determines, from any given quantity of accessed energy, how much is consumed (‘lost’) in the access process, and how much (‘surplus’) energy remains to power all economic activities other than the supply of energy itself.

Critically, the depletion process has long been exerting upwards pressure on the ECoEs of fossil fuel (FF) energy, which continues to account for more than four-fifths of the energy used in the economy. The ECoEs of renewable energy (RE) alternatives have been falling, but are unlikely ever to become low enough to restore prosperity growth made possible in the past by low-cost supplies of oil, gas and coal.

Accordingly, global prosperity per capita has turned downwards, a trend which can be disguised (but cannot be countered) by various forms of financial manipulation.

This means that, long before the coronavirus pandemic, the onset of “de-growth” was one of three main problems threatening the economy and the financial system. The others are (b) the threat of environmental degradation – which will never be tackled effectively until the economy is understood as an energy system – and (c) the over-extension of the financial system which has resulted from prolonged, futile and increasingly desperate efforts to overcome the physical, material deterioration in the economy by immaterial and artificial (monetary) means.

On these latter issues, the slump in economic activity has had some beneficial impact on climate change metrics, whilst we can expect a crisis to occur in the financial system because its essential predicate – perpetual growth – has been invalidated. The global financial system has long since taken on Ponzi characteristics and, like all such schemes, is wholly dependent on a continuity that has now been lost.

Top-line aggregates

With these parameters understood, the critical economic issue can be defined as the rate of deterioration in prosperity, for which the main aggregate projections from SEEDS are set out in fig. 2. Throughout this report, unless otherwise noted, all amounts are stated in constant international dollars, converted from other currencies using the PPP (purchasing power parity) convention.

During the current year, world GDP is projected to fall by 13%, recovering thereafter at rates of between 3% and 3.5%. This rebound trajectory, though, assumes extraordinary levels of credit and monetary support, reflected, in part, in an accelerated rate of increase in global debt.

Within debt projections, the greatest uncertainties are (a) the possible extent of defaults in the household and corporate sectors, and (b) the degree to which central banks will monetise new government issuance by the backdoor route of using newly-created QE money to buy up existing debt obligations.

This is a point of extreme risk in the financial system, where a cascade of defaults – and/or a slump in the credibility and purchasing power of fiat currencies – are very real possibilities, particularly if the ‘standard model’ of crisis response starts to assume permanent characteristics.

Fig.2

#177 Fig. 2 aggregates

Looking behind the distorting effects of monetary intervention, it’s likely that underlying or ‘clean’ output (C-GDP) will fall by about 17% this year and, after some measure of rebound during 2021 and 2022, will revert to a rate of growth which, at barely 0.2%, is appreciably lower than the rate (of just over 1.0%) at which world population numbers continue to increase. Additionally, ECoEs can be expected to continue their upwards path, driving a widening wedge between C-GDP and prosperity.

These effects are illustrated in fig. 3, which highlights, as a pink triangular wedge, the way in which ever-looser monetary policies have inflated apparent GDP to levels far above the underlying trajectory. This is the element of claimed “growth” that would cease if credit expansion stalled, and would go into reverse in the event of deleveraging. The gap between C-GDP and prosperity, meanwhile, reflects the relentless rise of trend ECoEs. This interpretation, as set out in the left-hand chart, is contextualised by the inclusion of debt in the centre chart.

Fig. 3

#177 Fig. 3 chart aggregates

Fig. 3 also highlights, in the right-hand chart, a major problem that cannot be identified using ‘conventional’ methods of economic interpretation. Essentially, rapid increases in debt serve artificially to inflate recorded GDP, such that ratios which compare debt with GDP have an intrinsic bias to the downside during periods of rapid expansion in debt.

Rebasing the debt metric to prosperity – which is not distorted by credit expansion – indicates that the debt ratio already stands at just over 350% of economic output, compared with slightly under 220% on a conventional GDP denominator. As the authorities ramp up deficit support – and, quite conceivably, make private borrowing even easier and cheaper than it already is – the true scale of indebtedness will become progressively higher, thus measured, than it appears on conventional metrics.

Personal prosperity – a worsening trend

The per capita equivalents of these projections are set out in fig. 4, which expresses global averages in thousands of constant PPP dollars per person. After a sharp (-18%) fall anticipated during the current year, prosperity per capita is expected to recover only partially before resuming the decline pattern that has been in evidence since the ‘long plateau’ ended in 2018, and the world’s average person started getting poorer.

Meanwhile, each person’s share of the aggregate of government, household and business debt is set to rise markedly, not just in 2020 but in subsequent years. By 2025, whilst prosperity per capita is set to be 17% ($1,930) lower than it was last year, the average person’s debt is projected to have risen by nearly $17,900 (45%).

These, in short, are prosperity and debt metrics which are set to worsen very rapidly indeed. The world’s average person, currently carrying a debt share of $40,000 on annual prosperity of $11,400, is likely, within five years, to be trying to carry debt of $58,000 on prosperity of only $9,450.

This may simply be too much of a burden for the system to withstand. We face a conundrum, posed by deteriorating prosperity, in which either debt becomes excessive in relation to the carrying capability of global prosperity, and/or a resort to larger-scale monetisation undermines the credibility and purchasing power of fiat currencies.

Fig. 4

#177 Fig. 4 per capita table

In fig. 5 – which sets out some per capita metrics in chart form – another adverse trend becomes apparent. This is the fact that taxation per capita has continued to rise even whilst the average person’s prosperity has flattened off and, latterly, has turned down.

What this means is that the discretionary (“left in your pocket”) prosperity of the average person has become subject to a squeeze, with top-line prosperity falling whilst the burden of tax continues to increase.

Fig. 5

#177 Fig. 5 per capita chart

This also means that, in addition to deteriorating prosperity itself, there are two leveraging processes which are accelerating the erosion of consumers’ ability to make non-essential purchases.

The first of these is the way in which taxation is absorbing an increasing proportion of household prosperity, and the second is the rising share of remaining (discretionary) prosperity that has to be allocated to essential categories of expenditure.

These are not wholly new trends – and they help explain the pre-crisis slumps in the sales of non-essentials such as cars and smartphones – but one of the clearest effects of the crisis is to increase the downwards pressure on consumers’ non-essential expenditures.

Governments – the hidden problem

This has implications for any business selling goods and services to the consumer, particularly where their product is non-essential. It also sets governments a fiscal problem of which most are, as yet, seemingly wholly unaware.

As can be seen in fig. 6, governments have, over an extended period, managed to slightly more than double tax revenues whilst maintaining the overall incidence of taxation at a remarkably consistent level of about 31% of GDP.

This has led them to conclude that the burden of taxation has not increased materially, even though their ability to fund public services has expanded at trend annual real rates of slightly over 3%. When – as has happened in France – the public expresses anger over taxation, governments seem genuinely surprised by popular discontent.

The problem, of course, is that, over time, GDP has become an ever less meaningful quantification of prosperity. When reassessed on the denominator of prosperity, the tax incidence worldwide has risen from 32% in 1999, and 39% in 2009, to 51% last year (and is higher still in some countries). On current trajectories, the tax ‘take’ from global prosperity per capita would reach almost 70% by 2030, a level which the public are unlikely to find acceptable, especially in those high-tax economies where the incidence would be even higher.

Conversely, if (as in the right-hand chart in fig. 6) taxation was to be pegged at the 51% of prosperity averaged in 2019, the resulting ‘sustainable’ path would see taxation fall from an estimated $43tn last year to $38tn (at constant values) by 2030. At -12%, this may not seem a huge fall in fiscal resources, but it is fully 27% ($14tn) lower than where, on the current trajectory, tax revenues otherwise would have been.

Fig. 6

#177 Fig. 6 world tax

Politically, there seems little doubt that the widespread popular discontent witnessed in many parts of the world during the coronavirus crisis has links to deteriorating prosperity. Historically, clear connections can be drawn between social unrest and the related factors of (a) material hardship and (b) perceived inequity.

At the same time, the sharp deterioration in prosperity seems certain to exacerbate international tensions, where countries competing for dwindling prosperity may also seek confrontation as a distraction technique. These are amongst the reasons why a world that is becoming poorer is also becoming both angrier and more dangerous.

323 thoughts on “#177. Poorer, angrier, riskier

  1. Two speakers on change potential worth spending time with:
    Rod Swenson on Thermodynamics 2.0.

    What does the Second Law really mean? Was The Maximum Power Principle the final story, or just a first approximation? What are we really trying to maximize, and how does a group do it? With one huge unanswered question right at the end: How is it that Nature uses the waste of one organism as the fuel for another organism and sets up finely balanced circuits…a Circular Economy…but humans seem to have gone off the charts? Swenson’s analysis seems to me to favor letting the appropriate response to energy availability emerge. In the lab, we can turn up the heat or turn down the heat, and the material being observed changes accordingly as it finds a new optimum pattern of behavior. Humans don’t find that to be easy, but lying to the public about the true situation seems to me a short-term solution with a long term disaster in the making.

    Rich Roll interviews neuroscientist Dr. Andrew Huberman:

    How does one go about rewiring one’s brain? We, individually, have a great deal of neuro-plasticity, but we have to learn the tricks of the trade in order to accomplish it efficiently. Learning to concentrate and sleep on it is one key. (First 5 minutes is a tour through juvenile dysfunction and skate-boarding…be patient)

    I haven’t run across a really persuasive analysis of how a society goes about changing. I see debt as a powerful ‘anti-change’ agent…people have to stay in their traces as they desperately try to pay their monthly credit card and mortgage. The tentative suggestion from Sam Baker in Thermodynamics 2.0 about the potential for a minority to begin to live in a different way which then emerges as the way forward as BAU collapses is possibly a productive way to think.

    Don Stewart

  2. Oil giants are dumping the cruddiest and most expensive hydrocarbons

    https://www.economist.com/graphic-detail/2020/07/20/oil-giants-are-dumping-the-cruddiest-and-most-expensive-hydrocarbons?utm_campaign=the-economist-today&utm_medium=newsletter&utm_source=salesforce-marketing-cloud&utm_term=2020-07-21&utm_content=article-link-4

    OIL AND gas firms, which report second-quarter earnings in the coming weeks, are cutting investment and trying to sell billions of dollars’ worth of resources. Even before covid-19 lockdowns hit energy demand and oil firms’ profits, investors were wary of big projects. Now the risk of costly stranded assets has grown more obvious. Last month BP and Royal Dutch Shell, an Anglo-Dutch rival, said they would take write-downs of up to $17.5bn and $22bn, respectively, on assets. As we report this week, the oil majors are ever keener to own only the cheapest, cleanest reserves.

    Today Brent crude, a global benchmark, fetches just over $40 a barrel, making about half the world’s oil reserves too costly to produce. The impairments announced by BP and Shell last month accompanied revisions to their forecasts for the price of Brent. Shell now expects a barrel to cost $40 in 2021 and $50 in 2022, down from the $60 it assumed in its most recent annual report. BP forecasts that Brent will average $55 from 2021 until 2050. Just a few months ago its central assumption for prices over the next 20 years was $70.
    (the rest is paywalled).

    Clearly oil companies understand ECoE since they are writing down asset losses and only retaining reserves that enable a profit with oil at $60 a barrel.

    If oil companies know then governments know.

    My feeling is that governments are OK with debt as long as there is inorganic economic growth, pay rises and inflation. Maybe they think there is a sustainable level of debt. If the proportion of debt repayments in relation to disposable/discretionary are reducing due to the inflationary value of money, then I presume debt is sustainable.

    My main concern with debt is that it is bringing to the present future availability of resources which may well be reducing the longevity of nonrenewable resource availability.

    My question is whether gdp growth has to be clean/organic or can it legitimately incorporate sustainable levels of debt.

    • No, they understand production costs, as they affect the industry – not ECoE, as it affects the economy.

      The next article here is likely to look at (a) economic modelling, (b) energy supply projections, and (c) inflation/deflation. This issue will fall under (a) and (b).

  3. This is a rather long posting and I hope it’s one that stimulates some debate regarding our surplus energy dilemma.

    I recently found an interesting article about Ford Motor Company’s research into electric vehicle manufacture (link at bottom of page) and that provoked me to question the mainstream view of certain technologies
    The gist of the EV article is that in order to efficiently manufacture batteries and motors for electric vehicles, they (Ford) need their very own private 5G network. Having been in manufacturing engineering for longer than I care to admit, I’m sceptical about this “must have” claim. There are other ways of executing real-time process monitoring and control.

    Anyway, the story leads me “call out” the proponents certain new technologies. Technologies that are being hailed as necessary for a better and sustainable future. But do we really need some of these things? I challenge the narrative, and contend that (in view of our surplus energy dilemma), we probably don’t need them, and really can’t afford them.

    The top 4 candidates on my radar (in reverse order) are-

    Number 4 = 5G technology: – Do we really need faster interconnectivity so that our smartphones can handle the latest Xbox game, or so that we can connect to our smart fridge while sitting in the park?
    Ok, there’s many other applications dreamed of for 5G (including industrial uses such as the Ford example), but my bet is that for most applications, it will be case of massive additional cost for marginal gains in utility. Possibly even negative utility if your home’s smart-hub is hacked. The huge data centres needed for data storage are big energy users, and so are the transmission systems. The digital economy isn’t really “energy light” as most people imagine, it’s quite the opposite in my view.

    Number 3 = Electric Vehicles: – I’m highly sceptical about the overall environmental benefits claimed for these things. I can’t argue with zero CO2 or NOx emissions at tailpipe, but that’s only part of the story. For the average car, the majority of CO2 emissions occur in the form of embodied energy from the manufacturing process and the supply of raw materials. My understanding is that embodied energy is higher for electric vehicles than it is for internal combustion equivalents, so there’s a net environmental negative from that perspective.
    EV’s won’t solve the problem of environmental pollution cause by vehicle brakes and tyres. Also, the electrical energy required to charge EV’s will be using fossil fuels for the foreseeable future. Finally, there are the required upgrades to national electrical generation and distribution systems for a fully electric vehicle fleet to be supported. All these things assume there are sufficient economically viable rare earth metals and other key resources for a full EV changeover.
    As I said, I’m very sceptical, and suspicious that vested interests are promoting this misadventure to line their own pockets. There are other alternatives, which I think Tim has previously touched on.

    Number2 = Cryptocurrency: – Yes I get the arguments promoting the merits of cryptocurrency. However it seems that the crypto world is awash with bandits, and many of the crypto launches have been out and out scams. Those that haven’t been outright scams seem to be heavily manipulated, losing money for the majority of investors. Furthermore, from an energetic viewpoint it doesn’t stack up. Accessing crypto requires constant availability of electricity and internet communications, and that’s something we probably can’t take for granted in the future. Even worse, these things are drivers of energy consumption. Bitcoin is recognised as being extremely energy intensive, and needs lots of processing power. Hence the phenomena of rogue bitcoin miners hacking people’s computers to steal processing capacity.
    When it comes to crypto, I like the concept but the execution sucks, and is probably not sufficiently robust in an energy constrained future. I will stick with my filthy old wad of notes and some shiny stuff in a secure vault.

    Number 1 = The Space industry: – Satellites have provided many benefits, in some cases life-saving benefits. Beyond these useful devices, I can’t see any justification for wasting resources in this industry. Yes, it might be thrill to ride on Branson’s Virgin Galactic space buggy, but it’s a totally extravagant use of resources. As for human settlements on the moon and on Mars, that has to be the ultimate waste of time and energy. If it was going to help solve our mounting and converging crisis on earth, then let’s go for it, but it’s not going to. This new space race is geopolitical vanity at best, and a new era of imperial colonialism at worst. For me it’s almost criminal to throw resources in this direction.

    To conclude, we (humankind) need decide rather quickly whether these particular technologies are going to save us or sink us. They will demand significant resources that we can no longer afford to waste. Even if we’re sure they are right for our future, can they take hold, or are they already destined to become casualties of de-growth and simplification?

    It will be interesting to see what emerges from Tim’s forthcoming analysis of the business world.

    https://www.roboticsandinnovation.co.uk/news/automotive/ford-deploys-5g-to-enhance-electric-vehicle-manufacturing.html

    • hi Neill,
      I can only agree with all your observations,

      a reason I’m aware of for wanting a 5G network is apparently once you have countrywide coverage you can use modern computing power to monitor disturbances in transmissions when a stealth aircraft passes through the networks emissions and effectively create a passive radar net that renders stealth technology redundant,
      this supposed passive radar net would be dual purpose, i.e. used for day to day commercial communications and the majority of the infrastructure would be provided commercially hence making it relatively cheap,
      if this is truly the case it might well explain why 5G has become such a ‘hot potato’ amongst the security and intel services,
      otherwise the civil uses seem rather trivial, maybe it could enable internet speeds equal to a decent landline connection,
      if so maybe the landline infrastructure is destined for the trash bin of history, also making a technological retreat more difficult,
      one positive use of tech is that in under-developed countries mobile phone technology has allowed the delivery of 21st century communications to the masses without having to first go through the development of all the landline infrastructure that preceeded it,
      effectively they’ve been able to leapfrog a generation of technology entirely,
      again solar PV has been able to supply a modest amount of electricity to rural Indian households where no fixed lines or distribution grid existed,
      in the advanced West having to rely on just solar PV would be seen as a downgrade from being grid linked but for someone who’s never been grid connected it’s a great leap forward,

      cypto’s seem even less tangible than fiat currencies, in the 1800’s there was a major solar flare, electricity was in it’s infancy and the hardware was pretty robust, electricity was still a novelty and not really a vital part of human infrastructure,
      the charged particles in the solar flare induced a current in any conductive object it hit as it washed over the planet,
      sparks were seen crackling along telegraph wires and tickertapes burst into flames!
      a major solar flare these days would fry a huge amount of electrical hardware,
      IT is especially vulnerable, during the Cold War great efforts were made to harden military hardware against the effects of EMP from nuclear detonations and it involved using a lot of clunky retro tech and tons of shielding,
      one good solar flare and all crypto’s could be effectively erased en masse!

      the current resurgence of interest in all things ‘space’ is rather absurd, more vanity projects to massage national ego’s and vain efforts to create a Star Trek future,
      satellite technology is extremely important and has allowed us an amazing scientific tool to overview the planet, it’s delivered almost instantaneous communication worldwide and is now a vital part of international infrastructure,
      the thing is that there’s already a huge amount of stuff up there,
      much of it is redundant but will take decades or even centuries for their orbits to decay sufficiently for them to finally fall to earth,
      it is literally raining space junk now and it’ll only increase for the forseeable future,
      it’s so crowded up there that launch windows are less about launching in the right direction and more about avoiding hunks of junk on the way up,
      there’s a picture of the damage done to a space shuttle windscreen caused by ‘a paint chip’ it looks like a bullet has hit a plexiglass shield!
      in the 1970’s a NASA scientist put forward a scenario that became known as the Kessler Syndrome,
      it pointed out that an orbital collision produces numerous fragments that can go on to cause further orbital collisions that can snowball into an ablation cascade that could easily render the use of orbital satellites impossible for a considerable number of years,
      so really, a major solar flare and/or a developing Kessler Syndrome event could render most of modern technology impotent,
      we’d be back to transatlantic cables and carrier pigeons!

      https://en.wikipedia.org/wiki/September_1859_geomagnetic_storm

      https://en.wikipedia.org/wiki/Kessler_syndrome

      https://www.fagain.co.uk/node/16

  4. This is well worth reading, and “astonishing” is right.

    It is, of necessity, backward-looking, but of more immediate concern has to be the apparent lack of preparation for what happens in the UK (and elsewhere), probably in September/October, when the ‘standard model‘ coronavirus response – that I’ve described here – causes a monetary and fiscal crisis.

    https://www.bbc.co.uk/news/uk-politics-53484998

    • I personally find this report from the Commons Public Accounts Committee astonishingly hollow and light on detail.

      What is their alternative?

      What is their ideas?

      How are their ideas better than existing ones?

      Hollow criticism with no implementable alternatives is an astonishing failure in itself and has come to typify much of Government criticism. Consequently, hollow rhetoric has progressively displaced policy suggestions. It is ideas that we need, not the insatiable melodramatics of grievance politics.

    • Thanks.

      As I’ve said, what worries me is what happens when ‘furlough’ either ends or continues in conjunction with the need to end rent and interest payment ‘holidays’, and/or bail out lenders and landlords. I doubt the committee, any more than the government, has thought this through.

      I’m going to put this up for discussion in the next article here.

    • Sorry, but why would you be astonished at the lack of planning and foresight by government? What historical precedent is there for any government anywhere ever managing decline sensibly? It’s not in the human psyche.

      Limits to growth was published in the ’70s and we’ve been on track to fantasy-land ever since. No votes ever have, or ever will be given for admitting decline.

      It’s nobody’s fault, it’s just the way humans are wired.

      Apologies for sounding so cynical, but it’s who we are, so hey ho hey ho it’s probably off to war we go.

    • Understood – and party-wise I’m neutral – but in the broader (rather than simply the financial) handling of the crisis, this government looks as inept as the one that blundered in arrogance into Suez, blundered in a panic out of Empire, and didn’t know what it’s own spies (and Profumo) were up to!

      I’ve no idea why they didn’t shut ports and airports much sooner, didn’t take the addresses of people being tested, and so on (and on and on).

      Meanwhile, picking fights with both China and Russia at the same time as trying to deal with the EU looks utterly inept.

    • There’s no solution. Everything is connected. Gail Tverberg mentioned several times the ‘dome’, built with Leonardo sticks. As soon as you pull just one stick, the dome collapses.

      Fiat currencies and politics was a dangerous combination for hundreds of years, fossil fuels made it possible for them, and us as devoted followers, to blow it up to unimaginable levels.

      Soon we all have to sit down at the table of consequences.

    • The question that comes to my mind is whether the extensive lockdown and forced business closure was the right thing to do. Going down that route, it was inevitable that there would be a contraction in business activity, bankruptcies and job losses. Was there a balanced risk assessment that weighed the potential economic losses against the reduction in personal risk? That is the way these decisions are supposed to be made.

      As for whether the government could have been better prepared, the answer of course is yes. It could have stockpiled masks, gloves, medicines, vitamins, etc. It could have had plans in place to swiftly seal the country’s borders. It may well have been a failure of planning on their part. But this sort of emergency has been almost unprecedented until now. There are a long list of possible emergencies that could befall the nation. It costs time, resources and money to plan for all of them. But sensibly, there should be a sector of the government that examines emergency scenarios, assesses the unmitigated risk, identifies mitigation options (including preventive measures) and develops a plan that best balances risk against cost.

      From what I understand, that sort of preemptive disaster planning does not appear to be in place. It is premature to lay exclusive blame on the current government that such a system is not in place. Was it in place under David Cameron, Gordon Brown, Tony Blair, John Major or Margaret Thatcher’s government? I suspect not. Instead of point fingers and assigning blame, a sensible approach would be to set such a committee up for future events. People that can plan for the unexpected. One can never put an infinite amount of money and resources into planning for a specific scenario. There will always be potential crises that you will not be fully prepared for. That is not necessarily a failing in itself.

    • @TonyH
      Many professionals in the Public Health sector in the US have been warning about pandemics over the last decade. They have mostly been ignored. The Emergency Response organization in the Federal Government which was set up by Obama was disbanded by Trump…apparently just because it was set up by Obama.

      We seem to have extra hundreds of billions to throw at the bloated military budget, but no money for a predictable event.
      Don Stewart

    • Thanks.

      I accept that nobody can prepare for everything. This can excuse, at least in part, failures like insufficiency of PPE equipment. (You can’t have thousands of snow-ploughs in any country where snow is rare).

      But the UK has made some truly enormous mistakes in combatting the Wuhan coronavirus.

      1. They failed to shut down international travel as soon as events in Italy became apparent, even telling the House that aviation wasn’t a major source of infection transition.

      2. They made a complete hash of test and trace, by including tracking (which would deter large numbers), and, reportedly, failing to take the addresses of people tested.

      3. They failed to act over Dominic C’s “eye test”, or the (alleged) trip made by the PM’s father to Greece.

      4. They re-opened beaches, and did not act to stop mass demonstrations

      5. Having hailed NHS staff as “heroes”, they then went back to charging them up to £3.50 per hour to park at their place of work (a practice that has always seemed to me incomprehensible).

      6. They opted for local rather than sector lockdowns.

      All of this can await an inquiry, if one is ever held.

      But the concern now has to be whether they are prepared for what happens when the ‘standard model’ response – income support, plus interest and rent deferral – hits the buffers, probably in September/October.

    • The problem was that the Department of Health had only prepared for a flu pandemic. Moreover the National Security Council was not tasked to evaluate the risk and the threat of a SARS pandemic.
      https://unherd.com/2020/05/britains-national-security-council-is-a-joke/?tl_inbound=1&tl_groups%5B0%5D=18743&tl_period_type=3

      When sars2 hit Britain, the 2011, the UK Influenza Pandemic Preparedness Strategy was activated by the newly elected administration which was soon found to be unfit for purpose and had to be abandoned hence the formation of SAGE.

      Preliminary research has found that 75% of inbound transmission events came from Spain, Italy and Spain, with over half being UK nationals.
      https://unherd.com/thepost/how-did-covid-come-to-britain/

      Closing UK borders and halting international travel would have left stranded millions of UK nationals who for all intent and purposes were on their winter holidays. Systems were not in place to evaluate possible inbound infections.

      As a result the advice was to stay at home and quarantine if anybody showed symptoms with vulnerable groups shielding themselves.

      As a global hub, if Britain or London in particular, was to lock down before alternatives were put in place, especially for the global business community, then the economic damage would have been a lot more severe. Hence, the government had to balance the needs of the economy with the needs of public health.

      As it happens, Britain and London in particular is a highly connected global hub which leaves Britain highly vulnerable to global shocks including the availability of PPE and testing materials. Countries that did well produce their own and are not reliant on global supply chains.

      Moreover, due to Britain’s massive overpopulation in relation to its natural capacities, the logic of capitalist domestic and international economies and the logic of the EU single market, much of our needs, wants and desires are produced abroad, leaving us highly dependant on foreign producers. This is clearly a national threat in itself but nevertheless was not picked up by the National Security Council.

      That said, perhaps the biggest failing of the UK State, which is sometimes referred to as the Government, was Brexit and in particular the dynamics of Brexit intransigence which effectively distracted the UK State and the National population since 2016. As such, repeated attempts by the Liberal Establishment in cahoots with the EU Commission distracted time, energy and resource availability away from a comprehensive risk assessment. This was compounded by the unknowns being thrown up by the prospect of leaving the EU Treaties, especially regarding continuity of supply chains.

      In this respect, Britain was unlucky in that a highly disruptive geopolitical event was occurring which took up Whitehall capacity which was then exacerbated by Brexit intransigence.

      This Brexit intransigence has since morphed into a more generalised politics of intransigence which has helped to fragment Whitehall, fragment Westminster and fragment the necessary cohesion for a country to act with a single purpose in defence of a national threat. Consequently, criticism has come to replace constructive thinking which under conditions of a democracy means deliberate attempts to undermine confidence in the elected government.

      Therefore, not only was the recently elected administration under duress due to the prior failures of the National Security Council, previous administrations and the UK State in general, which includes the abject failure of the Opposition to raise awareness of possible SARS pandemics because they were too busy trying to overturn a national democratic decision, then Britain as a whole was wholly unprepared for a SARS pandemic.

      That said, EU core countries, such as Italy, Spain and France were similarly unprepared which points to the incompetence of the EU Treaties which restricts and limits the necessary autonomy to create national resilience beyond the logic of the EU single market and the logic of the EU Customs Union, including the excessive deficit protocols which limits national borrowing and imposes strict fiscal disciplines on State expenditures. This has seen austerity cuts across large segments of the public sector with many services cut to statutory services alone.

      Prosperity degrowth has clearly exacerbated all these considerations whereby contraction of the real economy due to rising ECoE has stunted the required increases in tax receipts in order to create a fully prepared State. This is in contrast to Germany who have enjoyed budget credits due to the inbuilt advantages of an undervalued euro and EU single market economies of scale which in particular privileges Germany’s export industries but at the same time hollows out manufacturing and technical capacities within other EU core countries including Britain.

      Regarding the economic fallout, on balance and within the short term, then it is probably cheaper to furlough people than to be paying contributions based universal credit which entitles people who are made redundant to much of their previous earnings for a period of time.

      However, an economic transition was always on the cards as a result of a high ECoE which for the sake of economic continuity was and still is subsidised by debt. In other words, debt is now an important consideration with regards economic health and wellbeing since without it, we would literally be experiencing gdp degrowth which will undoubtedly increase public dissatisfaction especially under conditions of population growth.

      As of yet, there isn’t a country in the world, an international or supranational agency, an economist or a political scientist that has been able to construct an economic model or economic strategy that can allow a national economy to function without debt under conditions of population growth and under conditions of a rising ECoE. Possible exceptions are the references provided by Don Stewart.

      As such, national government’s, such as Britain have been seeking the necessary expertise to resolve the many paradoxes that a country faces as a result of rising ECoE and a rising human population with debt and monetary adventurism being currently the only available options to ensure reasonable levels of social and societal stability.

      Overall, these dynamics are delineating Progressive and Conservative political forces with Progressives seeking a more long term global framework by which to manage rising ECoE and a rising human population with an emphasis on achieving global economic convergence especially for poor Black African States who to this day are held in poverty under the grip of White transnational corporations. Therefore, Progressives seeks a global reality in which White States are actively helping Black States to converge but not from a perspective of White economic degrowth but from a perspective of maximising resource availability through global socialism by utilising modern monetary theory, otherwise known as the magic money tree. The clear danger here is the race to the top in terms of human consumption expectations and the collapse of ecological life support systems and the heightened risks of zoonotic pandemics as wild Nature seeks to defend itself from further encroachment by human Nature and tamed Nature.

      The Conservatives on the other hand, understand that debt is simply the means by which to purchase future resource availability and as such shortens the longevity of nonrenewable resource availability for future generations. Similarly, Conservatives also appreciate the added pressures of human population growth and the tendency of population growth to reduce per capita prosperity whether economic or ecological. However, much more contentious is the Conservative viewpoint that Black African States should remain largely poor in order to reduce the likelihood of a revengeful and reactionary Black civilisational threat.

      This means Conservatives will tend to take the rationalising strategy in contrast to the maximising strategy of Progressives which despite inbuilt injustices, seeks to limit population growth, seeks to limit resource consumption and seeks to limit ecological degradation by maintaining a rich/poor divide.

      Personally, as a working class political ecologist that lives a very low impact urban livelihood living in my allotment shed, I can see the wisdom of maintaining inequalities since it restrains and limits to some extent the race to the top in terms of human consumption expectations compared to the maximising tendencies built into equality frameworks.

      So whilst, maximising resource availability, a magic money tree and an unrestrained race to the top in terms of human consumption expectations might seem ostensibly desirable it is undoubtedly the risk strategy compared to the precautionary approach of rationalising resource availability, limiting the operation of the magic money tree and restraining the race to the top in terms of human consumption expectations.

      At present, the British electorate prefers the precautionary and rationalising approach of the Conservatives in contrast to the risk and maximising approach of the Progressives.

      With no other options currently available, then the standard model applies and debt as opposed to the contraction of the economy is the preferred modus operandi.

      The task therefore of anyone who feels this approach is wrong needs to be able to present an alternative implementable model of how to ensure the fulfilment of human basic needs, how to ensure the required protection of our ecological life support systems and how to ensure the required systems of distribution to ensure public civility.

    • Just one comment, on aviation. It isn’t as important as government seems to think. It contributes about £5.2bn to GDP (less than 0.3%), and employs about 90,000 people (from memory, the UK workforce is 33 million). And even those numbers include freight. It produces a lot of CO2 for a very small contribution to the economy.

      On this basis, I’ve yet to be convinced about ‘hubs’, i.e. that it really matters whether people going to the US change flights in London or Schipol. They’d have to buy a lot of coffees and newspapers for it to make much of a contribution to GDP!

      Repatriation could surely have been accomplished without allowing huge numbers of foreign nationals to transit through UK airports, and with mandatory quarantine. The sums at stake in this crisis (HMG has borrowed £128bn in three months) dwarf the £5bn contribution of aviation to a whole year’s GDP.

  5. Why Can’t Governments Be Part of the Solution
    Here is a fundamentally energy based analysis of the food production system which is entirely possible (takes about 5 or 6 minutes if you are familiar with the concepts, longer if it seems like a mystery).
    https://drive.google.com/file/d/19Ue_omXqBZhVosY5RgTOfvVufc6oKNQ2/view?inf_contact_key=0e081d2d9f0543828d8cade44a886a264dfbc39d7283b2cb89d5189540b69330

    The key points we might note are:
    *solar powered with fossil fuel driven machinery serving in a relatively modest amount…not industrially intensive
    *complexity is continually increasing…as is discussed in the Thermodynamics 2.0 conference…not the running down economy generally attributed to the Second Law and Peak Oil and Peak Debt and rising ECoE theories.
    *Mother Nature has somehow crafted a symbiotic relationship between different organisms, which organisms are themselves symbiotic relationships of different organisms and specialized organs. A village seems to be a pretty good model of a symbiotic group of humans, but anything more complicated seems to be very difficult for humans to attain.
    *If governments are fundamentally dependent on value added taxes, then this picture doesn’t offer a lot of prospects for expensive governments. Most of the consumption is internal. If we counted the amount of glucose made and the amount exported to a market, the ratio exported would be small. And if the economy consists mostly of people using Nature to make glucose using this model, then the price of marketed glucose is capped at what it would cost the other players to do it for themselves.

    I suggest that it is possible for governments to facilitate the deployment of such systems, but they cannot mandate the conversion of the current dead-end system to the regenerative system. Furthermore, the general population would consider this whole thing to be degrading and unacceptable. I hope for the best, but expect that we will experience the survival of a remnant.

    Don Stewart

    • As usual, CHS is very good.

      My own take on the inflation/deflation question will be covered in the next article (provisionally entitled ‘Models, Energy & Stagflation’).

      Near term, I’m expecting the prices of essentials to rise, but those of discretionaries (non-essentials) to fall, as part of a major economic realignment. This realignment has big implications for business across many sectors, but that will have to await a later discussion.

      Meanwhile, it’s very hard to see how an autumn fiscal and monetary crisis can be avoided.

  6. An interesting article here regarding another grey swan which could wallop the global economy further: https://www.theamericanconservative.com/dreher/china-three-gorges-dam-collapse/.

    I would like to draw people’s attention to the following section:

    “China’s massive Three Gorges Dam project on the upper Yangtze River is at risk. If that dam breaks, the resulting flooding would be a catastrophe of world-historical proportions. Hundreds of millions of people live along the lower Yangtze River. And the catastrophe wouldn’t simply be confined to China. The lower Yangtze is China’s commercial and industrial heartland — which means it is perhaps the world’s most important economic region. If it is swept away by a torrent, it could easily crater the already weak world economy. The Wall Street Journal‘s Jonathan Cheng [..] says that the flood has already raised the water dammed behind the Three Gorges to 50 — fifty — feet higher than the maximum flood level.”

    I cannot ascertain the likelihood of this event occurring and the full extent of any repercussions and fully understand that American conservative publications are chomping at the bit at China at the moment which may result in this article being exaggerated. Even so, a Three Gorges Dam collapse would be a punch in the throat for an already gasping world.

    • surely landlords have no choice but to be reasonable in their actions?

      I mean I can hardly imagine there are new tennants lining up to take on rentals with their pockets bulging with cash?
      if anything, if you were faced with re letting a vacant property wouldn’t you be likely to offer a more competitive rent than previously?

      if I was having to move about now I’d not be shy of haggling over any rental rate I was presented with.

    • One would hope so – and that the same applies to lenders. There’s no point in reposession, as putting huge numbers of properties on to a depressed market would simply cause prices to crash.

      The basic problem, though, is that huge numbers of people and businesses cannot pay rents, or interest on mortgages or other debt, and this is imposing huge strains on landlords and lenders. This seems likely to become a very serious problem, most probably in the autumn.

    • One piece of news that has had surprisingly little coverage is Travelodge landlords planning to set up their own alternative brand rather than suffer the rent cuts forced on them by Goldman Sachs and the hedge fund owners. Proof that this change is already happening. I cannot see that Travelodge have much of a business if they don’t have rooms to offer.

  7. https://www.economist.com/leaders/2020/07/23/governments-must-beware-the-lure-of-free-money

    This article I think gives a good summary of our options with the exception of degrowth which I assume is not an option for The Economist.

    The following article is from one of the leading ecological economist. He is presenting differing economic systems and assessing them using two models he has help construct.

    I haven’t read it but I’m sure it will be interesting.

    https://cusp.ac.uk/themes/s2/paper-tj-pv-lowgrowsfc/
    The Transition to a Sustainable Prosperity—A Stock-Flow-Consistent Ecological Macroeconomic Model for Canada

    Have a good weekend everyone 🏵️🌸💮🍁

  8. I would imagine that the perceived value of aviation has more to do with the global mobility of labour, than it does any direct contribution of aviation to GDP.
    Also, the globalist rich, who provide a great deal of funding for UK political parties, expect to be able to enter and leave the country when they wish. Aviation is also the means by which mass immigration takes place, which the UK government has decided it cannot do without. The elites cannot continue to rub our noses in ethnic diversity if aviation were to stop.

    • I don’t see aviation stopping, as such, just that prior growth expectations, never remotely realistic in the first place, are now being exposed as fantasy. In other words, shrinking, not growing.

      As many readers will know, we’ve been talking here about ‘peak travel’ since well before the coronavirus crisis.

      Airlines and aircraft-makers are cutting capacity (and shedding skilled workers) in long-term ways that reflect, not just the current crisis, but radically changed expectations for the future. These are not the actions of businesses expecting to get back to ‘business (and growth) as usual’, within months or even in a year or two.

      It doesn’t help that the weakness of airlines’ most favoured business model are being cruelly exposed. The low-margin, high-volume model (which is vulnerable to even a brief setback) is clearly over, and the future is likelier to involve carrying far fewer passengers, at much higher prices, and (probably) in far greater comfort.

      It might not be far off the mark to say that ‘the average person will fly half as often, at twice the price, but at least not crammed in like a sardine in a tin’.

    • Inequality, between the north and the south.

      Inequality, between the east and the west.

      Inequality between the debtors and the savors.

      Inequality between black and white.

      Inequality between writers and readers.

      Until the deer becomes a lion. And we all die.

  9. Looking at the 7 day moving average for Covid-19 infections, I reckon that the UK is about 2 weeks behind spain in seeing a new ramp-up in cases. Then what? A reversal of the “Great Re-Opening” before it’s even been fully implemented? That could prove terminal for certain sectors of the economy, especially those that haven’t yet been permitted to re-open e.g nightclub’s and soft-play centre’s. This could be setting up for a very nasty autumn, as Tim has been forecasting

  10. People hate uncertainty in their lives and the UK govt.’s screeching u-turn with a no-warning quarantine yesterday will be lethal to confidence and therefore an already crippled economy. This is a display of chaos that even the placid majority will be dismayed at even if they still willingly accept it and continue to just follow orders without questioning the logic behind them. Would you go on holiday now? Would you invest in your business now if it can be closed tomorrow by arbitrary decree and no warning? Would you change job, move home or make any major purchase or decision with no way of knowing if that’d be a mistake? This is self-harm on a national level. Wow.

    • The whole ‘exit from lockdown’ process has been bungled, and nowhere more so than in Britain and the US. The whole thing has been haphazard, with little or no apparent weighing of comparative importance and safety between different sectors.

  11. For those interested in technical issues, it now seems that SEEDS can draw a direct correlation between how much energy is consumed in an economy and how much economic output ensues.

    If testing proves this, we will be able to isolate efficiency trends – “how effective is economy A at turning energy use into economic value, and how is that efficiency changing over time?

    • I’d like to think so – in fact I’m still trying to assess its implications.

      It could mean that we can run a fairly simple matrix along these lines:

      Stage 1:
      How much energy will be consumed? (+/- X%)
      How much economic value do we get from each unit of energy used? (in $, £, $PPP, etc)
      At what rate is this efficiency factor changing? (+/- %)
      = Aggregate of economic output

      Stage 2:
      Deduct ECoE from economic output
      = Aggregate prosperity

      Stage 3:
      What is the population trend?
      = Average prosperity per capita

      Stage 4:

      How much CO2 is emitted from the quantity/mix of energy consumed?
      = CO2/prosperity ratio

  12. Pingback: #178. The Ides of Autumn | Surplus Energy Economics

Comments are closed.