#189. Dead money walking


“It’s easy to be the last man standing – if all the others commit suicide”.

Although this isn’t one of the sayings of Confucius, it applies now with particular force to the Chinese renminbi – after all, to what currency, other than the RMB, can the world turn when each of its major rivals seems determined on self-immolation?

In Britain and America, economic and financial policy have long had all the hallmarks of self-destructive intent. Both countries believe that it makes sense to ship value-productive industries (such as manufacturing) out to lower-cost countries overseas, whilst trying to turn themselves into low-wage economies whose main profitable activity involves moving money around. The UK has driven debt upwards relentlessly, for the sole and senseless purpose of buttressing property prices which have already been over-inflated far beyond the point of affordability. America has binged on credit in an equally self-destructive effort to replace shock-absorbing corporate equity with inflexible debt, the result being a stock market which has become nothing more than a proxy for Fed monetary largesse.

Both countries seem now to have been driven to the point of policy despair. The American government is bent on injecting yet another $1.9 trillion of borrowed-out-of-nowhere money into the economy, whilst the Bank of England seems to be giving serious consideration to committing a symbolic currency surrender through the introduction of negative nominal interest rates. Both are deluding themselves about the real condition of their economies, with Britain, at least, seemingly persuaded that all will be well if consumers can only be induced to go on a spending-spree with money that they don’t have.

Britain and America have been described as “two countries divided by a common language”, but the operative definition now is that they are united in a shared commitment to economic fanaticism. It’s one thing to believe, mistakenly, that the economy is a wholly monetary system unconstrained by natural resources, but quite another to believe, as well, that the road to prosperity lies through the perpetual spending of borrowed and newly-created money.

Donald Trump may have coined the phrase “Make America Great Again”, but nobody can beat the British authorities when it comes to fatuous slogans. First there was the abolition of “boom and bust” during the biggest asset bubble in history. Next came “help to buy”, whose real meaning was ‘help young people to get deeply into debt to prop up the housing market’. Original thinking may be at a premium in Britain’s corridors of power, but the slogans keep coming.

In current circumstances, there’s something almost prurient in using the energy-based SEEDS economic model to evaluate the British and American economies, so let’s keep this brief. In the United States, prosperity per person turned down twenty years ago, falling from $48,850 (at 2019 values) in 2000 to $45,460 in 2019. Over that period, each person’s share of government, corporate and household debt rose, again at constant values, from $96,000 to $163,000. The ratio of debt to prosperity in America had risen to 360% at the end of 2019 – and probably at least 425% now – from 196% back in 2000. Government expenditures, on a per capita basis, rose by nearly $6,000 (37%) over a period in which prosperity per person declined by $3,240 (-6.6%).

Estimates for 2020 suggest that the prosperity of the average American declined by 8% last year, with only the most modest recovery in prospect before the gradual – but relentless – downtrend resumes. Using fiscal and monetary policy to boost financial demand whilst the supply of prosperity erodes is a recipe for inflation.




Financial recklessness is something in which Britain is fully competitive with the United States. Prosperity per person turned down later in the UK than in America, but has deteriorated more rapidly, falling by 10% between 2004 (£26,280) and 2019 (£23,560). Over the same period, debt per capita rose by £23,000 (38%) in real terms, and public expenditures per person by 14%. Worse still, British exposure to the global financial system, as of the end of 2019, stood at 10.8x GDP, equivalent to 15.2x prosperity. Aside from Ireland and Holland (both of which are far smaller economies), anyone in search of more extreme exposure to the world financial system would have to look at financial asset ratios in tiny economies like Singapore and the Cayman Islands.  




This is the situation in which Washington is committing itself to yet more borrowed stimulus, whilst London thinks it makes great sense to proceed with a vastly expensive new rail project, together with anything else that can absorb huge amounts of money that can be conjured out of the ether, quite possibly at the cost of even more saver-punitive rates of interest.

Neither the US nor the UK seems to realise that boosting demand (through stimulus) at a time when you can do little or nothing to replace lost supply is an implicitly inflationary form of behaviour.  Both Britain and America have multi-trillion gaps in future pension provision, which we can estimate at about £8tn in the UK, and $37tn in the US. Both have student debt on which large-scale default (politely known as ‘forgiveness’) seems highly likely. Neither government seems to realise that granting rent and debt payment ‘holidays’ creates huge strains for lenders and landlords. Both are watching their commercial property sectors spiralling into an abyss. In an ominous portent of the shape of things to come, the British regulator has now approved an increase of 9% in the ceiling on the combined cost of domestic gas and electricity.

If, just for a moment, we put tact aside, we can remind ourselves that Britain (with its obsession with “light-touch” regulation) and America (with the creation of “weapons of financial mass destruction”) were the main architects of the “global” financial crisis. Both now favour a “reset”, seemingly unaware that the opportunity to reset the system came – and went – during 2008-09. That was when adherence to market principles would have preserved monetary credibility at the cost of sharp falls in the (purely notional) prices of assets such as stocks and property.

To be sure, this would have been accompanied by defaults, which would have been very costly to remedy. Even so, recapitalisation of the banking system might have been cheaper than what has happened since, and what still lies in the future – after all, the debts which were kept in the ‘performing’ category in 2008-09 are no more capable of repayment now than they were back then.

It would have been far better, of course, if neither Britain nor America had embarked on the preceding, decade-long debt binge without which the GFC wouldn’t have happened at all.

The situation now is one in which both countries have handed themselves over to the theory of the magic money tree, seemingly unaware that money itself commands value only as a ‘claim’ on the goods and services for which it can be exchanged. The recipe of ‘produce less, spend more, and delude ourselves by inflating asset prices’ has never been a formula for success. An objective observer, perhaps visiting from a distant planet, would see no logic whatsoever in owning American dollars or British pounds. Both countries seem to have persuaded themselves that soaring stock and property prices aren’t signs of systemic inflation, and don’t understand that pouring new credit and new money into faltering economies can have only one possible outcome. 

If our interplanetary visitor was looking for a viable alternative to USD and GBP, he or she might be tempted by EUR or JPY. Neither, though, really holds up under objective scrutiny. The euro is a political dream-currency, built on the economically-illiterate idea that one can combine a single, “one size fits all” monetary policy with nineteen different sovereign budget processes. This means that the role normally played within currency areas by ‘automatic stabilisers’ has to be filled by contentious, ad-hoc aid and a dysfunctional clearing system. Even before the onset of the pandemic crisis, the BoJ had used newly-created money to buy up more than half of all JGBs (Japanese government bonds) in existence, to the effect that central bank assets already exceeded 100% of GDP by the end of 2017.

During 2020, it seems that QE equated to about 29% of prior-year GDP in Japan, 25% in the Euro Area, 15% in the United States and 14% in Britain, for an average of 20%, which compares with barely 3% in China. We can be certain that there’s a lot more money creation to come from the Fed, the BoE, the ECB and the BoJ – but not from the PBOC.

With the US and the UK seemingly bent on “print to oblivion”, the EUR resembling the financial equivalent of a camel (“a horse designed by a committee”) and Japan deeply committed to ‘monetisation to the nth degree’, our imaginary visitor from outer space might seem to be running out of options. Having rejected cryptos – and after casting a considering eye at precious metals – his or her choices seem to have narrowed to just one.

That “last fiat standing” is the renminbi.

It seems quite clear that China, alone amongst the major currency areas, is committed to sound money. Beijing appears determined to mute the siren calls of Anglo-American style financial “innovation”, and even to allow SOEs to default at scale, if that’s the price that sound money now carries.

110 thoughts on “#189. Dead money walking

  1. I’ve two very successful friends (60-ish) who advise wealthy clients globally, and both have come to similar conclusions. Barring unforeseen events, China is the best bet. Of course their method of governance displeases the rest of the G-20.

    • Makes sense. On the other point, I’d think that there’s a lot about Western governance that displeases China!

      The case for China isn’t “hyper-active growth forever”, but that China’s leadership sees the merit of maintaining monetary value.

  2. Another great peace, Dr. Morgan. Thank you. It makes me wonder though why the Chinese are ramping up their mining of bitcoin and have been buying precious metals hand over fist. would love to hear your thoughts on this.

    • When you say “the Chinese”, do you mean individuals or the government (presumbably the former)?

      I’ve nothing against cryptos per se, but I can’t see them being tolerated by countries whose own fiats are going into the blender – it makes it too easy for people to turn away from currencies like USD and GBP before they slide further down the ramp.

      As for PMs, if China is turning dollars into gold, that reinforces my positive take on China and the RMB.

      Don’t get me wrong – China does have economic and financial challenges. But Beijing has a much greater likelihood of resolving them without destroying the currency.

    • Seems the ‘allies’ are doing more talking about the new bully:

      “They cannot be allowed to impose their own order through their power,” Silberhorn said.

      Another ruling party source said: “We will show solidarity with our democratic partners. Australia and Japan have asked us to send troops, and we will comply with their requests.”


    • China’s military build-up in recent times has really involved building up their navy – the PLA-N – to a size commensurate with their global trade and other interests. Previously China had a big army (the PLA) but a navy that wasn’t much more than a littoral defence force.

      This said, they won’t tolerate outside intervention where Taiwan is concerned.

    • What can they do? Bomb Taiwan? Attack ships in international waters? Seems self-destructive as they benefit from global economic expansion, and they’d be destroying the geese that lay the golden eggs.

    • As I’ve said before, the $US looks to be in the process of a Century long decline similar to what the Pound Sterling did a century ago. ($US 5.00 to $US 1.35) Empires aren’t forever. The $ decline appears to have already begun, and it won’t be a straight line.

    • I’ve always understood that the US used a threat to sell GBP to put pressure on the UK to get out of Suez. What goes around comes around, perhaps?

  3. Ouch, Tim, very good article. The chart of financial assets to prosperity shows a terrifying level of delusion.

  4. Dr. Morgan
    As always thank you for your insights.
    I think I get why the U.S. and U.K. currencies are at risk. (Although I continue to construct geopolitical conspiracy theories in my head to try to give explanation to central bank and government actions beyond fear and greed.)
    But I did not make the connection through this post on what China seems committed to a sound(er) currency. You noted China is not without its own challenges, but from general reading I thought China had a massive credit bubble, at least in the shadow banking area.
    I know that you do not give investment advice on this blog. But this question. If there is a crisis with the U.S. currency, doesn’t the whole global financial system go into crisis in some respect? At some point I expect the U.S. will experience a sudden collapse or reset, with prosperity dropping downward rapidly. I am not interested in moving to China before or after that event. Right now the best strategy seems to accumulate as many dimes as one can in front of the on-coming steamroller

    • Thanks Shawn.

      First, I don’t think we need conspiracy theories to explain this, when ‘knaves and fools’ explains it better.

      Both the US and the UK are fully signed-up to neo-liberalism – I’ll leave you to decide whether that’s mostly folly or mostly knavery.

      In Britain, it seems that sanity has been ousted from decision-making. After all, the UK rejected Mrs May’s deal to get a worse one from Boris (complete with a customs barrier within the GBP area), and has a galaxy of idiots in government, egged on from the outside by people who seriously believe that they can turn Britain into some kind of Singapore. During the covid crisis, the UK authorities have refused to close the borders, trumpeted a “world class” test and trace system, outsourced everything in sight, and came up with the folly of “eat out to help out”. It’s said that a majority of Scots (and a lot of Welsh people) now want out, which is hardly surprising. The British public really deserve something better than this nightmare in the corridors of power.

      Based on the data that we have, China’s shadow banking problem isn’t vast, in proportionate terms anyway.

      Beijing has had to fire-fight on this sort of thing before, notably with the collapse of P2P lending back in 2015. It seems clear that Beijing has a determined policy of restraining excess financial risk. They’ve made it clear that the PBoC isn’t going to use magic money to bail out regional authorities or SOEs.

      On your final point, no, I don’t give investment advice, which is a regulated activity and rightly so. The global financial system does indeed have a huge dollar problem, caused in large part by the way the US now runs its economy. Everything is, as I’m sure you know, coming together pretty unpleasantly. But, if anyone can hold their own situation together, I’m pretty sure it’s China.

  5. Note I sent to my children, plus one additional comment:
    “I sent you Dr. Morgan’s analysis of the financial debacle being brewed by the EU, Britain, Japan, and the US (and also Australia). The ‘debt forever’ countries are obviously banding together to try to “stop China”. Germany, with nothing at all to fear from China in terms of military aggression, is sending a naval vessel to Japan. The US under Biden is keeping up the drumbeat of hostile messages about China ‘imposing their political system on the free world’.

    I will give you my blend of political theory and Dr. Morgan’s analysis of the numbers. Socrates was executed because of a democratic vote by the citizens of Athens. Socrates was not a fan of democracy. He favored government by ‘philosophers’, by which he apparently meant the young men (no women allowed) who studied with him. The Socratic method involved asking deep questions, while democracy involved dealing with superficial questions.

    In the US, the framers of the Constitution did their best to make government ‘representative’ and not ‘democratic’. The idea was to set up a government so that the wise could govern, without being swayed unduly by the mob. Over the years, that thought has been abandoned in all of the countries which are now cheerleaders for financial adventurism. China has a ‘representative’ government. Practices and policies have to make it through the hierarchy of the Communist party. Anyone can participate in local party affairs, but there is nothing like a ‘Brexit’ vote by the public. The government can decide to let businesses which have borrowed unwisely go bankrupt, while the other countries are trying their best to keep everyone afloat.

    One way of looking at it is that the financial adventurism countries think that China is unfairly using the representative government that was first popularized in the US, and which seems to be working better than democracy. Socrates would nod knowingly.”

    I will also add that the ‘financial adventurism’ countries apparently think that they can use protectionism against the East Asians (not just China) to protect domestic industries. So far, giving citizens money has resulted in record setting trade deficits in the US as the people buy stuff made in East Asia. So the solution, they think, is to restrict trade with East Asia. This is back to the argument about free trade in Britain. Britain (and the EU in general) went from ‘free trade’ to ‘managed trade’ as they tried to protect inefficient local processes against ‘unfair’ practices elsewhere. Protectionism (such as in the US in the 1920s) has resulted in global depressions, but has not been effective in terms of raising standards of living. Paying more for stuff made in East Asia, combined with stagnant or declining earnings, is a path toward ever lower standards of living.
    Don Stewart

    • It is likely that the $C will strengthen against the $US due to its resource wealth and low population. It is among the few nations living within its ecological footprint.

    • How can Canadians be living within our means when almost all of our means are non-renewable and depleting, as evidenced by us having to squeeze oil from sand using large quantities of diesel and natural gas?

    • The calculation I referred to is total resource stocks (incl. quality) divided by current national population. Average individual usage is 8th highest globally, but the population is tiny considering the total resources. Currencies are valued by *relative* value compared to other currencies. Canada is resource wealthy and politically stable and safe compared to other majors. This says nothing about long term risks from overharvesting and future geopolitical changes globally.

  6. Dear Tim,

    Thank you for your interesting analysis.

    Ultimately, the real value of all existing or future fiat currency will be the Energy that each issuing governement can mobilize to support the confidence that « their currency » can be exchanged for real goods & services.

    Securing these Energy sources will therefore be essential to support fiat currency credibility, prevent domestic financial & social collapse and ensure governement continuity.

    Currently and at least for the coming few decades, 80% of the Energy used by the global economy will come from fossil fuels. As you well know, the remaining positive EROEI planetary fossil fuel reserves essentially constitute a zero-sum game and the net energy that can be drawn from them irremediably declines along the « Net Energy Cliff ».

    In the absence of a high EROEI substitute for that « 80% », serious conflict is therefore likely to arise over who will secure access to the remaining fossil fuel planetary reserves.

    Since the 1971 suspension of the US Dollar convertibility to Gold, the « petrodollar arrangement » has essentially ensured the status of the US Dollar as the principal international reserve currency.

    Can China displace the US as the main partner in the above mentioned « arrangement » ?

    It remains to be seen.

    Can China militarily invade and occupy the Middle East oil producers, without provoking WW3 and extinction of life as we know it on the planet ?

    It remains to be seen.

    Can China develop through innovation a high EROEI low cost substitute for fossil fuels, such as a compact high EROEI aneutronic commercial fusion reactor ?

    It also remains to be seen.

    Best regards,


    • John, About 6 yrs ago I put a wad of cash on term deposit with a bank in Russia.
      At the time my train of thought was very much in line with what you have outlined here.

    • You’re quite right, of course.

      But I can’t see why China would need to invade anywhere to ensure energy supplies when it can simply buy them. In relative terms, China will be in an increasingly strong position, offering suppliers a resilient RMB rather than a decaying USD.

    • Dear Tim,

      Thank you for your comment.

      Just to play the « Devil’s Advocate »:

      Buying fossil fuels while there are still some to export on a relatively free market is one thing.

      Accessing them when such a market no longer exists is quite another.

      In that regard, you will recall that the « Petrodollar Arrangement » includes the «Carter Doctrine » and the means to implement it, in case of necessity…

      Best regards,


    • As China is buying much of its oil from the middle east, a few tankers being blown to smithereens will force them to provide naval protection for shipments. I would think that, that is a huge increase in ECOE.

      There are many ways to bring superpowers to their knees within a very short time frame. So how all this plays out is anyone’s guess.

  7. Excellent analysis as usual Dr Tim! In the 1970’s, one of the most frequent economic metrics was ‘balance of payments’ (often followed by the words ‘deficit’ or ‘crisis’). I rarely hear the term now (and the numbers would no doubt be pretty scary compared to the crises of the 1970’s). Assuming GBP and US$ decline dramatically, is it possible that this would (because of import-cost increases) cause a reversion to home-grown manufacturing? Correct me if I am wrong, but years ago I believe that a balance of payments crisis caused a decline in Sterling which was a self-stabilising mechanism. Why is this not happening at the moment? Presumably when it does happen, it will be so rapid and such a large correction (unlike the relatively minor Wilsonian ‘Pound in your pocket will not be devalued’) that on-shoring much of our lost manufacturing capability will lag it by a considerable time period?

    • I cannot see how it would be possible to re-shore manufacturing back to the UK.
      The main reason being that the UK does not have the trained people. Most Stems graduates from UK universities are foreigners, primarily from Asia, on graduation they leave the UK and take their skills back home with them. Even that rare breed of the ‘indigenous British engineer’ needs to go to either the USA or to Europe to find employment in their field. The UK no longer has sufficient scientists or engineers to establish any kind of manufacturing outwith cottage industries, in fact you hardly have plumbers and joiners to work in the building industry.
      You do however have an abundance of graduates in Media studies and in Gender studies.

    • Thanks Ian.

      “The pound in your pocket” is one of those statements to be filed along with “the white heat of the technological revolution”, “you’ve never had it so good”, “a wind of change”, “I’m backing Britain” and a whole lot more.

      The ‘balance of payments’ issue has never gone away. The UK in recent times has run persistent current account deficits, countered by borrowing from abroad and selling assets to overseas investors.

  8. Seed saving is possibly one of the oldest gardening pastimes. Before industrialization took over the world, farmers the world over would plant a crop, lovingly tend this crop and harvest it. A portion of the harvest was always set aside for the following years planting. In doing this year after year, plant varieties would adapt to the specific microclimate that it was planted in. This process created unique and robust varieties that were able to withstand the environmental and pest pressures that were annually exerted on them.

    With the advent of modern agriculture (Post 1950) what has happened is that factory farms, and large scale monoculture has lead to a decrease in the abundant food crop varieties that used to be planted. Now, where there used to be hundreds of smaller family run farms, planting hundreds if not thousands of different crop varieties. Factory farms literally plant only one or at most a few varieties of a single crop. The devastation to the environment is apparent with large scale soil erosion and reduction in topsoil as well as the loss of critical soil biodiversity.

    With the advent of genetically modified organisms (GMO), the plight of the farmer has gotten even worse. Now farmers will need to sign a contract with seed houses promising not to save seed and replant it. Even worse, a ‘Terminator’ gene has been developed that will ensure that harvested seed has no genetic viability. What does that say for the health ‘benefits’ of supposedly superior GMO varieties? Living food is the healthiest food.

    One of the side effects of GMO is a problem called pollen drift. In mielie (corn) fields pollen drift can take pollen from a GMO variety onto a traditional open pollinated variety and thus ‘infect’ the traditional variety with GMO genes. What then happens (and it has) is that the GMO Seed House can then take the owner of the traditional variety to court for infringing on their patent rights. The same can apply to any crop where insects, or wind pollination can easily transfer pollen from GMO to traditional open pollinated crop varieties. What happens is that the seed saving farmer is prejudiced by the large GMO seed house, as he is no longer able to save a portion of his crop for the following years planting. He now has to go and buy new seed, but guess what? Traditional varieties are no longer stocked by the seeds houses, he can only buy hybrid and GMO varieties.

    Don Stewart

    • Corn is not good for you anyway. Most crops are not GMO and never will be. Mostly grains and seed crops which are generally really bad for our health.
      Seed saving is the way to go Don.

  9. Interesting conclusion Tim. I feel the general population of the western world is lulled into a false sense of security with their currencies. My grandparents lived in Germany in the 1920s and I think it affected them deeply.

    Gold would be a good store of value but is still very much controlled by central banks. The US effectively confiscated it from their citizens for a massive discount in 1933. We do live in a very different world but history certainly rhymes.

    I guess the signs are already out there if you look. On Friday the Nigerian government banned crypto. It’s likely they are looking to devalue the naira again. Argentina limits and taxes USD purchases but doesn’t seem to have concerns over crypto which I believe might be increasing in day to day use as well as a store of value for people. Turkey seems to actively encourage crypto right now. The national football team is even sponsored by a Bitcoin exchange.

    I think in an interconnected world it will be much harder for governments to prevent an ‘escape’ like they could a couple of generations ago. It also seems long term counterproductive. Trapping the population in a falling pound or dollar will not improve living standards so it will be interesting to see how successful this is in the early fiat failures.

    As the Chinese say, may you live in interesting times!

    • Thanks David.

      The principle of seignorage is that governments cannot afford to tolerate rivals to their currencies. That’s really why FDR outlawed private holdings of gold in 1933, at the same time re-valuing the USD against gold by selling gold back to the public at $35 having force-bought it at $27.

      This is why I see limited merit in either gold or cryptos. I can well imagine governments intervening in cryptos, citing fears of “tax evasion” and “money laundering” (etc) as their reasons for doing so “in the public interest”.

      This is what makes RMB different.

  10. Despite his many faults it is likely that Corbyn would have made a much better job of responding to the pandemic. His instincts and those of McDonald would have been to use local authority structures to deliver track and trace and some kind of universal income instead of the highly skewed furlough scheme that has benefitted homeowners and kept what now are many zombie businesses afloat. Post pandemic Corbyn would have squeezed asset values by ramping up council tax and other property taxes introduced rent controls etc precipitating finally the readjustment in the housing market that has been avoided for almost 25 years. And then of course he would have been out of office at the next election as people and especially property owning voting people saw their currently perceived ‘wealth’ evaporate. The UK economy would be revealed for what it is built on paper

    • I think in many ways you might be right. I’m not party-political, and never thought I’d see a worse UK government than “New” Labour, but the current lot have to be contenders. Things might well have been better if extremists in her own party hadn’t turned on Mrs May. The present government seems to combine resolute commitment to all the wrong ideas with remarkable levels of bungling. Mr Corbyn might or might not have done a better job of the pandemic, but he could hardly have done a worse one.

    • Excellent summary of the current situation in UK.
      Sadly a rational alternative is not yet on the horizon.
      I think Caroline Lucas has a good grasp of the situation but a lone voice in an absolute wilderness of ideas.

  11. I bet on China too a long while back, simply based on their mentality and how that enabled several civilisations in their unique history. The world’s existential crisis now suits their practical mindset, as they will sacrifice whatever it takes to survive again, while we will have to re-learn that you can’t eat pseudo-democracy when starving.

    Our leadership will find out that the usual bullets, bombs, battleships, boneheadedness and bullsh#t wont beat brains. As you point out, you can bloodlessly take over using trade and diplomacy alone. Europeans back in the day knew this when they were top dogs, only resorting to the more expensive violence option if the threat alone wasn’t enough. China’s steady new silk road plan, essentially building a Chinese world based on trade controlled by themselves means they can exclude the US or any anyone else hostile to their program. This should insulate them from imploding currencies of economic former competitors who blinded by arrogant entitlement and exceptionalism, never saw the over-taking manouver over recent years, even though it was ‘hiding in plain sight’.

    • It seems to me that China’s mindset has always been comparatively insular (and I don’t mean that as any kind of criticism), so I don’t see them following an imperialist route. What they need to do is to use the comparative strength of their currency to buy the resources they need, meanwhile protecting their supply routes and their interests overseas.

      Ever since Deng, Beijing has been willing to use ‘capitalist’ practices to serve China, but has never considered letting China serve capitalism. They look at what’s happening in the West and, I think, choose to accept the bits that suit them and leave the crazy stuff to the Anglo-Americans. They’ve played technology very cleverly indeed.

    • Simply put, China seems to better understand than the west that capitalism is a tool among others. Neo-liberalism is akin to deciding that all tools but the hammer are not kosher and shall not be used.

      As long as all the problems were nails, it went fine. But try to drill a hole with a hammer…

    • I think I’d say that China tried one form of economic extremism, found it didn’t work, and became more pragmatic.

      The US and the UK have tried another form of economic extremism, have found it doesn’t work, but have carried on with it anyway.

    • Tim Watkins quotes Dr. Tim in his newest. “TM” below is a link to this essay.

      Bailey might, perhaps, take comfort from the thought that even if they don’t spend that £125bn, the rich will at least invest it. And that investment will surely generate jobs… won’t it? Energy-based economist “Tim Morgan” gives the lie to this:
      “In Britain and America, economic and financial policy have long had all the hallmarks of self-destructive intent. Both countries believe that it makes sense to ship value-productive industries (such as manufacturing) out to lower-cost countries overseas, whilst trying to turn themselves into low-wage economies whose main profitable activity involves moving money around. The UK has driven debt upwards relentlessly, for the sole and senseless purpose of buttressing property prices which have already been over-inflated far beyond the point of affordability…
      “Both countries seem now to have been driven to the point of policy despair. The American government is bent on injecting yet another $1.9 trillion of borrowed-out-of-nowhere money into the economy, whilst the Bank of England seems to be giving serious consideration to committing a symbolic currency surrender through the introduction of negative nominal interest rates. Both are deluding themselves about the real condition of their economies, with Britain, at least, seemingly persuaded that all will be well if consumers can only be induced to go on a spending-spree with money that they don’t have.”

  12. The latest numbers that I have for central bank assets (which I update monthly) show changes during full year 2020 as follows:

    BoE: +$0.4tn
    Fed: +$3.2tn
    ECB: +$3.3tn
    BoJ: +$1.5tn
    PBOC: +$0.487bn (tiny in relation to the size of the economy)

  13. So, Dr. Morgan, as your title says you think the RMB may be the last fiat standing. However, it will still ultimately succumb to the predicament outlined in your surplus energy economics thesis, right?

    • The situation as I see it is a relatively gradual – but relentless, and capable of accelerating – deterioration in prosperity

      Essentially, what I address in this article is relative, tactical and medium-term.

      The question with de-growth becomes one of how we handle it. Part of the equation is whether currency systems collapse. In this situation, having a viable currency system seems likely to be advantageous, vs acting in ways that tend towards fiat disaster. I can see a situation in which China adapts relatively well to prosperity decline, whilst the West – and the US and the UK in particular – make a complete mess of it.

      One of the things that I’m highlighting here is a huge gap in judgement and competence between China and the West.

  14. China is imploding demographically, they have a total fertility rate at about 1.05 nationwide and in the North East of the country it’s less than 1. Their so called technological advantage still comes essentially from stealing and copying Western intellectual property. China is going to face huge issues over the next few decades just maintaining the unity of their country. They will suffer a massive decline demographically, the strength of their currency can’t solve this

    • Since when does the population of a country dictate the value of its currency? India will overtake China by mid-C.. Yet its currency remains soft. Since 2008, the yuan more than doubled against the Rupee, while India’s population grew at a faster pace.Switzerland has a tiny population, yet it’s Franc has remained very strong.

  15. There is another way to look at the US and UK trade deficits (and monetary tactics). If I create currency out of thin air and give it to a real goods producer, like China, in return for products, I am getting something for ‘nothing’ (fiat currency).

    A goods supplier is willing to accept the transaction because they think they can do the same thing with the nothing they got from me. But if that fiat currency falls flat and is no longer accepted by traders, who is the sucker, the buyer who got real goods or the seller who got worthless scraps of paper?

    The potential collapse of any fiat currency should remind us that there are very few assets with intrinsic value that will always have value, one being land that can produce food, water and shelter, and another being the means to defend it from those who would take it away. Energy supplies might well be another. I don’t know about the UK, but the US has plenty of those kinds of assets. Can the same be said for China?

    And if major fiat monies are failing right and left, do you really think that the renminbi or any other fiat money will be able to rapidly gain the world’s confidence and become a new global reserve currency? Once bitten, twice shy.

    • You’re right, of course.

      But what use have the various economies made of this ability to trade paper for items of worth?

      The US and the UK (in particular) have used this process to reduce their capacity to produce, replacing it with the ability to move money around the system. China has built infrastructure, and acquired resources around the globe. If there’s a benefiit from being able to trade paper for items of worth, then throwing away that benefit by putting the credibility of your currency at risk has to be a mistake.

      My point with this article is that, if we’re interested – as I’m sure we should be – in the fate of fiat, then it’s well worth noting the difference between Western recklessness and China’s greater concern with ‘sound money’.

      I’ve been clear here, over a number of years, that China has problems. But at least Beijing isn’t compounding them by reckless monetary expansion. During the coronavirus crisis, the West has been using monetary policy to reinforce demand whilst it cannot similarly reinforce supply. The UK (in particular) seems to think that it can ‘fix’ its economy by getting consumers to spend more at a time when the economy is producing less.

  16. Economic growth requires surplus energy.
    Diminishing returns in energy production combined with population growth has brought us to this point. No amount of government laws, rules and regulations nor any of the current economic absurdities being implemented or proposed can make up for diminishing returns on physical resources and processes.

    “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein

    Most of the interest earners have not realized yet that, it’s over for them. They will destroy everything in their demand for payment rather than give up their privileged circumstances.
    Most politicians also live in these privileged circumstances and they have armed forces, military and civilian that, will ensure that you comply.
    My bank stopped paying interest on savings accounts years ago so, this is not a new problem. The unavoidable consequences that a now becoming apparent to many have been looming for years and nary a soul is ready for them.
    The currency masters must take physical control of everything now or face the wrath of the masses who, in the end, will backed by the armed forces who, by then, will also have been robbed and betrayed.

    The energy guzzling growth economy has all but destroyed our environment. Something has to be done.
    A New World Order anyone?


  17. A Way to Think About Collapse
    Perhaps the poster child for collapse is the development of frailty in older humans. Here is a current article which reviews the potential for looking at frailty through the lens of complex system science:

    *Dealing with one disease at a time doesn’t help very much
    *We get further when we consider basic anti-aging systems and how we can engage them (fasting is a promising way to do that)
    *At the present time, lifestyle interventions pay better than drugs
    *Preliminary evidence shows that the response to dysfunction is non-linear….3 dysfunctions is far more damaging than the sum of the dysfunctions.

    An alternative might be Dmitry Orlov’s Five Stages of Collapse. However, Dmitry has modified his views on that, now seeing social collapse as happening first in the US, to be followed by other collapses. The view presented in this paper does not try to present the various dysfunctional sub-systems as occurring in any particular order. The critical point is the complex system interactions which accelerate the collapse of the whole.

    Without trying to give a complete picture of the US at this time, we might identify these dysfunctions:
    *Social Media: https://www.nytimes.com/2021/02/04/opinion/michael-goldhaber-internet.html
    *Health…continued increase in chronic diseases and medical costs
    *Social Dysfunction… Vice President narrowly saved from a mob. Religious leaders shunning him for doing the right thing. Denial.
    *Real Economy…Monopolies everywhere. Trade deficit. Depleting resources…Pollution
    *Money and Government…rampant money printing and fiscal deficits
    *Education….demise of the Socratic method

    That’s enough of a list, I think, to make the close analogy between socio-economics and frailty plausible. Looking at the totality in terms of the complex system proposed for frailty is at least intriguing.

    Don Stewart

    • Thanks Don.

      On the subject of collapse, I’m planning to set out the mapping project here fairly soon, something from which I’ve been diverted by the morbidly fascinating subject of watching countries like the US and the UK swinging wrecking-balls at their currencies.

  18. Hi Tim – great work and love the comment section. My understanding is that we’re in the hyperinflation already. The dollar and dollar-denominated universe is so large that Triffin’s Dilemma barely captures the essence of the problem. It will be interesting to survive the digital version, as no one has gone before us on that. The authorities could have slowed down a long ago and hyperinflation would still come home to roost, recognizing that it is more about the loss of confidence than it is the quantity. In fact, one characteristic of hyperinflations is the general lack of money, once you get a step or two from the ‘printer’; which is counter-intuitive, but is part and parcel of the dynamic in any case. How long this takes is anybody’s guess, but it can be quite quick, e.g., Weimar Germany. One pundit opined long ago that the United States Treasury would “defend the dollar” on the way down using gold. Hope they retain a good deal of their inventory.

    And hopefully we’ll wake up one fine Monday morning and read that the giants of wealth management met over the weekend and concluded a ‘clean-float’ currency-system that fosters meritocracy and which completely liberates gold from ‘money’, finance and FX; utilizing it rather as a kind of gyroscopic ballast-of-credibility, a wealth-reserve if you will, just as it appears on Line 1 of the ECB’s balance-sheet. Their gold is marked-to-market, quarterly (if memory serves), and I think the design of the Euro system was meant for just these times. Not that the Euro, or the RMB for that matter, would ever want the burden of ‘reserve-status’; but the Euro seemed more about the kind of larger-scale flexibility for when the dollar swan-dives. I think it was a foregone conclusion much earlier than most suspect, and perhaps their sense of urgency explains why they didn’t consolidate debt at the same time, seemingly leading to quite a bit of unnecessary turbulence.

    Robert Mundell and Jacques Rueff would be pleased to see a further evolution of the concept of ‘money’; divorced from any notion of ‘store-of-value’. I think we would have seen this denouement quite some time ago if China had not stepped in to support the US dollar via Treasuries. That flat-lined around 2014. We in the U.S. are just going to have to come to grips with the fact that the future-dollar will not be backed by gold, or any post-war privilege, or by Saudi oil-trade arrangements, or by China’s self-interest. and certainly not by military might. The currency we have after the hyperinflation will be recognized as backed, like all other currencies will be, by the productivity of our nation and the quality of the goods we trade.

    Gold is perfect for the new role it will play. The stock-to-flow ratio is enormous and it is not required in any significant quantity for the maintenance of industrial civilization. It can act again in an ancient way as concentrated wealth. Gold’s ‘price’ in a new role is almost irrelevant to world at large. It can be quite large if the ‘giants’ decide it so. Arbitrage and speculation will be a thing of the past. It can easily ‘absorb’ enormous dollar-losses on balance-sheets across the globe. The London Bullion Market Association is just about bone-dry since 2018 and Comex is just a hat-check side-show. The pending exit of large gold institutions like bullion-banks from the paper-gold trading is something to watch. I picture gold at the national-level acting like a fire-extinguisher under glass. It can sit very quietly for centuries, yet stand tall in emergencies. For us shrimps, it may be the premier way to cross the abyss unscathed.

    Your SEEDS work inspired a new idea for what gold could represent in its ‘value-mantle’. One day, gold may be considered among the cognoscenti as a pure claim on future energy surplus, both at high-valuations. If anything intrinsically ‘carries’ past energy-expenditure, it’s surely gold. We have to remember that gold will still have the capacity to ‘act like money’, even in a store-of-value paradigm, in the same way that a rare violin can. The surplus-energy trade is sort of a reverse situation to what evolved into the gold-oil-dollar-BIS-“good-business” arrangements between the West and the House of Saud; where future cheap-gold for future cheap-oil kept things much less bumpy than they might otherwise have been. Those were fairly quiet arrangements; where central banks back-stopped a variety of paper-claims to gold with their own vaulted-gold, which arrangement did have the effect of helping to flood the world with dollars in many ways, but that’s water under the bridge at this point. I doubt central banks are going to back-stop any private gold deals from here on out, as the bullion infrastructure of the past has served its purpose quite well.

    We’ll see how it goes. As one mentor used to say – “Time will prove all things”.

    • I have never understood the fascination with gold. Pushing it as a hedge would seem to drive further exploitation of the Earth’s resources to get more of this stuff, when we need to invest that energy in “sustainable” solutions?

    • Indeed.

      Part of the problem is the understandable assumption that there ‘must be’ some form of safe haven inthe event of fiats imploding. Governments, as I see it, have so much riding on fiats that they can’t afford to tolerate large-scale opt-outs. FDR banned private ownership of gold in 1933. This time, the initial focus could be on cryptos, where governments can make a “case” based on anything from tax evasion to money laundering as to why it’s “in the public interest” to intervene.

      This isn’t meant as a criticism of governments. If some alternative currency, in widespread use, is capable of tempting large numbers of people to switch out of the national fiat, they’ve really no choice – sovereignty is very largely a matter of having a monopoly on the types of money circulating in the economy.

      Taking the UK simply as an example, let’s imagine that GBP was in an inflationary cycle and people started wanting – in shops, as wages, and so on – USD rather than GBP. That would be something that the government would have to stop.

    • Is it possible to Opt Out?
      I think it is doubtful, for this reason: Governments are the only ‘civilized’ way to store wealth. Land is only valuable to the extent that government can protect one from thieves or invasion by enemies. Stocks are only valuable to the extent that governments can facilitate effective commerce through commercial and criminal law and law enforcement. Bonds are only valuable to the extent that governments can maintain stability of monetary value and enforce contracts. A crop of wheat is only valuable to the extent that one can get the wheat to market, which almost always relies on government provided roads and bridges. If the collapse of fiat also results in the collapse of government, then an enormous amount of wealth will simply disappear. Judging by the past actions of U.S. governments, I would say that governments are likely to do their best to preserve private wealth…not least because it provides them something to tax. Which will not prevent them from stealth stealing through means such as inflation and lying about inflation so they can renege on promises.

      Many Preppers are thinking about self-defense and self-provisioning, assuming that governments will collapse. I hope we don’t have to find out the hard way whether prepping was the right thing to do.

      Another alternative, surprisingly popular in the U.S., comes down from Jesus and other religious leaders. Jesus told his disciples not to put their trust in worldly wealth, ‘where moth and rust corrupt, and thieves break through and steal’. He advised accumulating wealth in heaven.

      Don Stewart

  19. Pingback: Economic mood swings

  20. Ronald Reagan was the first to use the phrase: “Make America Great Again.”
    He use it at the Republican National Convention in 1980.

  21. Degrowth; Electric Vehicles; Uncertainty; Risk
    Two items to ponder. First is a careful analysis of the manufacture of bicycles, which are seen by many as part of a solution to transportation in a low carbon future:
    Second was an article I saw yesterday about the governments of the world getting behind electric vehicles, with cheerleading by Musk, of course, but also sober companies like General Motors. The article described the problem in Australia where the existing government has said that ‘electric vehicles take your weekend away from you’….e.g., a little electric car won’t tow your big boat or camper rig. Can the Australian government climb down from that statement (which is probably true) to one supporting mass electrification of the vehicle fleet?

    I pose the questions as to whether governments have the capacity to “plan” degrowth. They obviously do have the capacity to throw newly printed dollars at most anything they want to throw it at, from stock market bubbles to inflated house prices to electric vehicles to bicycles if they so choose. But how much of the money they are preparing to throw at electric vehicles will end up wasted?

    My observation is that going up the energy curve was not simple, but the increasing abundance of energy covered up a lot of mistakes. In the US, we rapidly went from walking to riding horses and pulling carts to canals and then railroads and then various kinds of powered vehicles (e.g., Stanley Steamers, electric cars, and internal combustion engines). Much of the investments made in the various modes of transportation ended up as wasted. The era of canals, for example, was only about 2 decades. I think a very few assumptions are safe: water will still be by far the cheapest medium to transport people and materials. However, everything else is up for grabs. Putin can tell the Davos crowd that governments need to lead…but how much confidence do you have that the leaders we have can thread the needles?

    My guess is that the future is walking. It is the simplest solution requiring no great technological breakthroughs, no supernaturally wise leaders, and humans have been exquisitely tuned by evolution to be very efficient walkers.

    Don Stewart

    • I should also have mentioned water. Kingston, New York, which is admirably situation north of New York City on the Hudson River has been presented with a plan to build for the future on their excellent water based transportation infrastructure. Boats are an ancient technology.
      Don Stewart

    • I believe that international transport will be best served ecologically by ships.
      There is more reasonable chance of power sources for their propulsion based on wind , nuclear and solar than ever propelling airplanes by solar/nuclear.

  22. Another thought provoking essay, Tim. There are certainly correlations between your essay and what Dr Michael Hudson was discussing at his recent Oxford speech.

    The bottom line is that the West, with private banking institutions, are engaged in wild speculative bubbles that benefit only a small section of society. The Chinese, with publicly run banks, are more engaged with making stuff – lending to industry.

    All in all though, it is a bit like betting on the best looking horse in the glue factory.

  23. Hi Tim,

    China needs a sound currency that other countries will trust when it comes to selling them resources. recent reports suggest that they continue to import massive quantities of resources.

    This is just to tell you about a light bulb moment that I had today that has made me feel incredibly stupid. For years I’ve been discussing the energy cost of energy without putting two and two together and appreciation that it’s the energy cost of all resources that is rising.

    You may be aware that the Financial Times are running a renewable energy q & a today in relation to the transition from fossil fuel energy production. Henry Sanderson their metals and mining correspondent pointed out in an answer to a question that I asked about us having the resources to transition that ” there is enough metals and minerals in the earth’s crust, but the question is what environmental and social costs are we willing to bear to get at them? For example we are expending ever more energy extracting copper because the easy stuff has been mined already, and the amount of copper in the rock is declining. Between 2001 and 2017 fuel consumption increased by 130% per unit of mined copper in Chile for example. We can keep making steel too, but it’s the single largest industrial source of climate pollution. So it’s not a question of lack of availability of metals or materials. We are even considering mining the deep sea.

    I was shocked at the figure for the energy cost increases of copper extraction but also given the amount of steel involved in the construction or a lot of renewable energy production and distribution infrastructure or rail based public transport our new green environmentally friendly future seems a lot less environmentally friendly today than the marketing had me believing only yesterday!

    • Thanks. The way I see it is that energy is the master resource. We can’t extract and refine minerals, turn metals into products, grow food or even supply water without using energy.

      If we had, say, an Energy Cost of Wheat, or an Energy Cost of Steel, we would find that each was in fact a subset of ECoE.

      Copper is an interesting example. Ore densities at some of the biggest sources are at or below 0.2%. This means we have to shift 500 tonnes of rock to get one tonne of copper. Copper, in turn, is imperative for any electrical application of energy. So ECoE feeds back through an ‘Energy Cost of Copper’ into ECoE itself, as this applies to the supply of electricity.

      In this connection, we’re seeing two (or more) depletion processes operating together. Copper depletion is increasing the energy required to access each tonne of copper. FF depletion is increasing the ECoE of FF supplies required to power the mining of copper.

    • Indeed, in that article he beautifully shows how the seeds of the current economic/energy dysfunction ruining the UK economy today were sown long ago and how what grew as a result continues to grow, fertilised by the same policies.

      In a way, for the long ignored half of the country not benefiting from the new economy, lockdown is nothing new, because in some demographics or regions, generations will be already be familiar with lockdown lifestyles, as they’re no different to any enforced by poverty. Lockdowns continue, only the justifications changing, and other than a small lackey-class servicing every conceivable need of the wealthy, the middle-classes are steadily being shattered into nouveau pauvre.

      If you are born into a depressed region or family, you are poor and have few prospects in life, the UK is not a meritocracy now, so you inherit the status of those who brought you into this world. If poor even in so-called rich countries, you are largely confined to a residence with overcrowding, lack and your movement is mostly limited financially to your walking range. More and more it’s indistingushable from lockdown life, you don’t own the place you live in, are not allowed to work, can’t go anywhere and struggle to meet needs let alone wants.

      Given this observation, once born, whatever you do or try, your life will be largely a result of 3 variables that’re completely out of your control: date of birth, location and family. Seriously good luck other than those favourable circumstances at birth is the wildcard that could give you a fighting chance if you were dealt a bad hand.

    • We learned, from the USSR and pre-Deng China, that extreme collectivism doesn’t work.

      We are in the process of discovering that extreme market “liberalism” doesn’t work either. It doesn’t work for the economy, or for society.

      The more extreme countries’ national economic ideologies are, the worse the results can be expected to be. We’re now watching America and Britain, in particular, throwing currency credibility under the wheels rather than change direction.

    • Do you seriously think that the devaluation of labor, overcrowding of cities, declining quality of lives, increased pollution, depletion of biodiversity and resources, etc. are mainly the results of intentional strategies by an elite? Aside from offshoring jobs to compete with others doing so, there is no benefit to businesses. The domestic market loses buying power. It affects rents and property values too. Governments get less tax revenue, so they lose.

    • Yes, but isn’t this where the macro gets confused with the micro?

      If, as a business, I can cut my wage costs, the apparent effect is to increase my profits.

      Other issues are externalities, not captured by a micro-based economic approach.

      For instance, there are some people in Britain who seem to think that the UK can be turned into some kind of Singapore. In pure P & L terms, this almost makes sense. In macro terms, of course, it doesn’t.

    • Pffff come on, Neoliberalism is just a conspiracy theory. How could the people who pushed it have ever guessed the policies they championed would cause such misery?

    • Hmm!

      Part of the problem is that, rationally considered, extreme liberalism is utterly idiotic. The thinking may thus run that ‘since no sensible person could believe in this nonsense, there must be some hidden agenda behind it’.

      Actually, throughout history some otherwise very intelligent people have believed in utter nonsense. The example that comes to mind is Conan Doyle believing in spiritualism, ectoplasm and ouija boards. The same French policeman who invented fingerprinting seems also to have believed that one could classify criminal types by the shapes of their heads.

      If ouija boards and head-shapes can attract the credulity of the otherwise intelligent, why not neoliberalism?

    • Because sometimes you have to go down that rabbit hole that most are deathly afraid of, and consider why you yourself believe something. Only from that does growth occur. If neoliberalism was to be questioned, the cracks begin to form in its dominance. As this “virus” spreads among the population you get a loss of faith in the those who lead or rule. Faith or respect or confidence is what controls all human societies. The belief began to wane after 2008, but was held aloft a bit when Obama was elected by “hope and change”. After a few years this was shown to be false, so they “pivoted” and now we have a war of all against all, except for those who continue to call the shots. Populism reared its ugly head (read thomas frank for better background on this) and suddenly half of the population is racist white nationalists as an explanation. Those who still have a stake in the system, the upper 20% or so have found a new religion in wokesterism. They wave this banner to keep those who have fallen off the wagon from eating them alive. And those who pushed neoliberalism in the 70’s and the 80’s now push for the great reset. Rather clever actually, but also the same song and dance since the time of the Romans.

  24. Also I view the world thru the prism that all things are done for power (not all, love does exist, but haven’t you ever wondered that even in relationships spouses spar for the upperhand?) We are not gods, just primates who evolved to create better toys then rocks.

  25. Neoliberalism is essentially three programs: (i) free flow of “capital” (money in the form of debt and equity) across international borders, (ii) arbitrage labor costs, and (iii) elimination of environmental and health and safety costs by sourcing labor in countries without protections or costly requirements. The three programs result in de-industrialization in first world countries.

    The first order thought is that profits will increase by a sizable reduction in costs for the company exploiting these maneuvers. However, it is apparent to any dimwit that if everyone does it, i.e., has the same seemingly brilliant idea, the result will be to create a serious customer shortage and eventual crushing of demand in first-world countries by eliminating “good paying jobs” and replacing them with low-paying service or gig jobs. I leave aside the incredibly stupid assumption / self-serving rationalization that everyone who loses one of these jobs can become a coder or investment banker in a “knowledge economy.” The only remedies are “crapification” – poorer quality goods at less cost – and covering over the loss of purchasing power with easy credit.

    You don’t need a conspiracy, and you don’t need an ideology. Typically, ideologies are self-serving justifications claiming (without evidence, just as a matter of logic or faith based on assertions about “human nature”) to produce completely unfounded and usually unprovable benefits, sidetracking criticism and dissent into endless, fruitless attempts to prove the ideology flawed, while the destructive behavior continues. They are not actual roadmaps for behavior. The legal and financial incentive structure is sufficient to guarantee the “wrong” choice: Short-term profits are maximized for the insiders to make as much money as possible; the macro effects are simply someone else’s problem – the government’s, or the responsibility of those whose jobs are destroyed to re-tool themselves for other work. If the government doesn’t force a company to act for the common good, the company basically faces the prisoner’s dilemma – it cannot be sure that the other companies will do the right thing, so the incentive is for it to “betray” the common good for its own self interest as soon as possible.

    Since governments are captured by companies and not regulators of companies, thinking this can be changed is delusional (aka “hope and change”) and all we have is the naked pursuit of self-interest and betrayal at every level.

    • My view is that ‘extreme liberalism’ – my preferred term – is the belief that everything should be left to market, and all government activity reduced to the minimum. It also argues for minimised regulation.

      Interestingly, this is not something that Adam Smith would have endorsed. In his invective against monopolists and others, he makes it quite clear (a) that markets only function when they are free from distortion, and (b) that participants have strong incentives favouring distortion. From this it is clear that he does not think that markets will remain free and fair if left to their own devices. Accordingly, his view favours robust regulation to keep markets free and fair, the only basis on which they can work effectively.

      Like most extremes – for example, Soviet and pre-Deng Chinese communism – this has failed. Its failure became manifest in 2008-09. This was when those who had most favoured ‘living by the sword’ of market forces turned against dying by that same sword. That was when the free market system was, to all intents and purposes, scrapped.

      At the same time, the monetary policies adopted during the GFC effectively destroyed both returns on invested capital and the process of creative destruction, both of which are prerequisites for a ‘capitalist’ or ‘market’ economy.

      Another snag with extreme liberalism is that it promotes self-gratification to the point where this corrodes communitarian values. It also promotes inequality.

      A strong case can be made that the two major countries – the US and the UK – that are now in the worst positions are in the state they’re in because of past and continuing adherence to extreme liberalism. The US is bitterly divided – in large part between ‘winners and losers’ – whilst the UK is, in many ways, falling apart. Having rejected a reasonable “Brexit” deal negotiated by Mrs May, extremists pushed the UK into a much worse deal. This has helped increase pressures for independence, most obviously in Scotland. The UK is in the process of being excluded from European financial markets, and a City with limited access to Europe has few obvious attractions to third party financial markets.

      The US might survive the denouement of liberal extremism, though it’s hard to see how. The UK has reached what looks a lot like the point of no return.

  26. Oddly enough, when reviewing the Forex between the dollar, sterling, yen, euro and renminbi over a 5 year period, then in relation to one another, these currencies are relatively stable with perhaps the euro experiencing some depreciation.

    Presumably, quantative easing and stock inflation is manipulating Western currencies in relation to the renminbi which is essentially making Chinese takeovers and foreign property purchases more difficult.

    This sets up a debate about ‘what is money’ which arguably goes beyond money simply being a claim on available goods and services. Whilst this is certainly true, money also has the power to be utilised for currency manipulation by inflating asset prices within regionalised stock exchanges. Similarly, when money is used to manipulate currencies, it can also acts as a check against increasing trade deficits.

    Overall, stock markets act as a cushion when monetary stimulus seeks to create artificial growth in that stock markets provide a pressure release valve whilst supply chains respond to the notional demand effects of printed money.

    This leaves the question of the worth of debt that is accumulating on Central Bank ledgers. Arguably it is worth nothing in itself except in a relational capacity in that gilts that are effectively taken out of circulation renders those in circulation more valuable which adds value to the currency denomination that the bonds are in. Hence the presumed importance of Central Banks being able to set interest rates.

    Overall, money as a human construct seems to have many more uses than a simple promisery note that has a hypothetical claim on available goods and services especially within a currency exchange context. In other words, money, especially within a currency exchange context is arguably an extension of national economic sovereignty therefore it is highly unlikely that the renminbi will be taking over the global economy anytime soon.

    • Traditionally, money has been said to fulfill three functions:

      – a medium of exchange
      – a store of wealth
      – a unit of account

      My view is that it performs the first function very well, the second extremely poorly and the third in ways that are wholly self-referenced, i.e. there is no independent benchmark.

      On this basis, I define money, functionally, as a ‘claim’ on goods and services. Most of the “laws” of economics are in fact simply behavioural observations about the human artefact of money.

      The market strength or weakness of a currency tells us little about the absolute value of money – if the purchasing power value of each of the world’s currencies was falling at the same time, FX markets couldn’t tell us, because they only compare one fiat with another.

      Inflation is widely understated. First, and since the 1990s, stats have been distorted by hedonic adjustment, substitution and geometric weighting. Second, asset prices are excluded, even though they have an obvious bearing on the day-to-day cost of living.

      Historically, it has suited China for the RMB to be weak, because China has a big trade surplus in goods and services. This has been more important to China than the cost of overseas acquisitions.

      One of the effects of QE is to put a big buyer into the market for government debt, supporting its price and reducing the yield, i.e. the market cost of debt, which is the market’s equivalent of the interest rate set by CBs.

      Even before 2008, real interest rates were very low, and perhaps even negative, when compared with actual inflation rather than the understated version reported officially. During the GFC (which might better be called the Anglo-American AAFC), the decisions taken effectively reduced the cost of debt to deeply negative real levels and did the same for real returns on invested capital. This has driven a huge wedge between asset prices, on the one hand, and all forms of income (wages, dividends, profits) on the other. At that point, ‘capitalism’ – which requires positive real returns on capital – ceased to exist, and was replaced by ‘extend and pretend’. That, of course, is necessarily time-limited.

  27. Trade Balances and Global Currencies
    I think everyone recognizes that China has pegged its currency to the US dollar, which is supported by the agreement of the Middle Eastern oil countries to price their petroleum in dollars. But that doesn’t mean the arrangement will continue into the future. Here are the statistics on trade balances in 2018:
    At the top of the list, we can see that the US and the UK are both running significant deficits. We can also see that China is running a very large surplus, that South Korea has a much smaller surplus, and Japan is now running a small deficit. Of the other manufacturing countries in East Asia, the Philippines and Indonesia are running deficits while Viet Nam and Malaysia are running surpluses. Russia is running a very large surplus. I believe the EU as a whole was running a small surplus (I didn’t add them up) but Italy, Switzerland, and Germany account for a lot of the surplus with the UK and France and Portugal and Spain and Greece accounting for deficits.
    If we think of a global currency as enabling people to buy goods and services from people in other currency blocs (or else to go to the non-productive countries on vacation), then it is clear that China and Russia and the Oil countries are at the top of the heap. China and Russia are increasingly trading between themselves in their respective currencies. China has been taking American IOUs and buying something solid with them…no longer accumulating US debt. Which leaves the elephant in the room as the Oil countries selling to China and Viet Nam and Malaysia in US dollars. Whether those countries will be willing to take US and UK IOUs in the future and hold them (rather than turn them into something solid) is the question on the table. Since the East Asian countries are now the primary market for their oil, some sort of replacement for the US dollar seems like it could happen at any time…so that there is more stability in oil prices reflecting underlying supply and demand. If it does, then the US will be in a world of hurt. The UK is probably in a world of hurt even if the dollar remains the basis for trade.
    Don Stewart

    • Impeachment Trial
      I’ll just mention that the truly horrendous video footage being used in the Impeachment Trial should give pause to everyone except the delusional. The fact that a significant number of Republicans think the rioters didn’t go far enough, and also the fact that a whole lot of Republicans are scared to vote against Trump, should be the scariest of all.
      Don Stewart

    • As a neutral, one does have to wonder whether, now that DJT is out of office, it might be better to just move on – as Gerald Ford did after Watergate?

    • Ford and Nixon were both Republicans. Biden and Congress are now Democratic. As hard as it is to believe, there is still a core group of, mainly Evangelical White Christians, who will follow Trump if he succeeds in setting up a strongly funded political action organization. The Democrats, along with a small % of Republicans want to make DJT look as bad as possible. After this ‘trial’ is over, I expect more of Trumps tax returns to be broadcast widely, showing what a lousy manager he was and is.

    • @Dr. Morgan
      I’m not a neutral observer sitting in a far off country, I’m living right here in the US and what is happening affects me, my children, and my grandchildren. What concerns me is not whether these scenes will help or hurt the good and bad policies that Biden is trying to implement, but the obvious dysfunction among the populace, with such significant numbers making the country’s government dysfunctional because both parties get driven into insane corners. The same Republican senators who ran for their lives will now vote against impeachment and barring from public office because they believe they could never again win a Republican primary. When Nixon left the White House he went in disgrace. When he tried to purchase a cooperative on Fifth Avenue in NYC, the members refused to let him purchase. Trump exits as a hero to roughly half the country. The Union won the Civil War…but lost the Peace as racism continued to rule through the next 150 years. If this country hopes to survive Degrowth, we have to somehow develop a politics based on the rational. I could go on to describe the ‘sacred cows’ among the Democrats, but you get the idea.
      Don Stewart

    • Points taken.

      When I look at the wisdom incorporated into the Constitution, and then look at DJT etc and – well, not Joe, he seems OK, but some of the other Dems – I am baffled.

    • Thanks Mark

      I’ve pretty much completed the mapping project, and am in the process of writing it up. The readings for the UK are truly depressing.

      I’m not Tory, Labour or anything else, but this govt. looks utterly shambolic – most obviously on covid, travel, the deal with the EU and so on, but generally, too. Neither am I encouraged by the BoE, formerly a bastion of common sense (at least vis-a-vis politicians), but now getting ready for negative rates, and chiming in with the nonsense that all will be fine if only people will rush out and spend money that they don’t have……..

      I’m worried, too, about insecurity of employment for huge numbers, govt. fixation on house prices, and the UK’s seemingly pro-stance on everything gig economy.

  28. When the Student is Ready, the Teacher Appears
    I suggest this exercise for all those who are appalled or mystified by the intense emotional reaction pumped up by the mob behavior that Trump so easily manipulated. From a neuroscience perspective, and taking Lisa Barrett’s position that emotions are constructed by the brain to react to specific situations, can you describe the situation the rioters were reacting to, and what, if anything, politics could do to change the situation such that more helpful emotions might be expressed? Please take into account all the facts and reasonable expectations that students of this blog have in their portfolios. For extra credit, apply the same methods to the riots which broke out after the police killings of black people.


    ” emotions are constructions that our brains create to guide our actions and explain how we’re feeling in a specific situation”
    Don Stewart
    PS. Warning: those with the best ideas will be sentenced to a term as a senior Washington or state capital government official.

  29. Again can we be spared the excursions into partisan US politics….and the impeachment circus? The UK is no paradise but the US seems increasingly corrupt, violent, unequal and authoritarian. For ordinary Americans, the dream is dead. The blame for that lies very much with both the major parties and the malefactors of great wealth who bankroll them…which is precisely why millions voted for Donald Trump. He is a symptom of massive problems which are getting worse, not better. The one clear winner from all this is the CCP …..which plays the Washington establishment like a violin.

    • I agree, and there’s nothing to be gained by straying into party politics, very much a ‘dialogue of the deaf’ conducted with megaphones.

      My view is that the US and the UK have followed extremist economic doctrines which, as well as being simply bad economics, worsen division and undermine social cohesion.

      Looking ahead and using the SEEDS interpretation, the only sensible route is one which accepts the ‘mixed economy’ model of combined private and public provision, and which also recognises the need to retain credible currencies rather than ‘support everything in sight’.

      The longer this is avoided on ideological grounds, the worse the process of getting there is likely to be. It seems clear that some sectors and/or subsectors will shrink, some will disappear altogether, and some will have to be taken into public ownership. The current established view in the US and the UK is wholly opposed to (and blind to) these trends which, it seems to me, are becoming inevitable.

  30. Constructed Emotions vs. Carefully Calculated Actions
    While CEOs have emotions like everyone else, a corporation by its organization has a lot more ability to carefully calculate beyond any immediate sense of affect than an individual. As one example, among proliferating examples:
    “Lucasfilm drops The Mandalorian star Gina Carano following ‘abhorrent’ social media posts”
    So being a vocal supporter of the Trump riots has repercussions in the boardrooms…even if you look stunning in a storm trooper outfit. Quite a few corporations say they are withdrawing financial support for legislators who support the rioters.

    As a doubtless oversimplified explanation, let me suggest that corporations benefit when the electoral and legislative processes work predictably. When it is working reliably and is responsive to contributions, then savvy corporations can figure out how to get governments in their corner. When government submits to mob rule, then corporations cannot control government any longer. The same is true of those who engage in excessive ‘truth telling’…like Julian Assange or the Exxon-Mobil whistleblowers and even Ugo Bardi.
    Don Stewart

  31. The US and China lead Green Revolution?
    With the election of Biden, and the upcoming March meeting of the Chinese Communist Party to consider Xi’s proposed Green Revolution, the question of whether or not these plans are even remotely feasible has gained more traction in my mind. Several years ago, I read:
    Fridley and Heinberg’s book, which predicted that the only way to avoid climate disaster is through what amounts to an economic depression which never ends. In short, a complete reorganization of societies, including economics.

    Today I read an early publication of Albert Bates fictional imagining of Biden’s first cabinet meeting to get serious about climate change. I don’t pretend to know if Biden is serious, nor do I know what is going on in the mind of Xi. But it seems practical to at least think about the problem again. For one thing, if we are facing enormous inflation (as discussed in this blog) and if resources required to build a green infrastructure are limited and depleting, then the prospect looks pretty good for dual price increases in fossil fuels and materials…if Biden and Xi forge ahead. Which might very well influence how one tries to preserve one’s nest egg in turbulent times. Will it take an awful lot of fossil fuels to build that green infrastructure, and enormous amounts of steel and sand and gravel to be moved?

    Fridley and Heinberg’s book is a couple of years old now. Other than the steady stream of depressing data from Alice Friedemann and some work by Ugo Bardi, does anyone have any other reliable source who has put everything together in a neat package? I will assume that Dr. Morgan’s analysis of money and the assumption of a close connection between energy use and GDP are on target.

    Don Stewart

  32. The UK has reported a record 9.9% fall in GDP during calendar year 2020. Much the same will be reported for most other economies.

    When looking at any of these figures, please remember that all such figures are calculated including government intervention, funded by debt (of which some has been monetised). Had governments not done this, the underlying fall – a more meaningful measure – would have been much worse.

    • The growth economy has outgrown our ability to feed it and not all psychopaths are ignorant.

  33. It’s nearⅼy impossible to find knowledgeable people for this topic,
    but уou seem like you know what you’re talking about!

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