#193. Nothing for money


In the light of recent events, it’s hardly surprising that financial collapse has become an increasingly popular subject of debate.

There seems to be a dawning awareness that the economic crisis caused by the coronavirus pandemic has loaded the system for inflation, because the support given to incomes has boosted demand at a time when the supply of goods and services has slumped. Meanwhile, markets in general – and Wall Street in particular – have taken on some truly bizarre characteristics, suggestive, perhaps, of the frenzied dying days of a bull market.

Those of us who understand the economy as an energy system have long known that an event far larger than the global financial crisis (GFC) is inescapable. Indeed, ‘GFC II’ was hard-wired into the system from the moment when the authorities decided to prevent market forces working through to their logical conclusions.  

If markets had been left to their own devices back in 2008-09, what would – and arguably should – have happened was that those who had taken on excessive risk would have paid the price in widespread defaults, whilst asset prices would have corrected back to levels preceding the debt binge which had started a decade before the GFC.

It’s ironic that we hear so much talk of “re-set” nowadays, even though the only real opportunity for resetting the financial system came – and went – more than ten years ago. Promises of a post-pandemic reset are proof – if proof were needed – that ‘hype springs eternal’.  

Properly understood, all that covid-19 has really done is to accelerate our advance along a pre-determined road to crisis.

There are two big differences between the coming crisis and its predecessor.  First, whilst 2008-09 was caused by reckless credit expansion, the coming crash will be a product of far more dangerous monetary adventurism. Second, a crisis previously confined largely to the banking sector will this time extend to the validity of money itself.

The best way to understand the looming crisis is to recognise that the financial system, and the economy itself, are distinct (though related) entities. The ‘real’ or material economy of goods and services is a product of the use of energy. The financial system acts as a proxy for the energy economy, and consists of monetary ‘claims’ on the economic output of today and tomorrow.

If finance and the economy diverge, so that a gap is created between the two, the restoration of equilibrium must involve the destruction of the ‘value’ represented by ‘excess claims’.

Our current predicament is that there now exists, not so much a gap, as a chasm between the material economy and the financial system. The emergence and scale of this chasm can best be depicted as a series of “wedges” that have been inserted between financial claims and underlying economic prosperity.

The debt wedge

The best place to start is with debt, which customarily – though mistakenly – is measured by reference to GDP.

Between 1999 and 2019, world GDP increased by 95%. Expressed in constant international dollars (converted from other currencies on the PPP – purchasing power parity – convention), this means that GDP grew by $66 trillion.

Over the same period, though, debt expanded by 177%, or $197tn. Put another way, this means that each dollar of reported “growth” was accompanied by $3 of net new borrowing.   

As the first set of charts illustrates, what happened was that a “wedge” was inserted between debt and GDP.

This was a product of deliberate policy. The predominant belief, back in the 1990s, was that economic growth could be furthered by “de-regulation”, which included relaxing rules that, hitherto, had limited the rate at which debt could expand.

At the same time, the process of globalisation created its own pressures for credit expansion. Essentially, the aim was to out-source production to lower-cost EM (emerging market) economies whilst maintaining (and preferably increasing) Western consumption.

This divergence between production and consumption created a gap that could only be bridged by making credit ever easier to obtain.  

An even more important factor then in play was an economic deceleration known as “secular stagnation”. The real reason for this deceleration was a relentless rise in the Energy Cost of Energy (ECoE). But this causation wasn’t understood. Instead, policymakers thought that the hard-to-explain deterioration in economic growth could be ‘fixed’ by making credit easier to obtain.

This in turn meant that monetary stimulus, hitherto used for the perfectly reasonable purpose of smoothing out economic cycles, would now become a permanent feature of economic policy.

It seems to have been assumed that excessive debt was something that the economy could somehow “grow out of”, much as youngsters grow out of childhood ailments.     

Financialization – the second wedge

Debt is only one component of financial commitments. There are many other forms of monetary obligation, even without moving into the realms of assumed (rather than formal) commitments such as pensions expectations.

A broader measure, that of financial assets, gives us a better grasp of the extent to which the economy has been financialized. For the most part, these “assets” are the counterparts of liabilities elsewhere in the system, much as banking sector “assets” correspond to the liabilities of borrowers.

Financial assets data isn’t available for all economies, but the right-hand chart below shows the aggregates for twenty-three countries which, between them, account for three-quarters of the world economy. 

What this illustrates is that the “wedge” inserted between debt and GDP is part of a much bigger wedge that has been driven between the financial system itself and the economy.

Comparing 2019 with 2002 (the earliest year for which the data is available), the financial assets of these 23 countries increased by 158%, or $275tn, whilst their aggregated GDPs grew by only $44tn, or 77%.

On this basis, financial assets increased by $6.20 for each dollar of reported “growth”.

It’s a simplification, but a reasonable one, to say that, for these economies, each dollar of growth between 2002 and 2019 was accompanied, not just by net new debt of $2.70, but by a further $3.50 of additional financial commitments. 

What this really means, in layman’s terms, is that debt escalation has been accompanied by a broader – and faster – financialization of the economy. Essentially, ever more of the activity recorded as economic ‘output’ is really nothing more than moving money around.

This is represented in the aggregates by relentless increases in the scale of interconnected assets and liabilities.

The risk, of course, is that failure in one part of the financialised system triggers a cascade of failures throughout the structure.    

The third wedge – the ‘let’s pretend’ economy

By convention, both debt and broader financial commitments are measured against GDP. This would be reasonable if GDP was an accurate representation of the ability of the economy to carry these burdens.

Unfortunately, it is not.

Over the period between 1999 and 2019, trend GDP “growth” of 3.2% was a function of annual borrowing which averaged 9.6% of GDP. The mechanism is that we pour credit into the economy, count the spending of this money as economic “activity”, and tell ourselves that we can ‘grow out of’ our escalating debt burden.

As well as funding purchases of goods and services which could not have been afforded without it, relentless credit expansion also inflates the prices of assets, and this in turn inflates the apparent ‘value’ of all asset-related activities.

The SEEDS economic model strips out this credit effect, a process which reveals that underlying growth in the world economy averaged just 1.4% – rather than 3.2% – between 1999 and 2019. Accordingly, underlying or ‘clean’ output – which SEEDS calls ‘C-GDP’- is now very far below reported GDP. If net credit expansion were to cease, rates of “growth” would fall to barely 1%, and even that baseline rate is eroding. If we were, for any reason, to try to reduce aggregate debt, GDP would fall back towards the much lower level of C-GDP.

Neither is credit-injection the only major distortion in the story that we tell ourselves about economic output. More important still, ECoE – in its role as a prior call on output – is continuing to rise. Incorporating ECoE into the equation reveals that prosperity has stopped growing, whilst the number of people between whom aggregate prosperity is shared is continuing to increase.

In essence, this means that the world’s average person is getting poorer. This happened in most Western countries well before the GFC, and the EM economies have now reached their equivalent point of deterioration.

What began as “secular stagnation” has now become involuntary de-growth.  

We can’t make this hard reality go away by pouring ever more and ever cheaper liquidity into the system. All that monetary loosening really does is to create financial ‘claims’ that the economy cannot meet.

The combined effects of credit manipulation and rising ECoEs form the third wedge – the one that divides economic reality from comforting self-delusion.    


The fourth wedge – the quantum of instability

With the reality of flat-lining output and deteriorating prosperity understood, all that remains is to use this knowledge to recalibrate the relationship between a faltering economy and an escalating burden of financial obligations.

Even the ‘fourth wedge’, pictured below, excludes assumed (though not guaranteed) commitments, of which by far the largest is the provision of pensions.

The final set of charts compares debt and broader financial commitments with underlying prosperity. These charts reveal the drastic widening of the chasm between prosperity and the forward promises that the prosperity of the future is supposed to be able to meet. In SEEDS parlance, we are confronted by a massive crisis of ‘excess claims’ on the economy.

With these equations laid bare, we are entitled to wonder whether decision-makers are in blissful ignorance of this reality, or whether they have at least an inkling of what’s really happening and are simply nursing Micawber-like hopes that ‘something will turn up’. Based on the 2008-09 precedent, we can be pretty sure that the “soft default’ of inflation will play a starring role in the coming drama.  

The question of ‘how much do they know?’ must be left to readers to decide. The same applies to quite how soon you think this situation is going to unravel, and whether you want to label what’s coming as a ‘crisis’ or a ‘collapse’.  

127 thoughts on “#193. Nothing for money

  1. Well, now, Dr Tim, that sets out the coming, and very serious, crisis succinctly and understandably; thank you. The question is, “what can the individual citizen or family actually do to protect themselves?” I suspect rather little, apart, perhaps, by helping to accelerate the timing of the crisis by reducing consumption in favour of reserving (where?) to help cover the ever-rising cost of “essentials” and trying to work out how to avoid an impoverished old age.

    I sense only limited appetite amongst my relatively well-heeled client base to return to expensive overseas holidays because of the fear of contagion, mainly, but quite a few have engaged builders to “improve” their homes. Others have been caught up in the recent debt binge and have misallocated capital into portfolios of shoddy apartments in city centres bought “off-plan” via high leverage, a decision that they now bitterly regret. Many enjoy frankly unaffordable defined benefit index-linked pensions, but they are certainly the last generation to do so, unless we end up with a “reset”, enabling a real return from capital to be achieved.

    Mostly, I feel for the young. I know young masters graduates struggling to find work and those that have found work are being paid very little and work long hours. No wonder that there has been civil unrest in Bristol, a city 20 miles away from me over recent nights.

    • Thanks Mark.

      Set out like this, it does seem pretty obvious and inescapable, I think.

      Home improvement is a good thing, so long as it’s done to improve the utility – or, more simply, the enjoyment – of the home. Financially, only inflation can now prevent slumps in the prices of assets as the reality as I’ve tried to describe it here starts to dawn. Reset now would be vastly expensive, far more so than it would have been back in ’08.

      The young have been the victims of policy since the GFC, with houses priced out of their reach, careers hampered by academic inflation and, of course, worsening job insecurity. There’s a horrible irony to “help to get into debt” housing policies.

      I’ve noted with interest that Bill G has been buying up farmland, whilst Amazon has been expanding in groceries – seems very sensible to me

    • “what can the individual citizen or family actually do to protect themselves?”

      Prepare to live without money as much as possible!

      Debt-free land upon which food can be grown, wood harvested for energy and water collected for drinking is an intrinsically valuable asset that can support life without money. Property taxes must still be paid and we can only hope that when local governments become desperate taxes don’t become confiscatory. All monetary assets should be preserved in ways that they can be reserved as much as possible for paying land taxes. Money should be spent on nothing else but land, housing, farm infrastructure and tools.

      The globalized modern industrial civilization cannot function without a functional monetary system. Monetary signals are the means of communication by which everything is organized; resource extraction, processing, transportion and eventual consumption. Any interruption of those signals from doubt or confusion about the value of money will bring international commerce to a grinding halt.

      Access to a functional monetary system is now a matter of life and death for billions of people. If there is a monetary crisis, people will die. Every family should be doing everything they can to escape being dependent on money. Unfortunately, only the very poor in the Global South and a very few in the Rich North have much of a head start. It’s time to get serious about the final Back to the Land movement. Don’t wait.

    • I come at this as someone deeply sceptical about “prepping” – I’ve even drafted, though not published, a piece on why I wouldn’t buy a bunker (even if I could afford one).

      From this perspective, we need to ensure that essential systems continue to function, not just for ourselves but for everyone.

      Rather than UBI (which I’m convinced cannot work), I would advocate something that I call UEP (universal essentials provision), something I’m likely to mention in a forthcoming article which looks at the prospects and outlook for households in a de-growth situation as we understand it here.

      I think it would be a worthy ambition for politicians to seek a situation where the essentials (obviously including housing) are available and affordable for everyone.

      But this would require sacrifices which electorates might be unwilling to make. There’s an analogy here to the environment. Here’s an imaginary conversation in a cafe, bar or pub:

      A: “I’m really worried about climate change, and wish I could do something to help”.
      B: “You can. Stop flying, get rid of your car and uses buses”
      A: “Well, maybe I’m not quite that worried………….”

    • Dr Morgan said, “I come at this as someone deeply sceptical about “prepping” – I’ve even drafted, though not published, a piece on why I wouldn’t buy a bunker (even if I could afford one).”

      Many posts have been written about why bunkers have nothing to do with prepping, but I can easily see why an understanding that bunkers are an important part of prepping would lead to skepticism about it.

      More importantly, if continuously accelerating ECoE is inevitable, and I see no evidence that it is not, then the end point for a high-energy industrial civilization must be a low-energy agrarian society. If you think that there is a collective path from industrialism to agrarianism, a path that avoids an immense amount of premature death, I would be delighted to see the plan. Perhaps in a series of future posts?

      In the meantime, I think the prudent course of action is to assume that industrialism is subject to any number of events that could cause its sudden failure, well before energy depletion causes its inevitable failure, and prepare to live without it.

    • Joe, I agree it makes sense to prepare (prepping) for a low energy agrarian future. Not all who are preparing (preppers) are wackos with 200 guns just as not everyone who declines the new experimental vaccines is anti-science and/or anti-vaxxer. But somehow people tend to miss the differences in both cases. I think those who hope for thoughtful and logical solutions to the impending low energy future or to COVID-19 are showing ignorance of human nature.

    • Thanks Joe. I take the point about bunkers!

      My view is indeed that rising ECoEs are going to undermine what we now think of as ‘normal’. There’s no way, in my opinion, that individuals can isolate themselves from the consequences.

      Therefore, it’s essential that society itself adapts. We really are, in this instance, “all in it together”.

      This will require both the knowledge and the will to respond effectively. There is a school of thought which believes that technology will somehow ‘fix everything’. There’s another which states that we needn’t, can’t or shouldn’t co-operate in this way – that any such planning would be “communist”, that big gaps between rich and poor are “natural”, and that “greed” is somehow ‘a good thing’.

      These might, respectively, be called blind faith and self-serving obstinacy.

      The first policy objective, for me, would be to ensure that the essentials are available and affordable for all. The nearest past comparison might be the ambition, realised in various countries, that essential health care should be available for all,

  2. Bravo, Tim. I’ll be sharing this with several smart economist friends with a challenge for them to critique it. Timing is the unknown in my view. There was a comparison on Marketwatch this am of equity markets at two other secular bull mkts. They project many more years to go, which I find incredible.


    • Thanks Steven, much appreciated.

      Markets have ceased to function – in price discovery, and the pricing of risk – since the introduction of ZIRP.

      What investors have figured out since then is that: (a) asset prices are an inverse function of the cost of money, and (b) money is going to remain ultra-cheap, because the authorities have no plausible line of retreat from the “emergency”, “temporary” (ho ho) policies introduced during the GFC.

      This is a case of ‘some knowledge, but not enough‘. If you thought that the authorities are going to have to keep money cheap, you’d want to be long stocks. If you also inferred inflationary implications, you’d be short cash.

      But that doesn’t explain preferences within this asset allocation. It doesn’t explain why investors would favour stocks which (a) depend on more use of energy, and/or (b) are tied to consumer discretionary spending.

      In other words, investors are buying both ‘cheap money indefinitely’ and ‘growth in perpetuity’. These narratives are contradictory.

  3. I think the perception of whether it’s a crisis or a collapse depends on what level of the pyramid a person currently occupies,
    for someone in the upper strata’s it will seem like a catastrophic collapse of all their illusions,
    in the lower strata’s it will just be a crisis,
    frankly the last 12 years since the GFC have been an ongoing crisis for a lot of people,
    personally I’ll see the collapse as a blessing, the end of extend and pretend and the opening of a new chapter,

    do we have two types of inflation,
    the financial inflation of assets caused by ZIRP and very loose lending,
    and a rising cost of doing stuff in the physical economy caused by a rising ECoE?

    a massive hard default would clear the decks of all the financial inflation but the rising ECoE will continue,

    how does RRCI compare to the rising rate of ECoE?

    • Inflation is a topic that we might address here, though I think that, in recent articles – since the completion of the SEEDS mapping project – I’ve gone into rather a lot of technical stuff.

      Broad basis inflation is calculated as the “GDP deflator”, and that’s the one I use when referring to ‘real’ (ex-inflation) trends in, say, debt, GDP and so on. The inflation rate usually cited in the media is consumer inflation (CPI or RPI).

      RRCI is turning out to be very interesting indeed, and I hope to write about it – and the concept of inflation more generally – once we have final data for 2020. The aim is to capture, in a single broad inflationary measure, the effects of monetary gimmickry and ECoE.

    • Almost every valuation approach to stocks predicts a 10 year negative or flat return. The average dividend hanging around 1.6% is another factor. I don’t see any way that bond yields can be allowed to rise as it would create a risk off sale in stocks, yet the fed has to focus on targeting inflation. El Arian characterized the FED’s position as threading an ever shrinking needle.


  4. Dr. Morgan

    So if astronomers announced tomorrow that an asteroid was going to hit the earth in a year, bid prices for equity shares/stocks and bonds would presumably go close to zero?

    Could an event of lesser significance produce a rapid drop in shares and bonds that the central banks could not prevent or could not reflate? The world mood seems more sober now, maybe more somber. And “degrowth” is getting small headlines now in some major on-line publications, although it’s a discussion of a “voluntary” degrowth to avoid climate change and environmental disaster. How can share prices rise (in aggregate) if degrowth goes from the reality that you and your readers accept as true, to a widespread belief about the future? What is the bid price on a 30 year bond in the era of degrowth?

    I accept that “they” will try to “print” and try for a soft default. But I am still wondering if events will spin in unexpected ways by forces not under control of the monetary authorities.

    I would not have thought it possible, but your articles of late seem to be getting even more precise and concise in thought. Thank you.

    • Thanks Shawn

      If it were predicted that a giant asteroid was going to hit the Earth in a year from now, how long would it be before someone claimed that this asteroid would be rich in copper, lithium and nickel, replenishing the world’s stocks of ‘transition materials’? Would there be a new market in ‘asteroid futures’?

      I’m only being semi-facetious here.

      All that I can do is to model the situation and set out the facts as I see them. Markets, nowadays, are more a matter of narratives than of facts.

      I suggest that, if investors knew about – and were prepared to believe – the real situation, they’d be acting differently. They might be buying farmland, like Bill Gates. They might be diversifying into groceries, like Amazon.

      For the most part, though, it’s a case of ‘keep taking the tabloids’.

  5. Do you think something like “War Socialism” that America did during WW2 possible? Cost plus limits to corporate profits, limits on executive compensation, directed fuel use to essential transportation and agriculture. Promoted local food production “Victory Gardens” Rationing for essentials. Seems preferable than letting the “free market” (oligarchs) sort things out.

  6. Tim your question of ‘how much do they know?’

    My guess is they can probably see this. This is why they are so desperate to move towards central bank digital currencies. They would then have much more control over lending and money supply. Until then they will suppress yields by buying bonds, manipulating the gold and silver prices (which seem to be the only ‘commodities’ that aren’t inflating right now). The bond market can then be left to wither on the vine. Bonds will be held mainly by central banks (so they can be cancelled) and pension funds. These will generally have an upper cap to inflation so the liabilities will be safely inflated away.

    Unlike Mark I think the young would probably be fine. The older generation will see their wealth decline as per pensions and many other assets. Those with debt will see this disappear. An effective reset.

    I had a conversation at work with a couple of colleagues last week. One was complaining about how everything was going up in price, broadband, council tax, electricity etc and the other said it was due to Brexit.

    In the book ‘When money dies’ there is a sense that in 1920s Germany most people saw price rises but never associated with a declining currency or purchasing power. They even felt wealthier for a time; financial markets were going up, people were selling assets for more money. By the time people realised it was too late. The government introduced capital controls to stop money leaving the country. This caused a rush to obtain physical assets which then caused inflation to go parabolic. Demand pull inflation.

    But on the other hand I think most of the ‘Keynesian’/MMT economists that write for the papers/BBC etc don’t see that. They think it will be business as usual and just needs a push for growth. taxes/austerity is bad. I seem to remember reading that at one point taxes in the Weimar Republic dropped to about 5% of government spending. They ceased to matter any more.

    As Mark Twain said “history does not repeat but it rhymes”.

    • If those who hold high places are aware of the situation, I expect the digital currencies if issued will be issued as national tokens of some sort to facilitate rations of deemed essentials.

      Credit and money supply are important in rationing growth or claiming a rent on economic growth/activity. The world today is awash in excess production capacity but is natural resource constrained.

  7. ‘Involuntary degrowth’ Indeed.
    And none of this analysis seems to mention the compounding effects of climate disruption. Now there’s an economy wrecker if ever there was one: slow-burn but inexorable. We appear to have +2C above pre-industrial locked in, and given the current political near-paralysis about taking effective action that could easy reach +3C or more.
    Our kids will be poorer than us. That doesn’t necessarily mean they will all be less happy; unless of course that descent is accompanied by increasing inequality, mass migration and regional conflict.
    Alas, all of those are likely given that these interlinked crises are very hard to tackle, and the need for solutions will almost certainly increase the simplistic, populist appeal of the autocratic strong-man who promises to ‘fix it all’. Hence Trump, Putin, Erdogan, al Sisi, Xi, Duterte, Bolsonaro, Orban and their lookalikes.
    Buy a bike and look after your vegetable garden! Oh, and don’t have kids.

    • I was watching a presentation by Dennis Meadows to the University of Ulm in 2019 and at the 41mins 20 secs point he starts talking about:

      “The Time of Greatest Stress
      Most people assume the major global difficulties would occur after the end of growth,
      this is not correct,
      The globes population would experience the most stress prior to the peak, as pressures mount high enough to neutralise the enormous political, demographic and economic forces that now promote growth.”

      we are at that most frustrating Sisyphean point where we are desperately trying to push the boulder up the hill but it won’t go any further, once gravity takes over and the boulder starts rolling downhill we can only watch and go with it,

      Sisyphus was being punished for his trickery and his hubristic belief that he was cleverer than the Gods,

  8. Dr Tim. An excellent analysis as usual!

    I am not an economist so please forgive me if I am being naive, but would it be fair to say that true prosperity turned down in the West, say, 40 years ago but the effects have been ameliorated/hidden by:

    (1) Privatisation/financialisation (for example selling utilities, in the case of the UK government, and selling business premises then renting them back in the private sector)
    (2) An explosion in government and private debt
    (3) Zero Interest Rate Policies, which not only reduce repayments but exacerbate #(2)
    (4) Offshoring manufacturing to lower-cost economies to enable us to buy cheap consumer products

    As each of these factors has worn off, the next factor has come along and given an illusion of ‘everything is OK’ (although in practice this is a simplification since they have overlapped).

    Therefore our current predicament is that all of the ‘ammunition’ has been exhausted and there is now nothing left to ‘throw at’ the next financial crisis.

    Keep up the good work!

    • @Ian Noble

      Your summing up of the 40 years of neoliberalism is so apposite.
      PFI is another “ financially engineered” disaster to be added to your list.
      In an earlier post I quoted the words of Nate Hagens and in the light of your
      comments I think it is worth repeating them.


      Another subject that puzzles me are the space projects that are pursued on this energy Impoverished planet.

    • In economics, extremes are almost always bad. Collectivism failed in the USSR, and would probably have failed in China, too, but for the genius of Deng.

      The fall of the Soviet Union was taken in the West as a licence for extreme economic “liberalism”. It has been a disaster.

    • The ‘success of China’?
      “China initially had a soviet-style
      40:48 economy but in 1978 a new leader came to
      40:53 power in China Deng Xiaoping and he
      40:56 analyzed the situation and he concluded
      40:58 that the Soviet system is doomed to
      41:01 failure and that’s of course dangerous
      41:04 he concluded for you know for the
      41:08 country and it’s better to abandon this
      41:10 system and instead he looked at other
      41:14 countries that had a more successful
      41:16 monetary system such as Japan and
      41:19 Germany and the US and he concluded well
      41:23 we need to decentralize banking and so
      41:26 when he came to power 1978 what what was
      41:28 the key one of the key things he
      41:30 introduced was he found it thousands of
      41:34 banks thousands of new banks local banks
      41:36 small banks regional banks specialized
      41:40 banks all across China and the rest is
      41:43 history that’s how you get high economic
      41:44 growth “

  9. Excellent piece as usual. Also kudos for the Dire Straits reference in the title! There are just too many variables and too many random inputs to predict the timing of events. Those in charge are very skillful at using the levers of their power to just keep things going a little longer, and then a little longer still. And everyone is gleeful to point out when predicted events don’t occur. People were making predictions for imminent peak oil back in the 1990’s and it will have taken ~25 years for that to occur. And you don’t really know until you can look back from 5 years beyond, what current events really mean.

    • Thanks! I just wish I could remember the source of the original quotation that “hope springs eternal”, which works nicely as “hype”.

      One doesn’t have to work in capital markets for long to discover that there’s always drama, and everything is either fantastic or disastrous, but that most of it has no bearing on the wide world outside the office window. This time, though, it really does seem different.

  10. DeGrowth; DeFinancialization; Triage; Focus; Balance; Choose Health; Collapse; Self-Reliance
    I suggest that all of those words could be used to describe the phase we will certainly be experiencing over the next 20 years. The facts are that we have to cease letting debt drive everything, carefully choose the life affirming and eschew the life destroying, let the dysfunctional die, and buy less gratification. Since many of the ills that afflict our society are a result of rather stupid use of fossil fuels, there is an opportunity to improve outcomes as the amount of free energy at our disposal declines. Perhaps we need to look carefully at the ‘genius of Deng’ and the writings of Marcus Aurelius.
    Don Stewart

  11. Dr Morgan, great piece as usual, you never fail to impress.
    Here in the US-. As a wholesale (plant) nursery owner what I am watching is surreal.
    The demand for plants last year due to people fixing their yards instead of traveling and dinning was more than extreme. Production follows a shifting up pattern- 4″ to gallon, 1 gallon to 2, 2 gallon to 5, with a year or so between actual shifting to being ready for sale. Last year took everything from 5 gallon to 1 gallon depending on species. Vegetable starts were rationed by growers with garden centers getting 20-50% of what they ordered. On the grower end vegetable starts are roughly 28 day production cycles. People who waited until summer to do their landscaping often found stores empty of what they wanted. This has NEVER happened in my 40 yr. experience. Canning lids disappeared, new freezers had a waiting list.

    Enter 2021. March. Vegetable starts are already being rationed. Potting soil for people making raised beds is in such demand that bagged potting soil producers cannot find enough trucks to handle the surge in demand. Seed packets are disappearing off store shelves. Garden center owners are holding back seed packages to prevent hording and extend the ability of more equitable disbursement. My non booked inventory resembles late June when the spring season is over with and sales traditionally drop. I am turning away customers. My landscaper customers are redesigning landscape designs around plant availability. This is nuts, landscapers equate it to 3rd world. (1st world problems I know….) While it is good to be busy and way better than 2008 this feels apocalyptic. How do you possibly make long term plans in a situation like this.
    My sister in law tells me canning lids are in short supply right now and we are what(?) 4-6 months from canning season.
    I firmly believe everyone should be somewhat prepared and this actually makes a society more resilient. We personally did not wait in line for toilet paper last year. helped out others in short supply. There is a difference between ‘head for the hills’ and stocking up. Fewer panicky people is always a good thing imho. Best to be quite about it for “hoarder shaming” is right there from the unprepared.

  12. Dr. Tim,
    What an amazing article, you’ve outdone yourself and that’s saying something. So well presented. A real air raid siren! The overshoot of financial assets vs. prosperity in the fourth wedge charts is jaw-dropping.
    Btw, I love the brilliant title and inversion of the Dire Straits song, “Nothing for money.” “Money for nothing” does indeed eventually become “nothing for money!” I also loved “hype springs eternal.”
    Thank you for your hard work, insight and analysis.

    • When a digital token runs up 1000%, corrections are normal! Dropping 6% in a day isn’t a big deal.

      52 WEEK RANGE
      5,867 – 60,738

    • What interested me about the story wasn’t the price correction, but talk about bans.

      At the moment, cryptos are investments, not money – to spend them, you still have to convert them into fiats.

      If they ever did become money, though, I don’t see how the authorities could afford to tolerate currencies competing with their own – governments need a monopoly of money in general circulation (seigneurage, Gresham’s Law and all that).

    • Yesterday (or day before) Elon Musk said that you can buy a Tesla with Bitcoin! Others may follow. The plot thickens.

  13. Looks like more U.S. tax increases on labor (and those with the least prosperity) are coming. Can’t let large corporations and wealthy individuals foot the entire bill!
    Biden promised he wouldn’t hike income taxes on those making less than $400,000 p/a, but – you got to love politicians – nobody said anything about not passing a national VAT!

    Surprise! – seems like a trial balloon but :

  14. A Wall Street View of Renewables, Fossil Fuels, Nuclear

    They didn’t say it this way. Do you remember when Putin joked that Musk had figured out how, after Hitler failed, to run trucks and cars on coal? They talk about the low density of energy in wind and solar, and how that drives very low IRORs. It occurred to me that we are trying to take a low energy density source and make a high energy density vehicle which weigh 2 tons to move a 200 pound human from Point A to Point B, which is very low energy efficiency. Combining low density with inefficient work using expensive scarce resources.

    Rozencwajg likes nuclear. Alternatively, invest in copper because it will take an awful lot of it to make EVs.
    Don Stewart

    • In re: Ever Given, check out the new online Atlantic Monthly article, “The Big, Stuck Boat is Glorious,” It has a really funny website address – “we’re going to need a smaller boat.”

      “I’m obsessed with the dang boat because people like me and you are not really supposed to be aware of what boats like her are up to. You’re not supposed to think about, or even notice, global freight, but the Ever Given has made cartoonishly noticeable some of the crucial infrastructure of global capital, which is usually invisible in most people’s daily life. She has done so with an absolutely sublime visual gag, improved by every new detail about the problems the ship is causing and every new photo of the impotent human measures being undertaken to fix them. Peruse the surrounding waterways on any of the internet’s maritime trackers, and you’ll find the beginnings of a far more significant problem: More than 150 other absolutely huge shipping vessels, transporting everything from live animals to crude oil, are waiting on either side; the barge ran aground at a point where the Suez has only one lane, which means that traffic is blocked in both directions.”

      “. . . . . When people have to think about that—and perhaps, as a result, feel connected to the high-stakes logistical ballet that is global manufacturing, or implicated in the often miserable working conditions of the faraway people who make it possible—something consumer psychologists call “friction” is introduced into the buying process. Retailers, manufacturers, and shippers alike benefit if purchase decisions feel unencumbered by anything but consumers’ personal desire, which means the origins of the things we buy are usually obscured.

      You know what else creates friction? Sand. In the case of the Ever Given, it has created so much friction that trade between Europe and Asia has effectively paused, an oopsy so big that it is visible in satellite imagery. “

  15. Inflation vs. Deflation
    I once bought into the notion that as oil got more expensive and free energy from the petroleum production system declined, the price of oil would go up. Then BW Hill and Gail Tverberg floated different, but related, notions that what we would see is deflation because workers wouldn’t have enough money to buy stuff heavily reliant on oil. (The same logic applies to other primary energy sources.)
    I have now reached a tentative conclusion:
    *We will definitely see a decline in financial values as growth is recognized as a mirage. This is not physical inflation or deflation…it relates to fiat money and digital assets such as cryptocurrencies, which are not directly useful for anything at all.
    *Whether the price of oil goes up or down relative to currencies is a trickier question.
    #In a free market, many goods and services currently in demand in the OECD countries will no longer be in demand as the free energy declines. People would look at the relative price of imported and airlifted fresh grapes against the cost of sun- dried raisins and the fresh grapes will vanish. Similarly, wasted and harmful practices will be strongly disfavored. My ballpark guess is that half or maybe three quarters of the economy consists of these kinds of goods and services. Therefore, the price of oil stated in terms of food would not necessarily skyrocket, while it can’t be stated in terms of fresh airlifted grapes at all. However, as the cost of oil goes up, then it will gradually increase in price compared to, let’s say, potatoes or wheat.
    #But oil is not the only resource which is depleting. For example, farmland all over the world is declining in quantity and quality. Whether the price of food will rise more rapidly than the price of oil is unknown, but we can probably expect both to go up relative to, let’s say, haircuts.
    #We can conclude that there will be downward pressure on wages.

    BUT we don’t live in a free market. Governments are determined to take huge risks to try to keep BAU in place, and to prevent the kinds of substitutions I sketched out above. Governments MAY create an enormous collapse because they either don’t understand or because they are willing to take any risk in order to preserve their own positions. Look at Biden’s recent comments about China…there will be no peaceful co-existence. The rising tide will not float all the boats.
    So I think there are two plausible paths forward…collapse brought on by clueless governments or painful but necessary changes in consumer behavior. And since the basis for life is the minimization of free energy (i.e., using it all), we will generate the maximum harm from climate change and other ecosystem damaging uses of fossil fuels.

    Don Stewart

    • I’m in the deflation camp. If you compare oil price to CPI you see an incredible curve fit. Those of us who understand energy should ask ourselves “If we expect high inflation (historically, not relatively) are we really confident that oil prices will be high?”

      I thought this was a very balanced article contrasting different sectors for inflation:


      He distinguishes consumer goods, capital markets and subsidized sectors as having three very different inflationary profiles.

  16. Good editorial-style article about country bans on vaccines by Ian Welsh, with pointed comments aimed at the EU:

    “OK. I have said this for years and years but I’m going to say it again now that it is being illustrated brutally: if you can’t make it yourself, you can’t be sure you’ll have it when you need it, since countries that can make it will tend to prioritize themselves.

    You must make and grow everything essential to your country domestically if you can. Any international laws that forbid you from doing so are illegitimate. They may exist; they are not Just.

    A lot of people are going to die who didn’t need to because neoliberal “free trade” orthodoxy said you didn’t need to be able to both design and make vaccines in your own country: the “market” would supply you.


  17. Are we in the End Game now ?
    As I had expected all along, the UK is now a totalitarian state with those attempting to flee he country being shot at the border, while the mindless masses are clapping for even more draconian Lockdowns.
    OK, so they are not shooting people quite yet, but the UKL 5,000 fine for trying to escape the country is just the first step.
    I expect Capital controls are next, but as that will be a Klaxton horn for a failing system, they will be introduced without being announced. So when you try to transfer UKL 10,000 out of the country, you will be called into your Bank and Waterboarded in a back room until you agree to cut the amount you are transferring to 50p.
    You might think that I am being flippant here, but to be quite honest, – I’m scared.

    • It is scary and I don’t think you’re being flippant. The majority are still, I think, sensible people, but there’s a sizeable minority with very loud voices. Nobody speaks up for restraint, a mixed economy and a preference for sanity over neoliberalism.

  18. Things that make you go hmmmmm. “How China is prepping for global financial meltdown…With interest rates still near the lowest levels in history and stock market valuations at all-time record highs, according to some indicators, it’s understandable why there are such high levels of concern in China that it may all come crashing down one day.”


    • If we raise rates we push the economy into a slump, and asset prices tumble. The latter is not all that bad in itself, but it undermines collateral and creates a debt crisis.

      If we don’t raise rates we get an inflationary nightmare. In China Mr Xi has been applying gentle pressure to the brakes and, for China, it might just work. In the West we are victims of our own past follies, and are about to find out the cost of the mistakes made in 2008-09.

  19. Thanks Dr Morgan , that was a great read.
    Encouraging that other commentators are aware of the unsustainability of the path the global economy is on.

    How do you see this playing out?. I heard the theory of the ‘crack up boom’ where the stock markets goes patabolic then slumps.. Jim Rickards is calling for hyperinflation and $15,000 oz gold. Harrry Dent says no…the money printing will cause a deflation with gold slumping in price. Perhaps the crash has already started.?..cost of steel and timber are up 40% since 2019.

    • Thanks. Incidentally, I don’t see how money printing could cause deflation.

      There are no good outcomes from where we are. The least bad outcome might be if rises in inflation led the authorities to raise interest rates, and/or ease off on money creation. Asset prices would slump, and we’d face a wave of defaults. This is what might have happened back in 2008-09 if we hadn’t opted for ZIRP.

      It seems more likely that they will, once again, try to stave off reality with more gimmickry. That means hyperinflation. If we adopt – say – negative interest rates, that puts the price of money at less than zero, and forces of equilibrium would align the value of money with its price.

    • I personally think they are both right, its just a matter of timing. We will see some major asset price collapses in the equities and housing, which will take other assets like gold with it. But commodities and PMs will rise soon after that as people seek a safe place. There will be so much misery the FED will try to print themselves out of it, which will cause the hyperinflation.

      Basically Brent Johnsons “milkshake theory” still makes a lot of sense to me.

    • If all goes according to plan, the next article here will be about interest rates and inflation. I’ll be using SEEDS, RRCI and the distinction between the energy and the financial economies.

      The conclusion is that the authorities need to make relatively modest rate rises very soon if they want to avoid much bigger rate hikes – and/or hyperinflation – in the not too distant future.

    • @Dr. Tim

      Bullard had an interesting paper about how a public long term commitment to low rates has a paradoxical deflationary pressure. Here’s a link to an executive summary of his longer paper:

      Click to access SevenFacesSummaryFinal.pdf

      Another way to look at it is the Taylor Rule where

      r = p + .5y + .5(p – 2) + 2


      r = the target federal funds rate

      p = the rate of inflation (let’s assume real is 6%)

      y = the percent deviation of real GDP from a target (let’s assume 27% in the US as this is the combined stimulus percent)

      R = .06 +.5(.03) +.5(.06-2)+2

      R= -.76

      Interest rates are already way too high?

    • I’m hoping we can have a lively debate around the next article! I plan to publish this after the Easter holiday.

      My view is based on drawing a distinction between the ‘real’ economy of goods and services (ultimately of energy) and the ‘financial’ economy of money and credit. The latter consists of ‘claims’ on the former.

    • The federal banks can’t by law “print money.” They lend, which increases debt in financial systems. To the extent this spending is used to backstop consumption it causes deflationary pressure unless it is used to create investment which produces a flow of future revenue which can pay back interest and principal. The US FED was granted a special exception to buy (printing money through spending or “money financing”) corpoorate junk bonds which has now expired. This was the SLR and was a balance sheet function.

      The BOE also dipped it’s toes in the Rubicon through a “one time” direct payment to the treasury last year due to coronavirus issues.

      So long as the CB’s create debt, long term rates will go down. If and when the federal reserve act is rewritten or some form of direct buying by central banks is allowed, then we will see the hyperinflation.

      Dr. Lacy Hunt is in my opinion the best informed on this topic.

      I think the stimulus will produce 1-2 quarters of improving conditions and inflationary expectations, followed by a further bust.

    • Let me come at this in a different way.

      The ‘real’ economy of goods and services is an energy system. Rising ECoEs are putting a stop to growth in this ‘real’ economy. Growth between 2002 and 2019 was just below 2% annually, though lower in the later part of that period, as the ECoE squeeze tightened.

      The ‘financial’ economy of money and credit consists of an aggregate of ‘claims’ on the real economy. Between 2002 and 2019, the aggregate of financial claims expanded at a rate in excess of 6%.

      The gap between the ‘real’ and the ‘financial’ economies is enormous. The financial system has defied gravity only because of a false narrative of ‘growth in perpetuity’ – that the excessive financial ‘claims’ of today can be met by growth tomorrow.

      Inflation and/or default are the only ways in which this situation can be reconciled. To minimise these consequences, we need to stop the financial economy from continuing to grow at break-neck speed.

    • @ Dr. Morgan – thanks and I’ll look forward to the next article! 100% with you on the energy economics and terminal decline.

      In looking forward I think It’s important to characterize the FED (or CB in general) operation right I think: The treasury sells bonds to Prime dealers/big banks. These dealers sell to smaller banks. The FED buys the bonds from these same entities but does so only by debiting a reserve account of these banks held at the FED. Neither the FED balance sheet of assets nor these reserve accounts circulate directly as money.

      The reserves can (but don’t have to) be used as the basis for lending, which comes close to the hyper inflationary thesis. However, individual banks still needs to cover the risk premium, and the borrower still needs to repay the loans with interest. Increasingly these banks are using balance sheet operations for financialization, not lending to productive economic activities (which as you correctly note are in terminal decline due to the underlying energy basis of the economy).

      Much lending is winding up in unproductive asset speculation (housing bubbles, share buybacks, etc.). Essentially, increasingly, the created money never leaves the financial system – supporting asset sales at increasing levels of debt. This leaves some people with high priced houses (and no discretionary spending) or firms with high priced stock (who can’t invest in expansion out of savings). Hyper inflation would definitely happen if this process were changed to allow the FED to spend directly. Rather I see a horizontal series of asset booms and busts – like a skipping stone on water making smaller jumps.

      Thank you! Looking forward to the next article.

  20. @Dr. Morgan
    If the US is stricken by hyperinflation, does that not necessarily imply the death of the dollar as the world’s reserve currency and the effective defaulting on debts owed to the US and by the US?
    *Countries which have borrowed heavily in dollars get debt relief
    *Foreign investors who have loaned money to the US lose their investments
    *The standard of living in the US drops 40 percent just due to loss of the reserve currency
    *The US cannot afford a huge global military
    *The US contribution to global warming sinks to near zero
    *The US gamble that the Rest of the World could be made to pay for the big US infrastructure program turns out badly
    *Probably the dissolution of the US as it devolves into probably warring states

    Apocalypse Now?
    Don Stewart
    PS. The thought occurs to me that China, with a currency pegged to the dollar, might de-peg and become the defacto global currency….backed my manufacturing capability, which fits nicely with block-chains.

    • @Dr. Morgan
      I think (not based on any personal conversations, just observing and inferring) that Biden and the New York Times and the other elites sense that ‘the American Way of Life’ really is on the table, despite Bush I’s assurance that it never would be on the table. Failure can come from different directions:
      *The ordinary Mayan people got fed up with the elites and just walked away into the surrounding forest. That may be what the Belt and Road countries are doing.
      *The people in the US become convinced that the tenth of one percent are not on their side, and rise up in revolution. This never happened in Rome, to my knowledge. I will just appropriate the name ‘consciousness of sheep’ for my purposes. Deep grooves from habitual ways of thinking and the constant re-inforcement in socially approved rituals make it hard to get the wheels out of the ruts. Trump went out of his way to attack those who disrespected the rituals. When I was in middle school, we learned to disrespect the rituals. When did things change? I think it was when most in the US lost any sense of real purpose and it all became about money.
      Don Stewart

    • Thanks, Tim, fantastic presentation by Messrs. Hudson and Escobar. They don’t take the energy cost into consideration – it’s not clear how either of the two warring financial systems will survive that, but Hudson’s view on the desire of America for war with Russia is bone-chilling.

    • The way I see it is that the Sino-Russian side leans towards the ‘real’ economy of goods and services, and the US/UK towards the financialized economy of money and credit.

      Where rising ECoEs come into this is that they add to the wedge dividing underlying prosperity from GDP. The inflexion point of Chinese prosperity seems to have occured at an ECoE of 8.2%, whereas British and American prosperity turned down at c4.5%.

      This is a more serious issue for a financialised economy, because the stability of the system depends upon an accurate understanding of the underlying economy. If you look at it in the Sino-Russian way, you’re attaching a lot of weight to physical metrics. On the US-UK basis, you’re relying on a financial representation of output, which makes you more vulnerable to mis-calculation. It’s hard to reference this metric when you economy is heavily biased towards services in general and financial services in particular.

    • More broadly, what struck me from the presentation was that the US-UK side is losing the contest – wrong strategy and, many might contend, wrong motives.

      I really don’t see how the US could conveivably fight Russia, or China for that matter. This goes beyond the ‘simple’ MAD of nuclear exchange. Either side could destroy or cripple the other’s communications systems without ‘dropping a bomb’ on anyone.

    • I’m afraid I agree with Michael Hudson’s overview and I’ve seen this discussion reposted in several places, some quite unlikely such as Zerohedge,

      but for anyone staunchly wedded to the current mainstream orthodox view everything in this discussion must be very alien to their way of thinking,

    • @drtimmorgan
      “I really don’t see how the US could conveivably fight Russia, or China for that matter.”

      But I do! My last prediction (last year, IIRC) was “WW3 within 5 years”. At this point I’m tempted to reduce the timeframe again… within 2 years, maybe?

      “This goes beyond the ‘simple’ MAD of nuclear exchange. Either side could destroy or cripple the other’s communications systems without ‘dropping a bomb’ on anyone.”

      Is that even a bad thing at this point? 🙂

    • Hopefully, Chomsky is right?
      “By the time you got to the first Bush administration, after the collapse of the Soviet Union, they came out with a national defense policy and strategic policy. What they basically said is that we’re going to have wars against what they called much weaker enemies and these have to be carried out quickly and decisively or else there will be embarrassment—a way of saying that popular reaction is going to set in. And that’s the way it’s been. It’s not pretty, but it’s some kind of constraint.”

  21. UK mortgage borrowing hits an 8-year high, as tax breaks distort the residential property market. Much more interestingly, UK credit growth has hit a 27-year low, according to the BoE, with a -9.9% annual decline.
    Those with money are scared, too; £17.16bn was added to UK deposit accounts in February; hardly investing in productive assets. I sense a creeping confidence malaise amongst to 50+ age group, with people hunkering down, unconvinced all will be well come “unlocking” in June; we shall see.

    • is it only people over the age of 50 who can remember the 1988 crash?
      anyone younger hasn’t experienced that sort of economic crisis?

      the 2008 GFC should have triggered a sizeable houseprice correction, more unemployment and an uptick in interest rates but the unprecedented fiscal intervention propped the whole system up,

      when Gordon Brown claimed to have ended boom and bust wasn’t 1988 the bust he was really referring to?

    • ‘ “No return to boom and bust” was a phrase I coined when I was chancellor and we had achieved four years of growth with low inflation before Gordon took office.
      “Brown has traded heavily on the credit flowing from making the Bank of England independent. But I had already reformed monetary policy; and the stable monetary framework that he inherited, with the inflation target at its heart, was the decisive change. Inflation had been defeated by the Major government. “

    • Indeed. The person quoted is Kenneth Clarke, and he was right. He was British chancellor (finance minister), and a good one. The ‘New’ Labour years were a disaster.

  22. If they didn’t have any sort of understanding, why would they attach the dollar and oil at the hip?

  23. hyperinflation will only happen in two ways: Either the US repudiates its debt or the world does. Won’t happen before one of those occurs. Otherwise everything is still expected to be “paid” back. As long as the debt exists the hyperinflation will not occur.

  24. “Incidentally, I don’t see how money printing could cause deflation.”

    It’s not money printing until the debt doesn’t exist.

  25. Regarding the inadequacies the PTB in matters economic as mentioned often here :

    The UK business and energy secretary in yesterday’s press stated that “Scotland’s oil and gas industry has been the economic artery for many communities”.
    What he should have said was Scotland’s oil and gas reserves were turned from the “metabolism “ of the economy into a financial commodity that was then siphoned via the arteries of the exchequer to
    1 award bankers bonuses ,
    2 purchase Chinese goods (mostly for discretionary spending)
    3 military spending ( Falklands war etc.)
    4 a tunnel to a continent we have now divorced from economically .
    etc. etc…………

    Fortunately some dross remained to be “awarded” as welfare payments .

  26. Collapse and Container Ships
    If this is what collapse looks like, it is pretty peculiar. Search on Long Beach or Los Angeles container ships and you will find pictures of all the container ships from Asia lined up, unable to get to the docks in California. Accompanying the pictures are horror stories about the disruption to supply lines. One can draw lots of conclusions, some morbid and some merely comical.
    Don Stewart

  27. Thank you for such a concise and readable summary of the situation, one I will pass on as highly recommended. I tend to think the benefits of maintaining a reserve currency (i.e. not choosing the hyper-inflationary path) are underestimated. Put another way: what is the actual benefit of destroying the purchasing power of one’s currency? Cui bono–to whose benefit? The general assumption seems to be that hyper-inflation is beneficial because nobody defaults, but if you can no longer trade your currency for imported food and oil, then what was the benefit of hyper-inflation?
    Charles Hugh Smith

    • Thank you – much appreciated, and I’m a long-time reader of your excellent blog.

      The ‘cui bono?’ here is that inflation saves decision-makers from unpopularity. If they act to curb inflation, the resulting falls in stock and property prices anger a lot of very vocal critics. William McChesney Martin said it was the job of the central banker to “take away the punch bowl before the party gets started”, but that doesn’t make you popular with the revellers. The inflationary spiral begins in popularity and ends in disaster.

    • Good to see Charles here. I’ve been reading his blog for some years before adding this one a couple of years ago. Only a handful of economic ones make the cut, as science and population-environment ones are also in my mix.

    • Hi Charles/Tim – big fan of both your work. I think you both may appreciate Lyn Wood’s extensive analysis of the (questionable) value of the petro-dollar system. I don’t share her conclusions on a weak short term dollar or her confidence in bitcoin. But the basic point is that the downside of having a reserve currency is that one must supply the world with currency via trade deficits.

      The short term benefit is being able to consume without producing. However, the long term effects are structurally negative: (1) The U.S. through this process outsourced most of it’s industrial capacity (need to import goods to export dollars), and (2) increasing foreign reserves causes increase in foreign ownership of U.S. assets.

      Eventually the costs outweigh the benefits and the process encounters diminishing returns which in my mind leads to the increasing issuance of debt, or perhaps the abandonment of the system.


  28. I think the question of cui bono is attenuated because I don’t believe that hyperinflation is intentionally chosen. Inflation is chosen, particularly asset inflation, because it protects the asset values of banks’ collateral so that banks don’t have losses on defaulted secured loans, and it creates a wealth illusion which is useful for social control and particularly buy-in to the status quo by the wealthy and their apparatchiks. I am not sure the plan works so well if you have stagflation, which is what we have, because companies rely on consumers / renters to retire the companies’ debts, and if wages are not also rising as fast as costs of essentials and assets, eventually you have a question of who’s going to provide company/borrower viability for the next financed round of asset purchases. Can meets end of road.

    HI is a psychological event, a loss of faith in the currency. There is no clear bright line when you’ve pushed inflation too far, people start concluding you can’t trust the currency and begin getting rid of the currency for tangible assets asap, It likely starts slowly, like investors snapping up farm land instead of more financial assets. This spreads and snowballs and you’ve got HI, because you’ve pushed inflation too far.

    • Added to the above is global perception of the desirability of holding the currency. The $s reserve status, if waning, also can snowball. Losing relative value (to other currencies) increases import prices, exacerbating domestic (US) inflation. Also, investments in the US by foreignors would underperform in their local currency terms.

    • Indeed so. This is why I think CBs should make a public commitment to raising rates, helping to let some of the air out of the asset bubbles.

    • According to M. Hudson.
      “Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
      The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.”


  29. Alice Friedemann Reviews Bright Green Lies

    Alice, herself, is predicting a 6 percent per year decline in oil supplies starting right about now…which will decarbonize the economy more rapidly than any other solution on the table. If she is correct, then massive projects of the type expected to be proposed by Biden are a waste of resources that we urgently need to redirect in the direction of biological and lifestyle solutions. Also see Dave Pollard’s essay on the over-population, ecological destruction problems in Latin America:
    Dave thinks half the people in Latin America will try to move north.

    Cheery reading for a Monday…Don Stewart
    PS. The first ‘lifestyle’ solutions would be to put grain fed animals and grain grown for ethanol on the chopping block. The first biological solution would be to implement small-scale peasant farming of the type described by Chris Smaje or Geoff Lawton. Then somebody urgently needs to tackle drinking water…I have heard that a very high percentage of the wells in Iowa are contaminated. Perhaps the biggest obstacle is driving a stake through the heart of the ‘Mars Colony’.

  30. Prof. Robert Dingwall, a SAGE Member re-tweeted this

    I’m not sure if Prof Dingwall agrees 100% with the original tweet but its message was that a decision seems to have been taken to sell us into slavery. For some reason, a further attack on civil liberties is meant to help solve the problem of falling EROEIs.

    ‘Slavery’ … surely a gross exaggeration? Well I’d regard living in a Chinese-type society as close to slavery. People become viewed as state property, need a licence to live, misdemeanours lose them some aspects of access to normal life, etc.

    ‘Your papers, please’ sums it up for me. But a modern tracking device, called for some reason a smartphone, makes the work of the state much easier.

    • Dealing with China first, there is a well understood “grand bargain”, in which citizens do without certain rights that are (or were) taken for granted in the West, in exchange for prosperity delivered by the government.

      It seems to me reasonable to require people to wear masks, but not reasonable to coerce them into having vaccines if they prefer not to do so. One can sort of see the government’s point of view, given the parlous state of the underlying economy. The desperation is encapsulated in the fact that, whilst inflation is a very real threat, the BoE has rates at 0.1% and hasn’t ruled taking them negative.

    • @Don
      Thanks for drawing attention to this work. Looks highly relevant.
      I know that book recommendations might not be the best use of space on this blog but a book I am “essentially consuming” at the moment is “MORE” by Philip Coggan. It gives an excellent outline of how we got to where we are over the previous 10000 years.

    • Reply to Jeremy

      Here’s a well informed discussion of ‘geo-politics’ and the future relationship between the USA and China

      My reactions are (in Thatchers words)

      No, No, No

      to Artificial Intelligence, Big Data and a digital-only currency which they spend a lot of time discussing.

      But the UK seems to be heading that way and few of the population have yet woken up; they think that we face a deadly virus whereas we face a future that makes 1984 look like a free society.

    • Norman said: “ they think that we face a deadly virus whereas we face a future that makes 1984 look like a free society.”

      EXACTLY on all points. I didn’t think I could be more depressed about humanity or our future, but I was wrong.

  31. Good article on Yellen’s tax plan at WolfStreet on April 7
    Yellen “proposed to impose a minimum tax of 15% on “book income” – namely the inflated puffed-up income that corporations report to their shareholders. This measure would apply to “large companies that report high profits, but have little taxable income.” The proposal calls it the “minimum book tax.” . . .
    “If large corporations have to pay 15% minimum income tax on their profits as reported under GAAP, it could possibly bring some honesty and reality to financial reports because, under the 15% minimum tax on book income, companies that inflated and puffed up their income would have to pay 15% taxes on that inflated and puffed-up income. This would be a costly disincentive to inflate and puff up income.”

  32. Great read, thanks for this, I was directed here from a forum that follows a deflation/reinflation narrative, I’ve never been quite sure if it was deflation then inflation or just loads of deliberately generated inflation.

    I’ve been saying more or less what you’ve said in this article since 2012.

    You can find me on twitter under HousePriceMania

    They had a chance to slowly wind down this insanity in 2008 but the establishment have gone all in, there is no way back now. AFAICT they will keep going till the monetary system collapses.

    Then all hell is going to break lose, we are looking at Germany 1920/30s type scenarios here.

    The establishment care not, they can’t lose, they own all the assets, all the guns/tanks/soldiers and the monetary system.

    The pandemic should have see this whole sorry mess collapse but they’ve doubled down and made things much worse.

    The only question now for me is how to protect what I have.

    Will we see a collapse in the stock market. I’ve only invested in Energy stocks pretty much now so hoping to avoid the worst of it if it does. Or, will be just see ever more extremes back by money printing and more and more helicopter money ?

    I am keeping a close eye on this and have 2 options:

    1) Wait for asset prices to dip then buy outright with cash

    2) Go all in now and take on as much debt as possible and watch it inflate away.

    I had a lot of cash sat about and I am having a lot of sleepless nights.

    Just what do you think we’ll see over the next 2 years ?

    Any comments would be appreciated and not taken as advice.

    • Well, we don’t do investment advice here but I think the major question is whether one sees inflation or deflation. I’ll offer two images which impact my investment decisions. Do you think oil is going up or down?

      Do you see assets correlated with this trend?

      I’m in the (temporary) inflation (2%-2.5%) in the next 2-3 quarters, followed by deflation (30%-70% fall in markets) followed by hyperinflation camp (which will require rewriting the federal reserve act or something equally radical). One cannot of course rule out the tilt of politics (government collapse, war) or nature (more covid variants, environmental issues).

    • Our most recent brush with hyperinflation happened in the late 70s and early 80s. Dramatic rises in oil prices fed through into consumer price inflation, which fed over into wage inflation. This was stemmed by sharp rises in interest rates.

      The risk this time comes from a different direction – ultra-loose monetary policy, which has inflated asset prices, and the financial ‘claims’behind them.

      Conventional inflation measures such as CPI don’t capture either asset price inflation or the effects of asset price inflation. The broad-basis GDP deflator doesn’t capture this either.

      As you might know, I’m using the SEEDS economioc model to develop my own measure of comprehensive inflation, RRCI. Preliminary results show this climbing, globally, to 5.5% last year, with very much bigger spikes in a small number of ultra-vulnerable countries, such as Britain and Ireland.

      The real issue becomes clearer when we think of the ‘financial’ economy of money and credit as a series of ‘claims’ on the ‘real’ economy of goods and services. Between 2002 and 2019, compound growth was over 6% in the financial economy, but less than 2% in the underlying real economy.

      This has created a huge overhang of excess claims, financial ‘promises’ that the real economy cannot meet. Inflated asset prices are a by-product of this process.

    • Very good and witty.

      Of course what isn’t being factored in is the human growth crisis.

      Peak prosperity and a human growth crisis, has in my mind precipitated the Culture War, from America, to Britain and is now emerging in France. This is the downwardly mobile middle classes struggling to regain positions of privilege that can’t realistically be sustained anymore. Energetically or financially!

      It seems to me, the Authorities are trying to create a middle way strategy between stagflation and austerity with the hope that monetary stimulus will be absorbed by rising ECOE which will at the same time increase energy prices and make energy production more profitable for future investment. I guess the plan is to deal with any cultural-socio-economic side effects as they arise.

      Therefore, presumably the hope is that financial overhang in relation to the real economy will be invested in energy production. The question is whether the financial sector realises that they absolutely need to invest in energy production if they want to see their assets retain value.

    • Thanks Steve.

      I think we need to be clear about financial excess. What’s happened in asset prices is a by-product of the creation of excess financial claims. Fundamentally, real value isn’t destroyed by falls in asset prices. A company still exists if its share price slumps – indeed, even bankruptcy doesn’t destroy its assets, just transfers them to new owners (generally creditors). A house doesn’t lose half its value or utility if its price drops by 50%. These metrics, in aggregate, are ‘notional values’. We could never monetise the aggregates of stock markets or the housing stock.

      What matters is the scale of liabilities, which, perhaps confusingly, are the “assets” of the banking side of the balance sheet. We can’t invest these “real economy liabilities” in anything. We just have to hope that decision-makers understand this…………..

    • Thanks Tim.

      I think what I’m trying to get at (with my limited knowledge) is that monetary stimulus needs to be invested in energy production not fixed assets.

      I appreciate that the financial sector might see better short term gains by inflating asset prices but without the required investment in energy production, then these short term gains will be short lived.

      In this respect, I see the financial sector as the current guardians of our future prosperity.

    • @Dr. Morgan
      I live surrounded by old people, living independently. The predominate attitude among them is that the monetary value of their house is their guarantee of a comfortable place in the nursing home. So the perception of price inflation above the level of wage inflation in a nursing home is welcomed.

      As a second example, research studies support the notion that people prefer a 2000 square foot house in a neighborhood consisting of 1500 square foot houses rather than a 3000 square foot house in a neighborhood of 5000 square foot houses. In other words, status is hugely important. Price inflation of one’s existing house is a way to gain status by trading up and levering up.

      In a Degrowth future, the notion of the house as shelter and as a homestead providing the basis for self-provisioning and production of useful items with a market value may once again become dominant. But, as of right now, we are very far from that mindset.

      There is also the class conflict: the old with equity and the young with nothing much but debt.

      Don Stewart

    • House prices are a pretty general blind-spot.

      Imagine a conversation between a young person, complaining that prices are too high, and an older person. The latter is likely to think that the high price of his/her house reflects prudence and hard work, not, as is really the case, a combination of scarcity and monetary policy. The younger person won’t be impressed by prudence and hard work as a solution to his/her lack of home security and paper wealth.

      Some governments even believe that high house prices are ‘good’ for society and the economy………….

    • Self provisioning.

      The word of the day. I only used it yesterday as a substitute for self reliance.

      I prefer provisioning as it implies one is actually doing something rather than sitting on wealth.

      Similarly I like it because it is part of the ecosystem services lexicon 🙂

    • Hi Steve,

      have you read; Sustainable Energy Without the Hot Air by David MacKay?


      even maintaining our current primary energy base will be a huge headache,
      creating a greater surplus for further growth seems highly improbable.

    • Thanks Matt.

      Yes I agree. I don’t expect the same level of energy to be available indefinitely but it seems prudent to me to directly invest in energy production especially within the context of human population growth and the accompanying race to the top in terms of human expectations.

  33. With respect to Dr. Tims comment ‘ that the high price of his/her house reflects prudence and hard work ‘, cannot the same delusion be also applied to the notion of pension provision. After all, investing, either directly or indirectly, in any company requiring exponential growth ( and its’ attendant ecological damage ) to increase shareholder value and bonus, surely is exactly the same ?

    My siblings often proclaim that they have earned their pensions, but at what cost ? If my daughter and grand children ever understand what utter profligacy we have embarked upon, then we deserve their condemnation.

    Or we can just blame ‘ The Maximum Power Principle ‘.

    • Peter,

      MPP and questionable “free will” are key in my opinion. Blame accomplishes nothing as it is after the fact. I agree with your evaluation of history to date, though.

    • I too think biological factors are at play which are intentionally downplayed by culturalists and nurturists in order to leverage social policy as a political weapon.

      What this does of course is create a race to the top in terms of human expectations which itself could be described as a manifestation of the maximum power principle.

  34. A fascinating historical perspective to our current dire straits by Tim Watson on his ‘wake up & think for yourself’ educational site, written in his guaranteed, beautifully-balanced, clear and easy to understand style: https://consciousnessofsheep.co.uk/2021/04/10/reflecting-on-stupidity/

    It’s hard to dispute this account and therefore equally hard to see any ray of hope, but in trying to be optimistic, I thought that at least a person can stop condemning themself for the precarious situation they find themself in now. (As the system deliberately, continuously, conditions us to feel because victim-blaming distracts from the predatory and parasitical actions of the pathocracy)

    • Like Dr Tim’s work Tim Watkins’ take on things economic is so well described .
      These two men are giants . The world would do well to ‘stand on their shoulders’.
      Dr J C Mackay mentioned by Matt was clearly another giant. Sadly just discovered that he passed away in 2015 aged 48.
      Philip Coggan’s efforts are also admirable but he fails to draw any meaningful connection between the energy deficit of the planet and the monetary system employed therein.

  35. A Prosperous Way Down
    It is worth noting that Howard and Elizabeth Odum’s last book, A Prosperous Way Down, which is available as a free PDF, is also now available for around 30 dollars at Amazon. Originally published in 2001. A couple of years ago it was not available at Amazon at all. Howard is The Godfather of the Maximum Power Principle. So perhaps there is renewed interest in the subject.

    Here is an article from 16 years ago on the subject, well before the term Degrowth was coined:

    Here is Elizabeth’s expalanation of why they wrote the book:
    “This paper is based on one of H. T. Odum’s special projects: the future of human civilization. He put together facts, explanations and predictions in many papers and the book we wrote together, A Prosperous Way Down (Odum and Odum, 2001). Instead of anticipating a crash, a possible, hopeful, view of the future is predicted. These discussions and conclusions are based on two hypotheses. The first, with which most scientists agree, is that we (the world and our economy) are going down (there will be fewer resources to live on). The second, less considered, is that the lower energy future can be prosperous and happy – depending on our human actions. Our plans and activities must include the world environment as well as the economy, as shown in Figure 1.”

    A comment from me, which may or may not get published here since it can be pigeonholed as ‘biology’, develops the link between the malnourishment currently at epidemic levels in the US and other advanced countries and the malfunctioning of the brain in terms of psychoiogy. But if it isn’t published, do a little research on folate and magnesium.

    Don Stewart

    • There is definitely a prosperous way down because I am living it in my 10×8 ft allotment shed (with small conservatory on the side and covered balcony at the back). Been here nearly four years now, mostly self provisioning my own vegetables and beans which I process as stews for the hunger period.

      I use personal tech like smartphone and a laptop which I recharge with battery packs which are charged either by solar or mains.

      I buy in bottled gas for cooking and have a wood burner for heat and cooking.

      As part of my unofficial low impact living project, I help with allotment site management and maintenance, as well as a couple of small jobs to pay for food I cannot produce and my bills.

      The catch. With all the labour included, which I’d include some amount of my political activism, this way of life is a full time job with an income of around £50 per week. Therefore you can see why a high impact living lifestyle is more enticing.

      The downsides. Little income but lots of hard work means little taxes to pay for public services. This means a mix of low, medium and high impact incomes are required or else more time needs to be dedicated to the voluntary provisioning of public/community services. Hence the appeal of monetary adventurism.

  36. Covid; Gaslighting; Degrowth
    The parallels between the terrible experience of Covid 19 and the way the aerosol scientists were gaslit by the establishment…which led to a grossly wasteful allocation of resources, and the reality of Degrowth (which Howard Odum took as the common sense direction back in 2001, and before that Limits to Growth) is a cautionary tale. My characterization is:
    *Scientists mostly work in a world driven by data and theory.
    *Public life is mostly about gaslighting…whether politics, social media, or finance.
    The science does eventually win, but after an awful lot of misallocation of resources and suffering.
    Don Stewart

  37. So many questions, Steve.
    Don’t the authorities come knocking on your door ? What is your situation regarding ablutions and, ahem, the other ?
    I grow a few vegetables myself, hoping that my grandkids will take an interest, and have also pondered the idea of buying a bit of land and building a small cabin on it. The idea of having to dealing with councils for planning stops me in my tracks.
    Kudos to you, however.

    • Hi Peter,
      land prices, planning consent, etc. do make living an alternative lifestyle a rich mans hobby,
      I think you’d find the path of least resistance if you considered taking on an allotment and gardening it with your grandchildren,

      I empathise with what Steve is doing, I’ve done similar stuff myself, without the ability to bankroll such a thing it’s only possible if you navigate a lot of grey areas,

      most people end up cutting corners trying to climb the ladder and get into the middle class, these efforts have seemed increasingly futile over the last few decades,
      I’m swimming with the tide now and flowing away from middle class membership, I’m not quite sure where I’m heading but I’m not alone in heading there,

      my fantasy football league conception of government would be trying to enable people to adopt less energy intensive and more sustainable lifestyles, so as people are ejected from the ‘in group’ into the ‘out group’ there’s somewhere for them to go, instead of being trapped and becoming increasingly bitter that they’ve been excluded from progress and a middle class lifestyle,

      we can see where the long term trends are heading, it makes sense to ease people into transition,

      think of Steve as being a green urban pioneer trying to carve out an existence in the industrial wilderness,
      I suspect there are a huge number of other pioneers struggling to carve out a new world but doing it under the radar so as to not draw the ire of the establishment down upon them,

      Gandhi demonstrated the power of peaceful non co-operation, just ignore Klaus Schwab, Elon Musk, Bill Gates etc. and get on with doing what you think is right whilst not ruffling too many feathers in the process and kicking up a stink!

    • Thanks Peter. It took a year or so to get the site committee mostly on board and I was already helping on site. Sustaining good will is an important factor and trying to not let my rule breaking precedence get out of control.

      After 4 years I’m an open secret. The sustainability officer within the local council knows I’m here, as does many of the local environmental NGOs but as of yet no officials have visited me.

      Similar story here

  38. Dr. Tim – thank you for another superbly written piece of analysis laying out the story. On the subject of price inflation, my gut feeling and experience is that the prices of essentials are on the march. A useful measure from the ‘weekly shop’ is APPI – Average Price Per Item. This is rising remorselessly. In terms of anecdotal measure this morning I was struck by the fact that the price of a loaf of bread at the local bakers has gone up in price by +23.5% since the beginning of Lockdown1. Your observation that RCCI was typically +5.5%, but with higher spikes in ultra-vulnerable countries, such as the UK, strikes a chord with me.

    • I noticed the in-store bakery at my Tescos has replaced the packs of 6 soft rolls for 65p with a pack of 4 soft rolls for 80p!

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