#209. A path of reason, part two

PUTTING IT TOGETHER – HOUSEHOLDS AND THE FINANCIAL SYSTEM

In the previous article, we sought out a logical and evidential alternative to the continuity assumption that the economy can shrug off resource and environmental limitations in order to grow in perpetuity.

We demonstrated that the economy is an energy system – not a financial one – and that the fossil fuel dynamic on which the vast and complex economy of modern times was built is fading away, with no fully sufficient alternative in sight. The equation which calibrates prosperity in terms of energy use, value and cost has become a constrained equation, the constraints being (a) the relentless rise in the ECoEs of fossil fuels, and (b) the limits of environmental tolerance.

This does not, of itself, vindicate collapse theories, but it does mean that the world is getting poorer. The downturn in prosperity per person was preceded by a long period of deceleration, first identified (though not explained) in the 1990s, when it was labelled “secular stagnation”. Much of our economic experience in the intervening quarter-century has been characterized by failed efforts to use financial policies to ‘fix’ an economic problem which is not financial in nature, and thus cannot be countered using credit or monetary adventurism.

The onset of involuntary “de-growth” has profound implications for the four components of the economy which we can categorize as the household, business, government and financial sectors. Of these, the most important – and the easiest to project into the future using the SEEDS model – is the household sector. Simply stated, the average person will get poorer, on a continuing rather than a temporary basis, and his or her discretionary prosperity will be eroded by relentless rises in the real cost of essentials. At the same time, he or she enters this era with uncomfortably elevated levels of debt and quasi-debt commitments.

Through its effects on households as consumers, producers, savers, borrowers and voters, this process will shape the future development of the financial system, business and government.

The faith mistakenly placed in the ‘perpetual growth’ assumption has been strong enough to ensure that there has, thus far, been little awareness of, and even less planning for, the downtrend in global prosperity. Decision-makers in government, business and finance still seem to think that we can muddle through using denial, wishful thinking and a cocktail of things that Smith and Keynes didn’t actually say.

Financial – the high price of failed fixes

The immediate battleground for the conflict between continuity and reality is the financial system. Efforts to use financial policies to ‘fix’ the process of economic deceleration and decline have driven an enormous wedge between the ‘real’ economy of goods and services and the ‘financial’ economy of money and credit. Between 2000 and 2020, each dollar of reported “growth” was accompanied by more than $3 of net new debt creation and an increase of nearly $4 in broader financial commitments – and even these numbers exclude the emergence of enormous “gaps” in the adequacy of pension provision. Buying $1 of largely cosmetic “growth” with upwards of $7 of forward financial promises is not a sustainable way of managing an economy.

This has put the authorities between the Scylla of runaway inflation and the Charybdis of sharp rises in the cost of money. To be clear, finance ministries can run enormous fiscal deficits, and central banks can monetize the ensuing increases in debt, but neither can create the new sources of low-ECoE energy without which the economy must contract.

When we understand money as a claim on the output of the real economy, it becomes clear that the rampant creation of money and credit can only result in the accumulation of excess claims. These cannot, by definition, be met ‘at value’ by a contracting economy. This means that the value supposedly incorporated in these excess claims must be eliminated, either through the soft default of inflation or the hard default of repudiation.                      

The conundrum facing the authorities is simply stated. If they continue with negative real interest rates, which deter saving and encourage borrowing – and if they carry on believing that ever-larger injections of stimulus can somehow return the real economy to “growth” – they will drive the system into an inevitable process by which inflation destroys the purchasing power of money.

If, on the other hand, they decide to defend the value of money by raising rates into positive real territory, they will trigger slumps in the values of assets, and set a cascade of defaults running through the system.

The current policy is one of ‘hoping for the best’, assuring the public that the current spike in inflation is a “transitory” phenomenon caused by the coronavirus pandemic.

There are two main reasons for knowing that this explanation is false. First, ‘we’ve heard it all before’. The term “transitory” is the 2021 equivalent of the promise that the introduction of QE and ZIRP back in 2008-09 were “temporary” and “emergency” expedients. The more direct analogy is with the 1970s, when inflation was deemed a “temporary” problem, and governments even introduced the concept of “core” inflation, which excluded those very items (energy and food) whose prices were rising most dramatically at that time.

The second factor arguing against the “transitory” description of inflation is that soaring prices take on a momentum of their own. Rises in the cost of living prompt demands for higher wages, which in turn raise producer costs and push prices higher. To a significant extent, inflation is a product of expectation, a form of self-fulfilling prophecy that gives the authorities a rationale for understating what’s really happening in an effort to damp down public expectations. This, though, cannot work when consumers can see the prices of goods and services rising. This time around, the long-standing inflation in the prices of assets reinforces perceptions of inflation at the consumer level.

Where the inflationary issue is concerned, we need to be clear about causation. The chain of events began with a deterioration in the energy equation which determines prosperity. The authorities sought to counter this deterioration in ways which have led, with grim inevitability, to where we are now.

The policy of ‘credit adventurism’ – of making debt more readily available than at any time in the past – started a rise in asset prices, and created a surge in debt. When these trends crystalized in the 2008-09 GFC, the authorities responded with ‘monetary adventurism’, taking the real cost of money into negative territory.

This boosted asset prices still further, and created yet more debt, much of it channelled through the shadow banking system rather than through the more regulated channel of mainstream banking. Now we are in the grip of reckless stimulus, being carried out in the desperate hope that injecting ever more deficit finance, and persuading central banks to monetize most or all of it, will somehow reinvigorate the real economy (which it won’t), without triggering runaway inflation (which it will).        

The outcome of the inflationary conundrum is likely to follow the pattern set in the late 1970s and the early 1980s. First, the authorities dismiss inflation as a passing phase, and refuse to raise rates to counter it. Latterly, they take a reluctant and belated decision to act, raising rates in a macho demonstration of resolve.

That’s when asset prices collapse, and a wave of defaults rips through the system.

Back in the 1980s, this process triggered a sharp recession, but this proved temporary, because ECoEs remained low, and the economy remained capable of growth.

Neither condition prevails today. ECoEs have risen from 1.8% in 1980 to 9.2% now. Recovery in the 1980s involved the restoration of positive trends which had driven prosperity steadily upwards between 1945 and the disruptive and inflationary first oil crisis of 1973-74. Today, by contrast, inflation risk comes in the context of a long period of economic deceleration which, in the West, segued into deterioration between 1997 and 2007.

The first set of charts illustrates the magnitude of financial imbalances, comparing debt – and broader financial assets, which include the shadow banking system – with reported GDP and underlying prosperity. Full financial assets data isn’t available for the global economy as a whole, so the left-hand chart illustrates a group of 23 countries for which numbers are available and which, between them, represent four-fifths of the World economy.    

Fig. 1

Households – leveraged hardship

In any case, the financial system faces challenges which are far broader than the comparatively straightforward (though daunting) choice between inflation and rises in rates. This is where trends in the critically-important household sector shape the outlook. 

The average person in the West has been getting poorer over an extended period, though this reality has been masked by financial manipulation. Trends in prosperity, set against debt per capita, illustrate this situation as it has affected France, Britain and Canada (see fig. 2). Debt, it must be emphasised, has to be considered in the aggregate, including the government and business sectors, not just household indebtedness. Even these debt numbers exclude per capita shares both of broader financial assets and of off-balance-sheet commitments such as the underfunding of pensions.

In France, prosperity per person reached its zenith in 2000, since when the average person has become poorer by 8% (€2,540), whilst his or her share of debt has increased by 91% (€59,500). The inflexion-point in Britain occurred in 2004, since when prosperity has fallen by £4,600 (16%) whilst debt per person has increased by £23,800 (39%). The average Canadian has become 12% poorer, and 60% deeper in debt, since 2007.

Fig. 2

One of the myths of the contemporary economy is that sharp increases in indebtedness are cancelled out by rises in the prices of assets.

The reality, of course, is that increases in the supposed value of property and financial assets cannot be monetized, because the only people to whom a nation’s property or asset stock can be sold are the same people to whom they already belong.

The individual property owner can monetize the gain in property values, but even he or she then needs to obtain alternative accommodation. But homeowners in aggregate cannot do this, and reported aggregate ‘valuations’ are an error rooted in the use of marginal transaction prices to put a ‘value’ on housing stock in its entirety. Essentially, asset prices are functions of the cost of money, and of the quantum of credit in the system. As the economy moves further into de-growth, and as the inflationary spiral has to be countered by raising rates, inflated asset valuations can be expected to melt away like snow on the first warm morning of spring.

The decreases in prosperity cited here may seem pretty modest – the average French person has become 8% poorer over twenty years, the average British person’s prosperity has fallen by 16% over sixteen years, and Canadian prosperity has deteriorated by 12% over thirteen years. People in these countries have, then, been getting poorer at rates at or below about 1% per annum.

In terms of living standards, though, these rates of deterioration have been leveraged by relentless increases in the cost of essentials. In the SEEDS model, the calibration of essentials remains at the development stage, where ‘essentials’ are defined as the sum of household necessities and public services provided by the government. The definition of ‘essential’ varies over time and between countries, such that essentials may defy detailed calibration.

This said, the overall picture seems clear. As prosperity has fallen, the share of prosperity accounted for by essentials has risen. Moreover, the real cost of essentials is being driven upwards, because the energy-intensive character of many necessities creates a linkage between their real costs and rises in ECoEs.

What this leverage means is that, over a twenty-year period in which French top-line prosperity has fallen by 8%, discretionary prosperity – what remains after essentials have been paid for – has slumped by 23%. British discretionary prosperity has fallen by 34% (rather than 16%) since 2004, and the decline of 12% in Canadian prosperity since 2007 has seen discretionary prosperity fall by 24% (fig. 3).

Fig. 3        

These sharp falls in discretionary prosperity have not been reflected in actual discretionary consumption – but the gap between the two (which SEEDS can quantify) has been filled by continuous expansions in credit.

In some sectors this effect has been a direct one, and few people now buy a new car, for example, as a one-off purchase. Households may borrow on their own account to pay for, say, a holiday, but the broader effect is that household credit increases are supplemented by government and business borrowing – the former reduces the tax burden on households, whilst, in the absence of business borrowing, employment and wages would be lower, and consumer goods and services would be either more expensive and/or less readily available.

Full circle

There is, of course, a direct connection between an over-inflated financial system and deteriorating household prosperity. As and when a halt has to be called on perpetual credit and broader financial expansion, discretionary consumption will slump.

This of itself will impact the perceived values of discretionary sector businesses, and this trend will be compounded as businesses respond to de-growth tendencies including de-complexification, simplification (of product ranges and processes), adverse utilization effects and the loss of critical mass. At the same time, households will be forced to relinquish many of the outgoings which form streams of income for the corporate sector.

Ultimately, there are adverse feedback loops which connect deteriorating prosperity with a degradation of the financial economy. At the same time, the public is likely to be distressed, not just by the loss of cherished discretionary products and services, but by the widening hardship which occurs as falling prosperity draws ever nearer to the rising cost of necessities. The implications of this dynamic for government and the corporate sector are certain to be profound, but these implications must await another stage in our journey from ‘what we know’ about the present to ‘what we want to know’ about the future.     

In the meantime, here’s a reminder – if a reminder were needed – of how rising ECoEs drive prosperity downwards in a way that is frighteningly not understood by decision-makers in government, business and finance.  

Fig. 4

169 thoughts on “#209. A path of reason, part two

  1. much as the extend and pretend of the Afghan war eventually came to an end and the NATO forces had to withdraw with their tails between their legs and recriminations and denial flying around everywhere, whilst never hitting their true target,

    it strikes me that the same process will have to happen in relation to the extend and pretend about the financial economy since the GFC,

    I was deeply skeptical of going in to Afghanistan in the first place, I also only grudgingly accepted the bailouts of all the miscreant institutions in 2008/9

    nothing seems to have been learned in either process, even now one faction within the establishment thinks we ought to go back into Afghanistan,

    will the reversal of QE, stimulus and artificially low interests face a similar backlash from certain factions when it becomes impossible to continue?

    are the Afghan people going to be better off without NATO in the long run, will the ordinary citizens of NATO countries be better off in the long run when the Potemkin village of the establishments financial jiggery pokery finally collapses?

    I think it’ll be rough at the time but it could lead to a rebalancing of fact and fiction, it could be for the best although the current biggest winners will become the sorest losers.

    • According to Tony Blair, the withdrawal from Afghanistan was “imbecilic“. He points out that force levels had been reduced to the minimum, and that no allied soldier had been killed in Afghanistan in 18 months. The reason for invading the country was to prevent it serving as a base for terrorists bent on attacking the West, and it can be argued that Afghans have had twenty years of freedom from Taliban extremism. I’m no fan of the former PM, and have never thought the Iraq invasion was justified, but he does seem to have a point. The West looks ultra-weak in this situation.

      The policies of credit and monetary ‘adventurism’ are failing, and those who have gained most from them are likely to complain loudest as they reach their culminating point of failure.

      What interests me most about this is how we manage the withdrawal – better than we have in Afghanistan?

    • I’ve seen the figure of $2.26 trillion bandied about for the 20 years of the Afghan occupation,
      I’ve also seen their GDP for 2019 quoted as $19.8 billion,
      GDP per capita was quoted at $580 per annum,
      not an income conducive with hopping on a flight in Kabul and leaving the country for more than a cosmopolitan elite.

      if these figures are correct it looks both unsustainable and also shows scant evidence of nation building at the economic level,

      hasn’t it all been a mirage and Tony Blairs view from his ivory tower somewhat distorted and selective?

      I’m sure after the financial economy in the West eventually implodes some people will justify it as having maintained a period of artificial stability,
      but at what cost?
      do we write off the debts run up in Afghanistan, will we write off the debts run up in the UK since the GFC?

    • Thanks Steve. There’s a lot more to do – including the corporate sector and government – but I like to think we’re “getting there” in scoping the future from our basic understandings around the energy economy and the “constrained equation”.

  2. Re: the latest Afghan occupation, imagine if all that money just wasted, which was nominally ‘for the people or country itself’ had really been spent in a mega project like the US New Deal, to genuinely uplift that land and people within it, given a couple of decades and a generation to do it. This is funding a poor country today could only dream of being gifted, along with the needed expertise and all round education actually wanted by the people themselves instead of what outsiders thought they should want or be. Imagine what could have been achieved, it could have transformed like Singapore did from nothing, driven primarily by good governance, it could have similarly been an example to the world.

    Instead, a handful of multi-millionaires have upgraded to billionaires pro rata with respect to their positioning in the hierarchy of the military-industrial complex. They oversaw using some of the last hydrocarbon resources left to transition to sustainability, great technology and digital wealth to reposition a significant amount of rocks and barren dust from A to B in acts of war. Afghanistan now probably produces the most drugs per capita in the world while most of the people are as poor as they ever were. We demonise the Chinese as the incoming superpower, yet look at what we did.

  3. Dear Tim,

    Thank you for your most thoughtful analysis.

    I would appreciate if you could indicate how you have derived a 15% EcoE for the US in 2040 whille arriving at a 13% EcoE for China in that same year (ref. your 3 last graphs).

    Best regards,

    John

    • The China figure shown in the chart is erroneous.

      At the moment I’m revising all ECoE inputs for the new version of SEEDS. In this new version, ECoE in 2040 is 21% in China and 19% in the US.

  4. Dear Tim,

    Fascinating take on economics / energy. Coming from a family of engineers where systems were in the background of every discussion, this is the first time that the “Dark Arts’ of economics makes sense in any comprehensive way. Cant wait for your take on the other sectors and how their debt manuervering has masked their inevitable decline.

    I would be interested to read what you think about the two most exigent factors in the ongoing collapse of the Western economies – water and food – and how they fit into our continued cornicopean thinking that wont allow us to recognize the limits of our growth.

    Water is the true basis of all civilizations. I saw somewhere that the US / EU regions are using their surface / groundwater resources at a rate of 230 percent versus replenishment. If Northern California doesn’t get any snow again this year in the Sierras Nevadas / Cascades, the Imperial Valley, which is the US’s bread basket, may stop functioning altogether as rivers run dry.

    How does water fit into your energy equations?

    • Thank you, and I’m glad you find this site helpful.

      Water is a prime example of energy limitation. If we had sufficient low cost energy, we could use desalination on a huge scale. Without this, I suspect we’re in very, very big trouble over water supply. There are already examples of places where waves of outwards migration have been triggered by the loss of water supply. Needless to say, there are NO purely financial solutions to water problems.

  5. Extrapolating BAU
    Just a note to indicate that it is refreshing to deal with reality on this blog. I am involved in another effort where the base assumption is that world income will approximately triple by 2050, while population grows about 25 percent. I told them that my assumption is that we will have a financial collapse with a population effect probably worse than Russia in the 1990s and incomes in 2050 being significantly lower than they are today. It’s hard to overstate the difference in assumptions.
    Don Stewart

    • Don

      This is where the reader has to make up his or her mind – is the economy physical, and an energy system, or financial, in which case money, in tandem with technology, can fix all ills and give us perpetual economic expansion?

      It seems to me that evidence as well as logic strongly favour the former view, and that those who believe in the latter are really struggling to defend their case in the face of mounting evidence, including environmental and economic, to the contrary.

      The plan with this series has been to begin with the fundamentals, which I like to think we put in place in Part One. I hope the case was laid out fairly and objectively there. The aim now is to extend lines of enquiry, starting here with households and the financial system before moving on to other sectors.

    • “ Extrapolating BAU”

      Life is short, and than you die.

      That goed for the whole of humanity. Turning pigs and chickens into digestibles faster and faster, and after that, mealworms, while desperately trying to keep up the value of bitcoin is beyond stupidity.

      Brain quantity is no guarantee for success.

  6. This article documents the UK’s rapid economic descent,

    https://www.theguardian.com/business/2021/aug/25/sadly-trade-minister-is-right-to-say-uk-firms-do-better-in-foreign-hands and explains why it shouldn’t have been interfering in Afghanistan in the first place. If you can’t or wont sort out your own people’s basic needs, then you also can’t afford to meddle in other countries affairs, you should just cater for your own defence. (Not needlessly antagonising all your neighbours is an easy win in that regard)

    • as a young man I was a keen motorcyclist, I read a few books on the decline of the British motorcycle industry and the blame seemed to be laid entirely at the feet of senior management that wouldn’t invest, innovate, adapt or explore emerging opportunities,
      they just wanted to keep banging out the same model year on year with minor adaptions to the pinstriping on the paintwork and redesigned mirrors,

      Honda of Japan produced the most manufactured motorcycle in history, the Honda Cub, a utilitarian step through design with a pressed steel frame that became the backbone of private transport over a wide swathe of Asia,

      the profits of the Honda Cub were partially reinvested in developing the Honda CB750/4, the worlds first 4 cylinder production superbike,
      I owned one of these and did around 70,000 miles on it,

      at the same time Triumph was still banging out parallel twins of dubious build quality and I remember riding one that vibrated enough at certain revs to give you double vision and involuntary eye watering whilst engine braking into a roundabout,

      I saw the motorcycle industry as a microcosm of the wider ills of British industry.

    • A similar thing happened to the “great British sports-car”!

      Management has been an odd weakness in a country with remarkable inventiveness and a history of producing highly skilled workers. I sometimes think it has something to do with the class system and an obsession with ‘status’.

      The development of the railways had some bearing on this. Pre-railways, bosses had to live near the factory, as of course did the workers. Bosses were often hands-on engineers, not afraid of weilding an oily rag.

      Then came railways, and the bosses could live further away. Being Britain, railways had different classes of carriage from the start. The bosses now travelled with professionals, such as doctors and bank managers, and started to dress similarly. This meant no more oily rags, of course, but it also created the separate ‘office’, where clothes wouldn’t get dirty.

    • I agree it has a class element, management became viewed as a free ride as opposed to a position of great responsibility,
      I know socially I’m percieved completely differently if I scrub my hands and dress up, I can be treated as an equal when a few hours earlier I could have been dismissed as a grease monkey with my arms buried deep in some complex machinery,
      I ran pub quiz a few years ago and one person asked me if I was a teacher, it amused me no end!

    • @Matt, ‘……riding one that vibrated enough at certain revs to give you double vision and involuntary eye watering whilst engine braking into a roundabout’

      You Sir, almost lost me a keyboard to coffee with that description. It reminded me of driving a pickup truck on bone-jarring, corrugated bushroads in Africa and at the forced pee-break stops wondering if it looked pink because of all the red dust in your eyes or because your kidneys had taken such a sustained kicking. A friend who once had the misfortune to fly aeroflot (way back in the day when it felt like going cargo) assured me the sustained turbulence vibrations had a similar effect.

  7. When it comes to printing excess claims on the underlying real economy and existing “stuff,” I note simply that the printing press is always available for the “right people,” not so much for the citizenry at large. Yesterday it was reported that U.S. will be abandoning its $800M embassy in Afghanistan. No biggie, it’s just a drop in the bucket compared to the over $2T wasted on that war. I note simply that the amount that the country is just writing off on its embassy would have been enough to give every man, woman and child in the U.S. about $2.4M. Yet somehow, the idea that the country have a debt jubilee for personal debts is just off the table. “Moral hazard,” I guess. It’s very much a system of moral hazard for me, but not for thee.

    The U.S. was shoveling massive quantities of actual physical dollars out the door as part of it mission, because it was a metric that proved “progress.”

    See: “I was living like Scarface”: the ludicrous costs of the war in Afghanistan revealed in new documents, testimonies” at mintpressnewsDOTcom

    • Tagio, point is, fiat currencies only work on the way up. Because fiat currencies are a promise of ‘more’.

      On the way down, it goes so far until critical mass is breached. In everything we see, touch and feel.

      Assets vs labor is just the tip of the iceberg.

      I bet you are familiar with the exponential function?

      Double the amount of raindrops in a football stadium every hour. No one pays attention until their coke tastes like rainwater.

  8. Duh, math impaired!
    Off topic, but fun short video on how the French are dealing with vaccine pass mandates. It’s bracing to see what a people who have an identity other than consumerism can do.

  9. an anecdote to illustrate the type of management and administration I’ve encountered in British business,
    I had an insurance company send me a badly photocopied form, expecting me to sign and absolve them of indemnity over a claim against an insurance policy I’d taken out with them, leaving me exposed to the entire claim,
    after taking legal advice I rang the company, got a secretary who said her boss was out to lunch and not available, I asked for the name and number of his immediate superior and rang him,
    again I encountered a secretary, the boss was out to lunch, I obtained his superiors details and continued,
    this became like a game and went through about five cycles until finally someone answered,

    I said “oh wonderful, someone who actually is available to answer the phone, everyone else so far has been out to lunch”
    his reply was “of course I answer my phone, I’m the Head of *redacted* UK!”

    after a brief discussion he directed me to someone and said to use his name when I asked to speak to them,
    I was put straight through and had the matter cleared up in minutes.

    whilst running a business I’ve wasted no end of time trying to get the simplest things done, to the point I’ve had to work evenings and weekends to get the real paying work done.

  10. Dr Tim, I’m a Limits to Growth aficionado and I see the truth in your equations but do you see any relation between our coming collapse and the fact that we add an extra 82 million more hungry mouths to the planet each year? Just asking.

    • You are right, of course – when we invented the first heat-engine and started harnessing fossil fuels, the population was about 600 million. Now that FF-driven growth has ended, over-population, in relation to resources, is one of our biggest problems.

    • One of the symptoms is calling economic ‘refugees’ migrants.

      Because ‘migration’ is normal, espacially with millions, after millions, after millions…

      Tick tock..

    • Overpopulation is not a universally global issue. It is heavily concentrated in Eastern Asia, the Indian Subcontinent, sub Saharan Africa and Western Europe. Even in these places it is concentrated again along river valleys and deltas. To speak of it as a global issue therefore is perhaps not conducive to solutions. It really is a region specific issues. Unfortunately this problem will take care of itself in low energy futures, but there doesn’t have to be that much of an overall uptake in the death rate to make a large difference over the decades.

  11. Heather Heying in Natural Selections

    Heather and her husband are bringing out a new book about Hunter Gatherers and what they mean for us in the 21st century. She writes a blog with a lot about science and evolution. She wrote the following, which you may find intriguing as a bunch of engineers and bean counters try to parse what Degrowth really means:

    “Some people, when asked to describe how they find meaning in their own lives, may say that they seek happiness. But happiness itself is not good. Happiness is also not bad. Happiness is an adaptation which, in times past, motivated us to seek that which was good for us. Our happiness-seeking circuitry, long evolved in situations where sugar, comfort, abundance, and safe thrills were rare, is now on overdrive, helping us find that which markets have made ubiquitous. So we need to reschool our happiness-seeking circuitry, train it to find and appreciate legitimately rare or valuable things. Sugar, comfort, abundance, and safe thrills are no longer legitimately rare or valuable. Love and relationship, and the time and space to exist in ways not dictated by external forces—these are increasingly rare, and have always been valuable.

    Are the denizens of Milpa Alta, resource-poor but rich in fiestas and food made with love and long lingering conversations at the table, less happy or content than those of us in resource-rich communities? I think the answer is probably no, so long as they are not living in desperation, and haven’t yet had markets capture their ambitions. Instead, they are living in a world that more closely resembles ancestral conditions, and they are, I suspect, happier and very often healthier than their “wealthy” counterparts. Should we seek to reduce the resources available to all in order to spread these benefits more broadly? I think not. Rather, we should look to these communities to help us understand our modern world more clearly, and aid us in seeking a better way for all.
    What can we learn from this and other examples of forced or chosen simplicity driving deep human connection? What can we learn about ourselves and our societies? Where are we headed? And where might we prefer to go?”

    I don’t think I can give you a direct link. Search on her name and the name of the blog and sign up. There is a ‘pay nothing’ option.

    Don Stewart

    • Thanks for reminding me about Heather and Bret. I’ve followed them for some time on Twitter, but muted them as I had gotten overloaded.

      Re the excerpted quote:

      “so long as they are not living in desperation” is a major qualification that applies to billions of humans globally who are living on the edge. Given the addition of ~220,000 net humans daily, with most growth occurring in underdeveloped places, and shrinking resources globally, desperation is likely a growing condition.

    • Thanks, and let me say at once that Tim W’s latest article is excellent, as one has come to expect from him.

      I can’t speak for him, but I see my role as analytical, and to that extent neutral. What I try to do is take readers with me on a route of almost stringently neutral analysis. I’m not neutral about the economy being an energy system, of course, because that’s fundamental, is frankly obvious, and is the glaring omission which reduces much conventional economics to the level of gibberish.

      With that understood, though, how far can we model it, and use our understanding and modelling to interpret and predict? I get annoyed very frequently about policies and motives, but feel I have to stand back and be as objective as I can about the fundamentals.

  12. Nicholas Shaxson ( author of The Finance Curse ) has a very good column in today’s Guardian regarding the iniquities of private equity . Worth a read.

  13. @Dr. Morgan
    “stringently neutral analysis”
    The context for my observation is that Degrowth is almost guaranteed, and that the end of growth spells a chaotic period relative to BAU. A little like withdrawing a few troops from Afghanistan has led to chaos.

    I refer to this sentence from my post above:
    “Sugar, comfort, abundance, and safe thrills are no longer legitimately rare or valuable. Love and relationship, and the time and space to exist in ways not dictated by external forces—these are increasingly rare, and have always been valuable.”

    Now I would argue that sugar (maximum power), comfort, abundance, and safe thrills are all severely threatened by Degrowth. So all the myriad ways in which humans have adapted to getting at least facsimiles of those experiences in a fossil fueled world with a stable climate and a high level of capital per person are going down the tubes. This is creating chaos, and will create more chaos for the foreseeable future.

    It might seem that “love and relationship and the time and space to exist in ways not dictated by external forces” offers a way out. Yet we see that fossil fuels and financialization have severely undermined traditional ways of achieving those goals. Instead of love and relationship, we get social media, which has demonstrated negative effects on us. And the overwhelming burden of debt means that most of us do not have the time and space to exist in ways not dictated by external forces.

    Somebody (maybe not you) needs to take on the project of plotting some sort of conceptual path from where we are to where we need to be. Since one of your areas of expertise is finance, your focus on the alternatives we have in terms of dealing with unpayable debt is valuable. I think another area is land reform. As life gets simpler, access to land is likely to become pivotal…and there is no excess of it per capita.

    Don Stewart

    • As I see it, we are at the very end of an era. We might liken it to France in late 1788, or Russia in the last months of the Tsar, or the USSR after the Soviet withdrawal from Afghanistan. Perhaps a better metaphor might be Poland or the GDR in 1988-89. There are still those who think the system will last forever, others who are baffled, and perhaps still others who are trying to find a bridge across the crevasse. When revolutionary France banned the Church, many former clergy ended up as senior interrogators in the Committees for Public Safety.

      What’s different about this particular end-of-era situation, apart from its global rather than national scale, is de-growth. This isn’t by any means new, even if there’s still widespread denial and ignorance around the situation – the economy has been decelerating since the 1990s, and Western economies have been contracting since the early 2000s. It’s hard to believe that anyone really still believes that credit adventurism, monetary gimmickry and, now, reckless stimulus can do more than buy some time. We no longer have the 1945-80 mixed economy, or the 1980-2008 ‘liberal’-globalized economy. We’re into crisis management in an environment of deepening chaos.

      We are lurching from the baffled into the crazy. EVs. “Green growth”. Technology fixes everything. Relying on the permanent stimulus that Keynes didn’t advocate, or law-of-the-jungle liberalism to which Smith’s opposition is clear. Putting manifestly ill-suited people in charge. Diversion and distraction.

      Some countries are far nearer to a big step-down, or worse, than their citizens and, probably, their governments realize.

      Yes, we can become doom-sayers, or point fingers at those trying to wring the most profit from it. But the first step surely is to analyze it, the second to work out a best (or least-worst) outcome, and the third is to map a path to that outcome.

    • when we come out of this depression/crisis there isn’t going to be a boom in material wellbeing or rising personal wealth,
      since all those material and monetary rewards are now off the table we need to decide what metric we should use to gauge progress,

      quality of life, improvement of the environmental situation, better diplomacy and collaboration on the world stage leading to reduced tensions, clean air, water, food, quality over quantity, the prospect of a future that wasn’t terrifying!

      happy confident people can laugh at themselves and poke fun at each other without flying off the handle,
      I’d be pleased enough with a calmer, saner world, mental wellbeing has to be at the top of the list.
      .
      I believe in this current Chinese 5 year plan they’ve dropped the emphasis on GDP and are aiming at a HDI, a human development index,
      they’re also not fixating on exports so much and trying to develop their domestic markets,
      only a modest portion of China is actually highly developed, a large part of their hinterland is still rural and agrarian,

      why can’t we do something along similar lines?

    • Matt, et al

      You’ll have noticed that, after putting in place suggested foundations in part one – the “constrained equation”, etc – this article concentrated on the financial system and, in perhaps greater depth, the outlook for household prosperity. Thus far, we’ve not looked at the corporate sector, government, and related issues such as politics, ‘the elites’ and so on.

      There’s a reason for this sequence. To a large extent, the household sector outlook can be tracked and projected using SEEDS, and the trends are pretty clear. The outlook for the financial system, meanwhile, is pretty stark. Households get poorer, and the financial system goes into, at best, a massive ‘correction’. There are some economies in which the financial system is at existential risk.

      These have spillover effects into the other categories. I suspect that corporate and political leaders have little or no idea what’s really coming at them. Households getting poorer are going to get very angry, which will change the political landscape drastically. The popular focus will shift to economic issues, most obviously the rising cost of essentials. For corporates, change is likely to be even more profound, and even less manageable.

      Watch this space, as it were.

  14. Don, I think you are quite correct that land reform has to be very near the top of the list of practical measures in mapping here to there. At least it does if the goal is not that the mass of humanity ends up working as serfs for the very large corporations.

    Sadly, if you have a look at Walter Scheidel’s book, “The Great Leveler,” historically, land reform efforts rarely work and the reforms that are implemented have a very short duration.

    By far the more lasting change of ownership follows central government collapse. Legal title (in the U.S., a matter of state law) depends on a legal system that can be enforced by a strong central authority. When that collapses, “titles” become worthless pieces of paper, and absentee ownership becomes a thing of the past. Land is once again up for grabs by conquest to be held by physical occupancy and force very much limited to the bounds of the capabilities of local protection by the new “lords.” “I own this now, try to take it from me.” Example: The development of feudalism after fall of the Western Roman Empire. Unless Bill Gates has an alternate life as a warlord that we don’t know about, he and his heirs will not be able to hold onto his millions of acres of farmland.

    Sadly, the vision I think you propose – very much a Jeffersonian ideal of yeomanry – has to my knowledge never been achieved or maintained within civilization. It is far more accurately a feature of small tribes of hunter gatherers and nomads having access to unowned land. Example: American Indians before the arrival of Europeans. In that context, the notion of “territory”, rather than ownership, governs, an idea much closer to how animals who live in the physical world operate, rather than concept-laden, concept-addled humans, who live in a virtual legal world first and foremost.

    Long story short, the goal you seek depends, I suspect, on truly massive, orders of magnitude population decline.

    • Well stated, Tagio. Seems my global population contacts missed this yesterday:

      https://www.theguardian.com/global-development/2021/aug/26/use-your-11bn-climate-fund-to-pay-for-family-planning-uk-told

      excerpt:
      In a letter to Alok Sharma, president of the UN Cop26 climate conference, an alliance of more than 60 NGOs has called for the funding eligibility rules to be changed to allow projects concerned with removing barriers to reproductive healthcare and girls’ education to access climate funds.

      Bethan Cobley, a director at MSI Reproductive Choices, one of the organisers of the letter, said: “Billions are allocated now to climate financing, adaptation and resilience. We’re hearing loud and clear from communities and women and our clients who are most affected by the climate crisis that what they really want is access to reproductive healthcare, so that they can make choices about when or whether they have children.”

    • Excellent comment!

      As someone who has a small bit of farmland in Hawaii (16 acres), I know that my “ownership” is dependent on a functioning state. But without that state, even as warlords might take over the functional control of territory, people will still need food, including the warlords and their soldiers. I am hopeful that once they take their desired share, I will be allowed to keep enough of my food production to feed my family and continue working the land. In the end, it is in no one’s interest to destroy food producers or the land they work. Being a serf is better than being dead.

      Most people don’t realize that there are only two things of real intrinsic worth: (1) land that can provide food, water and shelter, (2) the means to defend that land from those who would take it or take that land from those who who would defend it.

      Most of human history has revolved around land and weapons. And so it will go until we’re gone from the face of the earth.

  15. Need for At Least Some Sketch of Life After Fossil Fuels
    Alice Friedemann includes 3 very short videos showing exactly how fossil fuels permeate our lives. I can’t figure out how to link to them directly, but if you go to Alice’s website, Energyskeptic.com, you will find links in a recent (not the latest) post, labeled as Updates to Life After Fossil Fuels. They are first in the list. What you see is a video of people just going about their business, and then all of the things in their lives that are constructed using or out of fossil fuels are erased.

    If we really strive to eliminate fossil fuels, or else cripple the economic viability by, for example, running cars on electricity and driving up the cost of diesel because the balance has been upset, then we need some plan to get the fossil fuel stuff in our lives out of our lives. It seems that a requirement would be the complete retooling of our manufacturing industry. What quantity of fossil fuels would that require? Do we have the materials to replace all of the plastics? And so forth and so on.

    A secondary question is how we might possibly cope with the current saturation of fossil fuels if no deliberate action is taken to limit them. Have we got ourselves into a fix we can’t get out of?

    Don Stewart

  16. @Tagio
    I hope you are wrong, but can’t confidently assert much of anything. During the New Deal, there was a Negro Resettlement Program, which moved black Americans into villages organized around agriculture…in order to get them out of terrible arrangements as tenant farmers. Some of those settlements survived into the 1950s. The difficulties, of course, include:
    *They already knew how to farm. Not common today.
    *The Federal Government had picked up a lot land for miscellaneous reasons having to do with the Depression (which also facilitated the National Forests)
    *Teaching the settlers better farming practices fit in nicely with agricultural and home economic initiatives in the broader New Deal.

    If I could rewind to 2008 and put myself in charge as a benevolent dictator, I would take land in payment for financial debacles and repurpose the land to subsistence farming. Young people, especially, would be invited to farm it. I know from my experience that there were a lot of young people attracted to small farms in 2008 and after…but the financial barriers were daunting.

    In 2021, I would make continued use of the land dependent on the adoption of regenerative farming practices and demonstrated increases in soil carbon. And I would make the purchase of agricultural products from these farmers a pre-condition for federal support of programs like school lunches. Which implies rehiring actual cooks in schools.

    I would start the program, hoping that utter collapse won’t happen before it could make a dent. Better than pouring money down the rathole of Wall Street.

    Don Stewart

  17. Steven,

    Is it possible this is looking at the wrong end of the distribution? Those of us who are older require more health resources and are less productive due to physical and mental aging, the young are the future.

    What about Elon Musk’s assertion the world has a population collapse baked in due to current demographics? Certainly if this can be modeled on a computer he has the power and ability to do so and of course, it affects car sales and people to ride the rockets to the moon and Mars.

    Dennis L.

    • When a species is in overshoot, nature sees to it that it gets back towards balance with its habitat. That is not pleasant for most individuals. According to https://www.footprintnetwork.org humans are nearly 50% overpopulated. Some highly regarded scientists judge that 2 billion is the current long term sustainable population, and we are near 8B.

      Don’t expect voluntary belt tightening. Life(we are social mammals) seeks to replicate, increase energy throughput, and expand niches. Voluntary simplicity is an exception to the rule, and is practiced by a tiny % of the global population. Suicide is another exception. See:

      https://www.ecologycenter.us/ecosystem-theory/the-maximum-power-principle.html

  18. Joe,
    The job of a good boss is to get people to work harder than they want to for less than they are worth. I was a boss.
    Why take the position of the peasant? Most people here seem to be intellectuals; it appears to me that their actual survival skills are minimal at best, part of that skill set is organizing and maintaining a group; not all groups need to sit around and take every injustice the world inflicts.

    Your mileage may vary.

    Dennis L.

    • Dennis,

      I’ve been a boss, but the future will be far more simple than today and we will need very few of them. I am active in community affairs and capable of organizing people, but so are many others. We’ll just have to see whether we need bosses and hope that we can find good people to fill those roles.

      I am fairly well prepared to be a peasant and happily so. I am also ready to join with my neighbors to try and preserve our peasant autonomy. Here in the US everyone has plenty of guns. But, the example of Afganistan aside, it is difficult to stand up to organized military forces who have overwhelming firepower.

      My neighbors and I would prefer to be left alone during and after collapse degrowth, but I know that may not be possible. We’re just going to have to make the best of it, whatever comes. If that means returning to the kind of feudal society we had here before the Europeans came, so be it.

    • All forms of wealth are subject to political arrangements.

      In medieval times, a bag of gold hidden in your house, or a barn full of grain, was only wealth if the system prevented its theft. Land has always been a form of wealth, but has often been confiscated, as when royalist lands were confiscated after the English Civil War, and given to prominent supporters of the new regime. Church wealth in England had previously been confiscated by Henry VIII. Private ownership of gold was prohibited in the US in 1933. Stocks constitute wealth, but can be nationalized, with or without compensation, by collectivist regimes. In some circumstances, as in France in 1789 and Russia in 1917, all forms of private wealth can be taken away by a new regime.

  19. anyone in London or the home counties who has any notions about urban food production when this situation goes south rapidly ought to be aware of an audacious land grab that seems to be underway and being promoted in the media,

    https://www.theguardian.com/politics/2021/aug/26/london-golf-courses-could-provide-homes-for-300000-people-study-says

    https://www.inyourarea.co.uk/news/allotment-land-could-provide-a-solution-to-englands-housing-crisis/

    I find this alarming, people should be kicking up quite fuss over this to get it squashed as soon as possible,
    form a lynch mob and march on your local planning office if neccessary!

    • I hope that lynch mobs will never be necessary, but peaceful protest might well be. Allotments are a valuable social asset, golf courses might be, but woe betide anyone who thinks of building tower blocks on football stadia or cricket grounds!

    • during WW2 they dug Victory gardens anywhere they could, I’ve seen pictures of the moat of the Tower of London being used to grow vegetables,
      I’m indifferent about golf but it has done a marvellous job of holding off the housing developers and could be turned into allotments overnight in an emergency,

      https://landscapeiskingston.wordpress.com/2014/11/10/tower-of-london-poppies-and-digging-for-victory/

      a lovely black & white photo and some details of ‘Dig for Victory’
      I don’t think we’re far off needing such contingency plans the way things are going.

      I use the phrase ‘lynch mob’ as a literary allusion, only those with a guilty conscience need become paranoid!

  20. Joe,
    “I am fairly well prepared to be a peasant and happily so. I am also ready to join with my neighbors to try and preserve our peasant autonomy.” If you have a wife, have you asked her? If you have children are you speaking for them?

    “I am also ready to join with my neighbors to try and preserve our peasant autonomy. ” What do the mass migrations speak to this in the US? Are those people trying to preserve a peasant autonomy? Why don’t they just tend a garden, “Living in perfect harmony?”

    Peasant life sucks.

    Dennis L.

  21. @Dennis L
    The point of science is always to make comparisons. If the comparison is:
    * a peasant economy with the abundance frequently mentioned in hunter-gatherer societies (which involve more horticulture and animal husbandry than most people have recognized) and the absence of chronic disease and almost total lack of hierarchy
    VERSUS
    *being a wage slave in an exploitative system which is doomed to crash

    THEN the question gets interesting. Some wise person said:
    “I don’t mind questions with no answers…but I can’t stand answers which can’t be questioned”

    Don Stewart

  22. Don

    Like the THEN paragraph, we have much of that in our current society, US.

    It seems to me personally DrMorgan is giving us a way to purchase some time, invest in tomorrow and leave today behind. Maybe one more financial round and then invest in essentials in an amount that one can personally use and in areas where there is an excess(profit) to account for depreciation, etc.

    Question, which is more essential, AMZN, TSLA? I would guess TSLA, it gives hope and a way out. AMZN is mostly discretionary the biggest component of which is a way to minimize our time spent on purchases. Bezos went into orbit, Musk is going to Mars and I would not care to take the other side of that trade. Thanks DrMorgan – what I have taken away so far.

    Dennis L.

  23. Chris Martenson and Some Crucial Questions
    The current email from PeakProsperity.com discusses, with some intelligent comments following, the question about Covid 19 and the Delta variant in particular. Norway and a county in Iowa have declared that “the Pandemic is over”. People who favor declaring it ‘over’ refer to the low death rate (0.5 vs. 1.0 for the common flu.), the finding that T cell immunity works better than a vaccine, the notion that T cell defenses are heavily influenced by lifestyle and previous exposure, and the heavy cost of trying to prevent infection at all costs. The ‘official’ stance still tends to favor draconian measures to stop the spread: vaccine passports, booster shots, lockdowns, etc.

    I won’t try to influence you one way or the other on that debate. But I would like to point out that our governments and broader social organizations aren’t dealing with risk very well. Where is Taleb when we need him? We obviously tolerate a lot of risk without anyone getting very excited: automobiles mixed with pedestrians and bicycles, automobile exhaust in big cities, increasing CO2 in the air, the threat of the sixth mass extinction, eating red meat instead of soy products, boys taking foolish chances trying to impress girls, any woman foolish enough to say “I do”, and so on and so forth.

    Making things worse is the notion that the trillionaires stand to benefit the more draconian the measures taken. Are they merely doing ‘god’s work’, or are they manipulating everything to gain even more money?

    My own suggestion, of which very few approve, is to turn it over the the insurance companies. I think an insurance company can calculate the chances of death and hospitalization for an individual resulting from Covid 19 pretty accurately (doing the kind of calculations that Martenson is doing, but with skin the game). So I favor minimizing the nanny state, but also letting people largely reap what they sow.

    I suggest that the generic problems posed by Covid become more acute in a Regrowth economy where governments are also going to have to Degrow.
    Don Stewart

    • A few comments:

      The seasonal flu killed 34,000 people in the US during the 2018-2019 flu season, mostly the elderly and the very young. The US Covid death count is over 600,000 despite a great deal of effort to keep the death rate down. Had the US continued with daily life as during a normal flu season (doing basically nothing), hospitals would have quickly been overwhelmed and millions would have died at home.

      Norway may have declared the pandemic “over”, but that is only after vaccinating all of people most at risk from severe disease. That is similar to our situation here in Hawaii, where all of the elderly are vaccinated. Our case count has skyrocketed with Delta, however, and the number of deaths is still going up. Fortunately, since the elderly are vaccinated, the death rate is far lower than in previous surges.

      As for letting insurance companies take over the responsibility for public health: I am sure that if all public health decisions where made by insurance companies, every policy would allow them to specify a whole range of mitigating behavioral requirements. They would want to keep their payouts as low as possible and might be even more strict about NPIs than public health departments are now. I’ve no doubt that every policy would mandate vaccination, when available.

    • In Sweden they did none of this. No lock downs, no masks, no mandatory social distancing. The Swedes live in densely populated cities with a lot more public transport than the US. Their mortality rate per capita wasn’t very different to other European countries with heavy handed lockdown policies; their death rates were lower than the UK and US.

      Both the UK and US were hit hard due to generally terrible metabolic health. Lockdowns and masks have definitely worsened that problem, making us more vulnerable, not less. People should have been told to get out and enjoy the air, not hide away in their homes getting fat. Also, did you read about the recent Israeli study showing that vaccination was 13 times less effective than natural immunity? If this is true, then vaccinations are likely close to worthless. But governments everywhere will continue to push them and lie about them, to bolster the profits of their pharmaceutical industry buddies, who will reward them with lucrative positions on company boards when they get tired of being MPs.

      Governments facing a crisis generally feel obligated to demonstrate that they are doing something. What they did across most of the developed world, was to copy the solution of the Chinese Police State, as if these people should in any way be role models for anyone on anything. Having failed to control the virus or mitigate it’s effects in any serious way, they are now terrified of being proven wrong and punished, having racked up trillions of dollars of costs without any meaningful benefits. So we face absurd censorship campaigns, propaganda from leftwing media outlets, who worship the state and care nothing for human freedom; bullyboy tactics pressuring people into receiving ineffective vaccinations. It is worse than pathetic. I hope the British government burn in hell for what they have inflicted on the British people. How can anyone still believe that these people do a competent job in running the place?

    • As you might know, I seldom comment on covid because I’m not an expert on life sciences.

      My view of the current UK administration is that they are clowns – putting this government together “deprived many villages of their idiots”. Behind this may be an element of running scared, because the British economy is in an extremely bad way. They are utterly clueless on the economy, as on many other matters. If brain cells were dynamite, this lot wouldn’t have enough to blow their hats off.

      Re. the US, I believe the policy in Afghanistan is insane – we can only hope that the country doesn’t once again become a base for terrorists. The policy of ever more stimulus seems deranged. I was no admirer of Mr Trump, but I’ve yet to find any question to which “Joe Biden” is the answer.

  24. Tim, in agreement with the general thrust of your thesis. My question: hydrocarbon extraction is one of the most heavily regulated industries in the West. Understanding that regulation has no bearing on the physical supply of the resource, could we lower our ECoE by removing all of the bureaucratic procedures currently in place? Surely, that could buy us some more time. If the situation gets dire I imagine it won’t be as frowned upon to drill up in the Arctic for example. Regardless of what that means for the environment.

    • I can certainly imagine some countries allowing virtually unregulated exploration in the Arctic, but I find it very hard to believe that any oil found there would be low-ECoE.

      The more general point is about desperation prompting a relaxation of standards, including environmental ones. I think that’s perfectly feasible.

      The glaring gap at the centre of consensus thinking is that there’s a conflict between our economic and our environmental best interests. In fact, there isn’t.

      Let’s imagine we decided to ignore environmental concerns, turn our backs on REs and conservation of energy, and bet everything on fossil fuels. That might or might not – but probably would – cause extreme environmental harm What it would do, though, is condemn the economy, which would be shackled to the relentlessly rising ECoEs of fossil fuels.

      I’m really surprised that environmentalists haven’t ‘picked up the ECoE ball and run with it’. It’s a clincher for their cause.

  25. dtr,

    Gail Tverberg seems to argue that projections of future carbon release are not realistic as there is less and less physical fossil fuels which can be extracted. Once discretionary income goes to zero it is tradeoff game, fossil fuels for many activities won’t be worth the effort. Both of you seem to be saying the same thing.

    Take off, don’t invest in discretionary sectors, Long term guess, bet on Musk, move much pollution off planet, make room for more fossil fuel pollution. If return on space is greater than one, can use that to subsidize fossil fuels extraction for ten years and then fusion becomes real – well that is the story told.

    Dennis L.

    Dennis L.

  26. If the economy is an energy system and not a money system, which I fully agree with, then it is nothing more than a ponzi scheme, as per the definition of the US Securities and Exchange Commission, by just changing funds, investment, and money for ‘energy’, like I’ve done below…

    “A Ponzi scheme is an investment fraud (energy fraud) that pays existing investors (energy users) with funds (energy) collected from new investors (new energy sources). Ponzi scheme organizers often promise to invest your money (your claim on energy) and generate high returns (more future energy) with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money (energy). Instead, they use it to pay those who invested earlier (earlier energy users with bigger claims on energy) and may keep some for themselves (always).

    With little or no legitimate earnings (new energy sources), Ponzi schemes require a constant flow of new money (existing energy) to survive. When it becomes hard to recruit new investors (new energy), or when large numbers of existing investors cash out (demand energy promised), these schemes tend to collapse.”

    I don’t know of any Ponzi scheme that has lasted, Bernie being a hero for keeping his going as long as it did. If money created out of thin air can’t keep the system of modern civilization going, and only energy can, then modern civilization is nothing more than a Ponzi scheme based on energy instead of money. Which unfortunately for all of us means there is nothing that can be done to stop it ending when the energy supply falls.

    Exactly what point along the fall (degrowth?) the whole falls apart like every Ponzi scheme is what fascinates those of us not in denial.

    I like civilization…

    • Indeed, but I think I’d state the conclusions slightly differently.

      The big new factor now is that surplus energy per person is declining, meaning that prosperity declines.

      We can define the financial economy as a ponzi scheme. When we understandthat money is a claim on the output of the real economy, which itself is a surplus energy system, there’s a big and widening gap between monetary ‘claims’ and economic (energy) reality.

      This tells us that the financial system as we know it now is a ponzi, i.e. it creates claims that cannot be honoured. This in turn means that the current financial system must fail. I think we know that. By definition, excess claims cannot be honoured for value. This leaves us with alternative forms of default – hard (repudiation) default, or soft (hyperinflationary) default. A process of denial and delay will let inflation run hotter. Then there’s a panic response when rates are pushed sharply upwards. I don’t do advice here, but stay out of debt, or as minimally indebted as possible, seems obvious.

      Civilization is a different issue. Back in university I took an optional (and fascinating) paper on revolutions – their history and theory. Our current situation, though varying between countries, ticks almost all the boxes.

      In this situation, the only alternative is reform. This requires wisdom and a preparedness to make concessions on the part of the incumbent elite. This is what the 18th/19th century British incumbency understood, but the French incumbency in the 18th century and the Russian incumbency in the 19th and early 20th did not.

      It’s a judgement call as to whether today’s incumbencies understand this, and are prepared to make the sacrifices required to make reform happen.

  27. @Dr. Morgan
    “I’m really surprised that environmentalists haven’t ‘picked up the ECoE ball and run with it’. It’s a clincher for their cause.”
    Two points. First, Charles Smith’s note to his subscribers includes a link to Simon Michaux’s analysis of the physical requirements for the ‘electric economy’ which show that it is impossible. I haven’t been able to locate the article with a simple search…and Charles’ note is copyright protected. Second, if the transition to electric is shown to be impossible, a huge percentage of the environmentalist movement will be in a state of cognitive dissonance…which is painful and pushes most people into a state of denial.

    The reaction to Bright Green Lies is informative. Here are environmentalists who are saying, not for the first time, that a “renewables economy” is not possible. The reaction in the environmental movement is overwhelmingly negative.

    The blogger who reproduces Michaux’s paper opines that the ONLY source of sustainable energy is food produced using entirely natural processes…it always has been and it always will be. {I would add wood for fuel and building}. Which implies that we need to seriously study ‘civilized’ societies which did not use fossil fuels, such as Edo Japan. Nobody wants to hear that.

    The blogger also mentions Rob Mielcarski’s article. Two tidbits;
    *Facts are irrelevant to beliefs
    *We embrace solutions that have zero probability of solving problems.

    I’m not saying that we should not consider alternatives. Among them:
    *Your hybrid wind and solar/ fossil fuel economy
    *Accelerated conversion of everything we currently have to electric
    *Improve efficiency in our purposing of fossil fuels…not just efficiency of use, but choice of efficient
    uses…e.g., transit vs. automobiles
    *Bet the farm on fusion
    *Prepare for a return to Edo, Japan…85 percent farmers, hopefully without the parasitic elites
    *Prepare for a return to hunting and gathering, counting on an early catastrophic collapse to preserve some of the natural world in which to hunt and gather. Ideal would be Bill Gammage’s portrait of pre-contact Australia in The Biggest Estate on Earth.

    There is also nothing wrong with some use of a hybrid model. Perhaps the Australian model for fire-prone places like California and Edo Japan for well-watered places like the eastern US or the UK and the Dutch windmill and canal system where that works.

    I suggest that the challenge is to look squarely at Michaux and Mielcarski and, if we want to pursue renewables, show that they are wrong. If M and M are right, then accurate feedback becomes the essential. The authors of the forthcoming Hunter Gatherers Guide to the 21st century believe that humans are extraordinarily adaptable, but adaptation depends on accurate feedback. The authors also note that the universal government response is telling people lies.

    Don Stewart

    • My initial response is that an economy based on renewables is possible, but will be nowhere near the size of the FF economy that we have now. Pre-industrial economies were RE-based, after all, but were drastically smaller, and had far smaller population numbers. The world had just over 600 million people when we invented the steam engine.

      Linkage is a critical point here. Can we build RE capacity and infrastructure without using FF energy? Unless we can make the RE system self-reproducing, it isn’t a renewable system, but a legacy one. At present, we can’t do this – and we can’t even use FF legacy energy to create an RE system, because we insist on using almost all FF energy for driving, flying and consumption generally, rather than investing it in RE capacity for the future.

      Fusion seems implausible to me. Even if it worked, trying to apply the resulting electricity to current systems would hit a series of resource constraints. An electric economy isn’t a petroleum economy. For instance, cars make sense in an oil economy, but not in an electric one.

      Promises about “green growth”, or even a non-growth but stable “green” replacement for the current economy, are fiction. They might be wishful thinking, misunderstanding (ignorance of energy reality), or outright lies.

  28. drt,

    Why stay out of debt? Inflation will make debts worthless; this assumes debt used to purchase non discretionary items, land comes to mind if it can be found such that it covers payments. Having financial assets for other than liquidity issues seems hopeless especially excess currency assets.

    Dennis L.

    • My view on debt is that CBs may be pushed into raising rates to halt runaway inflation. They’re likely to delay this to the point where really big rises become necessary.

    • If one has locked in a long term flat rate mortgage, rising rates isn’t an issue. 30 year mortgages were under 3% this year in the US. Real Estate might correct sharply, though, as those with variable rates could be forced to sell or default.

  29. dtr,
    It would appear one almost sure win is going long on a fixed residential mortgage and offsetting with a COLA stream of income such as SS in the US.

    Based on my understanding of your analysis, discretionary items will be affected until they are basically zero and then a sequence of essential items from least to most. Is this anywhere close to what you are stating?

    Dennis L.

    • Fixed rates would obviously be a winner in this situation. These should remain available until the market starts to understand what’s coming………

      The other way to look at this is that fixed rate mortgages, at any significant scale, are an L-pill for the lending sector.

  30. dtr,
    Thanks, in the US the market is the government although I guess these things are sold on the secondary market, too deep for me.

    Would scenario modeling be of any benefit? Looking at the decline of discretionary items, take one sector, a large sector, collapse that per your graphs and see how much that decreases non discretionary sectors, e.g. utilities. As utility usage declines, fixed costs remain, loss of scale, increase end user cost, further decline in discretionary, etc.

    It would seem to me that the biggest problem is solvency/liquidity; liquidity seems to have been a main function of CBs until recently. If one is solvent but lacks current liquidity, holders of notes can call them(claims on resources) and with liquidity have a good asset. Problem with liquidity is everyone needs it at the same time, this always seems to lead to sale of the best assets by various funds.

    Dennis L.

    • Scenario modelling is certainly possible though, at the moment, SEEDS only divides prosperity in each economy between essentials and discretionary prosperity.

      What I can do here is set out the situation as I see it. Prosperity per person has been falling, and the cost of essentials rising, meaning that discretionary prosperity is being driven steadily lower. Meanwhile, the authorities keep pouring ever more credit into the system, which has supported discretionary consumption.

      Obviously there comes a point at which credit expansion has to stop. This could happen if inflation accelerates, if rates are increased to prevent this, or in a number of other circumstances.

      At that point, discretionary consumption slumps. Whole sectors are then in big trouble. Some businesses adopt the measures we’ve discussed here before, which include simplification (of product and process) and de-layering. Other sectors then tumble. There are asymetric falls in markets which are correcting sharply anyway.

      Meanwhile, the public aren’t happy with any of this. They particularly resent the rising cost of essentials. Energy suppliers are a special case, because they have to pass on the increases in their own costs driven by RE expansion. Governments might seek to cap prices, but that could undermine the viability of suppliers. They might try subsidies, but their own resources are getting squeezed. In Europe, at any rate, my guess is that power and gas suppliers end up being taken over by the state. This might well extend to other utilities, like water*.

      These trends are fairly predictable, but what we don’t know is when the trigger-point comes – the point at which we can no longer use credit and monetary policy to enable the financial economy to defy gravity.

      * I’ve said before that political leaders ought to be anticipating this, and setting the objective of ensuring that the essentials are affordable and available to everyone.

    • Dr Tim,
      As ever your commentary is so well expressed.
      I would just like to add that “the financial economy may be trying to defy gravity” but the energy economy is trying to defy entropy while the environment is gasping for breath.
      A non-eternal triangle.

  31. Tim, another excellent article.
    I cannot however help but be sceptical about the essential conclusion: that people will continue to become poorer, but without a systematic collapse of some kind. There are four reasons why this would appear to me to be unrealistic.

    (1) The physical infrastructure that we have created, I.e. roads, railways, ports, mining, building stock, industrial agriculture; all require substantial energy investment to use and maintain. As ECOE increases, the energy burden of maintaining and using the systems that we have constructed, will become less and less tolerable and it is inevitable that they will atrophy. However, it isn’t possible to sustain an industrial civilisation without a huge amount of high embodied energy infrastructure. We already see a great deal of decay in legacy US infrastructure. In the years ahead, the massive legacy infrastructure investments in China will become a burden that they can no longer maintain.

    (2) Outright declines in aggregate energy production. A mixture of cheap credit and cheap labour have so far held off the prospect of absolute declines in fossil fuel production, regardless of ECOE. Many individual nations have passed production peaks for oil, coal and gas. On a global level, this has so far been avoided, but is getting more and more difficult with each passing year. It now appears that global oil production may have peaked towards the end of 2018. Critically, the world is entirely dependent on China as a low cost manufacturing base. China in turn relies on coal to provide two-thirds of its primary energy. It is producing more coal than the entire rest of the world on a reserve base only half the size of the US. This allows it to produce more steel than the rest of the world combined, about as much concrete, about one third of the world total of ammonia. Most of China’s coal comes from deep mines with average depth of 600m. Production has been on a plateau for about ten years. How long will this be sustainable? According to Gail Tverberg, Chinese coal production is very close to peak. Switching to another fossil fuel source or importing more coal is not an option. Chinese energy needs are so huge that they exceed those of Europe and North America combined. Until recently, they were expanding renewable energy technologies in an attempt to reduce coal consumption in electric powerplants. They are now expanding nuclear power very rapidly. But so far, nuclear power accounts for only a few percent of Chinese electricity supply, and none of its petrochemical or direct heat energy needs. If Chinese energy supply collapses, the country will not continue to provide low cost manufactured goods to the rest of the world. It will not be able to maintain its own infrastructure.

    (3) The world faces a demographic implosion as well as an energy collapse. The problem is severe across the entire developed world, but nowhere worse than China, with a fertility rate of 1.05 live births per woman. Decades of one-child policy have also resulted in an outright shortage of women. Working age population is facing a collapse. Projections that I have seen suggest a drop in total population of one third by 2071. Considering the rapid greying of population, this suggests a reduction in working age population of around one half in just fifty years. This trend is essentially baked in and will be very difficult to mitigate even with coercion. China will be an old folks home by the middle of the century. This trend makes industrial production less profitable, as customer base is shrinking and impossible to expand, as workforce is shrinking. This alone suggests deflation and implosion of the industrial economy in the decades ahead.

    (4) The threat of cascade failure – multiple systematic failures that reinforce one another. Essentially, the interaction of the three problems above. As net energy declines, the investment needed for energy transitions becomes less affordable. With far less oil, how do we mine the uranium needed to fuel nuclear power plants? How does a country with a declining industrial capability develop the complex supply chains necessary for the components? How can a country with imploding fossil fuel production afford the huge volumes of steel, concrete and polysilicon needed to replace fossil fuels with renewable energy? Energy shortage robs people of the wealth needed to raise families, accelerating decline later on by reducing the workforce. A smaller workforce reduces the scope for future energy production and the profitability of infrastructure.

    Putting the above four problems together, a systematic collapse begins to look more and more probable to me. Whilst SEEDS would appear to me to be an excellent tool, it is still essentially a linear model examining one aspect of the system in isolation. It would be difficult to develop a tool that can predict the future outcomes of our society, because the system includes numerous interactions and feedback effects that appear to be non-linear. But looking at the population and energy problems qualitatively, the situation begins to look increasingly grim to my eyes. I do not see how we can emerge from this situation without a rapid decline in human numbers and societal complexity – the definition of collapse.

    • Tony

      You make some very good points here, though let me touch on SEEDS – and the notion of ‘collapse’ – before I respond to them.

      SEEDS is, indeed, linear, in the sense that all such models are. BUT it has a module for addressing compounding effects where prosperity is concerned. You will, I’m sure, be familiar with the ‘taxonomy of de-growth’ that’s been referenced here from time to time – simplification of product and process, de-complexification of the economy, de-layering, loss of critical mass, adverse utilization effects and so on. I won’t go into how, but SEEDS has (and has had for some time) a way of including these compounding effects.

      This will be reviewed during the big revision of SEEDS starting soon. We’re in a situation in which money-based, non-energy economic models – and that’s the vast majority of them – simply no longer work. They appeared to work when ECoE was, say, 2%, when the distortion effect was small enough not to change outcomes too much. Now, with ECoEs at about 9%, conventional models have broken down.

      On ‘collapse’, the view often expressed is that everything collapses, and soon. This assumes that we don’t adapt. We’re doing almost nothing about adapting effectively yet. But that doesn’t mean that we can’t.

      On your first point, ECoE incorporates maintenance and replacement costs. That’s why prosperity turns down at lower ECoEs in Western than in EM countries. From here on, what happens depends on choices. Have we enough legacy energy to maintain our systems? Yes – but not if we carry on using most of our energy driving, flying and consuming goods which quickly find their way into landfill.

      As discretionary prosperity contracts, we can assume that these wasteful activities diminish, freeing up more energy for maintenance. If we replaced cars with trains and trams – not EVs – reduced air travel, stopped buying so many ‘destined for landfill’ goods and so on, our maintenance situation would be stronger. Many of these actions are already being advocated by environmental campaigners. My view is that, though people won’t want to buy into this ‘green’ agenda, they’ll be pushed into doing so by deteriorating discretionary prosperity.

      On your second point, I see FF output falling a great deal, but we can replace these quantities using REs, provided that we invest enough legacy energy into them. Total energy supply could be broadly flat, though energy value would carry on eroding.

      The demographics are horrendous in resource terms. I envisage far larger migration flows in the future. Indeed, I think this ramp-up has already started.

      Fourth, and most difficult, ‘cascade failure is indeed possible. In the financial economy, indeed, it’s all but nailed on. Some economies may not survive this process, and those at greatest risk aren’t necessarily to be found only amongst the world’s poorest countries.

    • Thanks Tim.  A lot of things to think about here.  It would be good to see Surplus Energy Economics develop into an academic discipline that is researched, funded and taught at university level.  There is clearly a pressing need for an academic discipline that brings a physicists mindset into economic circles.  It would get a lot more official attention that way.  I hope that that sort of offer comes your way if it hasn’t done already.  It puzzles me that physical sciences are trusted to provide an understanding of the workings of the universe and yet, when seeking to understand the human economy, people look to the equivalent of voodoo witch doctors or alchemists.  Very few people seem to recognise the strangeness of this situation.

      I am sceptical about the ability of renewable energy sources to replace the energy derived from fossil fuels.  Each TWh of photovoltaic electricity requires about two orders of magnitude more steel, glass, concrete and embodied energy than an equivalent TWh of legacy fossil fuel electricity.  That is a huge difference and eventually, we will need to produce all of that invested energy and industrial materials using PV electricity.  Unless the technology can develop in ways that substantially reduce inputs of embodied energy and industrial materials, I just don’t see how it can be helpful as more than a niche solution.  The EROI of wind power, offshore and onshore, is better, at least in Northern Europe.  But the steel and concrete requirements per TWh are still at least an order of magnitude greater than those of an equivalent coal burning powerplant or nuclear reactor.

      Nuclear energy, both fission, fusion and hybrid concepts, do appear to be more promising from an EROI viewpoint.  They could allow a high degree of prosperity to survive or be rebuilt if they are developed with sufficient scale economies to keep costs down and institutional obstacles are removed that presently impede their development.  But sustainable solutions here will look very different to the open fuel cycle, light water reactor dominated nuclear power that has dominated the industry up to this point.  We need solutions that combine: (1) High energy density at a whole system level, that are (2) capable of mass production using shipyard construction techniques; (3) have closed fuel cycles that eliminate long-lived actinide nuclear wastes and breed new fissile fuel; (4) Offer proliferation resistance; and (5) incorporate passive safety features, that make large scale nuclear accidents extremely infrequent, even at capacity levels far higher than today.

      A fast reactor system (The Integral Fast Reactor) that fulfilled all of these promises was developed and ready for deployment by the mid 1990s.  But the programme was cancelled by the Clinton administration, under pressure from the green lobby, who saw it as a threat to the sacred cow of renewable energy.  And rightly so.  Why would anyone bother developing low EROI ambient energy sources, when an equally sustainable high EROI energy source was available?  This was politically cheap for Clinton and his political cronies at the time, but will prove to be enormously costly for the US and the entire world in the long-term.  None the less, the technology could be resurrected.  The IFR team at Argonne wrote an excellent book describing the technology in detail.  You can download it for free here:

      Click to access PlentifulEnergy.pdf

    • Thanks Neill – there is indeed a great deal to discuss and think about.

      On SEEDS, it seems to me that conventional economics ‘is taking a long time dying’. The next version of SEEDS is likely to be more suited to commercial and perhaps political application.

  32. @Dr. Morgan
    No quarrel at all with your statement that adaptive ability needs to be in our framework. A huge problem, at least in the US, is our legacy legal and social system which is inflexible. Could one reasonably expect the Supreme Court to approve of what will be necessary in terms of shuffling private wealth? Are State governments, the foundation for our Constitution, a functional basis for what we will need to become? And is the attempt to make everyone a college graduate with an appropriate job simply, in American jargon, peeing up a rope?

    More broadly, I pose the question of Anti-fragility. It seems to me that there are two broad approaches. The most anti-fragile is a Peasant Republic (as sketched out by Chris Smaje in the UK) and small town life (as promoted by James Kunstler). In 1930 the Southern Agrarians posed the same question, being opposed to the New Deal notions which emphasized more top down planning. At the present time we have the UN promoting ‘stakeholder’ planning…get the major corporations together and try to reach consensus on what we need to do…very similar to the New Deal in many respects. Klaus Schwab promotes similar arrangements. I perceive that the current consensus among people who have the power to make it happen is, as it was during the Depression, top down planning.

    My own, shall I call it gut feeling?, is that top-down is going to win again and we will replace a broken system with a highly fragile system. The couple who wrote Hunter Gatherers in the 21st Century point out that a benign dictator is the most efficient political system…but that almost all dictators turn out to be corrupt and thus their efficiency turns out to be maladaptive.

    Top down, or bottom up? Alexander Hamilton or Thomas Jefferson?

    Don Stewart

    • I think I need to address the issue of “adaptation or collapse?” as a theme here!

      I should start by saying that the US will find it harder than most countries to adapt. This might make more sense if I explain that, whilst not “collapse”, adaptation requires (and creates) some truly radical changes.

      These ought to be possible in a democracy, as prosperity in general (and discretionary prosperity in particular) deteriorates, and as existing institutions are transformed by de-growth.

      In the context of the US, the financial system is deeply dysfunctional, often to the point of the surreal. It’s being kept going by stimulus, and that must end, either in runaway inflation and/or sharp rate rises. This is dictated by the divergence between the ‘real’ economy of goods and services (ultimately, of surplus energy) and the ‘financial’ economy of money and credit.

      Large parts of the corporate sector are tied to discretionary consumption, which slumps when discretionary prosperity can no longer be supplemented by large and rising stimulus-subsidy.

      The voters aren’t going to like any of this. Prosperity falling, discretionary prosperity falling even faster, cost of essentials rising, debt high and growing, quite probably rates rising. If you wanted to describe a prototype political beneficiary, it wouldn’t be another Donald, or another Joe, but somebody a lot more like Bernie.

  33. Dr Tim, there seems to be a slow realisation amongst those I speak to professionally here in the UK that individuals and families need to take their own steps towards securing a rather more sensible approach to managing their financial life, and this, in my experience, has been pushed up the agenda by a general sense of unease brought about by the current pandemic and, more so, by the sense of economic precariousness.

    Without anything that follows being ‘financial advice’, per se, here are some of the things that enquirers have been doing in recent months.

    Firstly, with the UK in the midst of a frenzy with residential property (piling money into consumption), the sensible are able to secure a 5-year fixed interest rate mortgage for a touch under 1% in many instances, for example. Whilst there are fees associated with such arrangements, I see, even though I no longer arrange mortgages myself, such deals as ‘insurance’.

    Secondly, and setting aside issues with market valuations, etc. for now, individuals and families are making good attempts to take advantage of the current attractive tax breaks in order to fund pensions. This is really the first time in my 30-year career that people have actively sought to plan for a ‘retirement fund’, rather than my bringing it up. There is a sense of ‘having to look out for myself/my family’ and a distinct lack of trust on government ‘pension promises’. So, pension planning has gone from the bottom of the pile in popularity to the top, and this has happened quite quickly. Those nearing retirement then face the difficult decision about using their accumulated funds either to buy income insurance via an annuity or to make all sorts of assumptions about drawing from the fund (or a mix of both approaches). This is a nasty and difficult problem and occupies a lot of my time.

    Thirdly, there has been a significant rise in interest in insurance, perhaps driven again by recent events, whereby individuals and families are seeking advice on the three financial insurance products on income protection (disability) insurance, critical illness insurance and life insurance. I think that this can only be a ‘good thing’ having many times witnessed the unfortunate consequences of there being none or not enough insurance. Here in the UK, were have a well-developed, fairly priced, and competitive market in such things, and there seems to be a slowly growing awareness that ‘we have to do this for ourselves’.

    Perhaps these things have been driven by ‘lockdown thinking’, precariousness, seeing elderly parents struggle on low retirement incomes, and knowing people who have been exposed to adversity. The terrible demographics of the UK are also subtly playing their part, too, I think.

    So, it is currently possible to build a sensible structure around oneself, at perhaps the most attractive ‘rates’ ever, but I have my doubts about how long that might last!

  34. Many thanks for another thought provoking article Dr Tim. Referring to you remark “some economies may not survive this process, and those at greatest risk aren’t necessarily to be found amongst the world’s poorest countries”. Am I right in thinking that nations such as the UK and Ireland, which carry large debt burdens and are highly exposed to the financial sector, would be centre stage in your analysis?

    Is it not the case that governments already have the necessary tools to stimulate an economic transition away from the most (resource) wasteful sectors of the economy, towards more productive sectors? It’s called taxation.

    I think we are all expecting taxes to rise in order to cover the spike in additional government debt driven by the pandemic measures. In the short term, targeting higher taxes at wasteful sectors could generate the additional revenue that governments seek. Of course, if the policy was successful, the targeted tax revenues would subsequently fall, but that would be a sign of success. As an example, why not double the VAT rate on the kinds of disposable “tat” that finds its way to landfill after a very short ownership period.

    Leaving it to the market has clearly not worked, and probably won’t work anytime soon. Although, if they (businesses) knew what was coming, that might be different. I say this because whole industry sectors are currently dedicated to churning out an excess of short life-span “stuff” that we don’t really need, and cannot afford from a resource depletion viewpoint.

    Whether it’s through taxes or other policy mechanisms, surely government will have to push the agenda for the conservation and re-direction of resources towards “essentials”.
    Higher taxes are never popular, and to be clear I wouldn’t relish higher taxes myself, unless I could see that they were somehow linked to a beneficial outcome for society. But, if we must have higher taxes, let’s direct them towards the most wasteful elements of the economy.

    The reality check is this would require visionary and courageous government, which seems to be in short supply wherever you look. I’m sure that even the “tat” producers will have lobby groups to convince weak-willed politicians that producing and selling this stuff is in the national interest. It was ever thus.

    • Interesting thoughts, Neill, though a lot of that would be hard to sell to voters.

      Ireland is an extreme case of financial exposure, and the term “leprechaun economics” has been used to describe Irish GDP. Ireland’s financial assets are truly enormous, as too are debts, when measured against a meaningful benchmark, such as prosperity. I would fear for Ireland were it not for the backing of the EU and the ECB.

      Intentionally or not, the UK has been retreating from financial exposure, though in absolute terms this remains excessive. The big problem for the UK is the need for a change of attitudes. The current government does seem prepared to move away from some of the excesses of economic “liberalism”. Can the public make the required transition, reducing the emphasis on self-gratification and also reducing the connection between self-worth and wealth (asset prices, consumption)?

      Obvious problems include debt exposure, particularly at the household level, insecurity of employment,and the growing marginalization of the increasing number of ‘JAMs’. Essentials seem to be getting more expensive, notably electricity and gas. Over time, rates will need to rise, asset prices can be expected to fall, and discretionary consumption will fall.

      What I’d like to see is an awareness of the need to ensure that the essentials are and remain available and accessible to all. This will involve a great deal of redistribution, which is likely to encounter stiff opposition.

  35. Gail Tverberg on some of the same issues currently considered here:
    The Afghanistan Fiasco (and Today’s High Level of Conflict) Reflect an Energy Problem

    at Our Finite World.
    Same focus on sorting the sheep from the goats.
    Don Stewart

    • @kleiber
      Thanks for link. My favorite source of information is Azby Brown’s book which gives us a story about how different classes of people lived in Edo. Azby is a US born and educated architect working in Japan, who studied relicts from the Edo Period and the museum collections from that period as well as written records. As an architect, he has a keen eye for what actually works. For example, how did the city of Edo build a sanitary system of far better quality than London or Paris? How did the people in Edo, to save capital, use a multitude of small commercial kitchens rather than invest in private kitchens?

      The book is no longer in print, but copies can still be found. I think it is a gem. Here is the Amazon description:
      “Just Enough is a book of stories, depictions of vanished ways of life told from the point of view of a contemporary observer. The stories tell how people lived in Japan some two hundred years ago, during the late Edo Period, when traditional technology and culture were at the peak of
      development and realization, just before the country opened itself to the West and joined the ranks of the industrialized nations. They tell of people overcoming many of the identical problems that confront us today–issues of energy, water, materials, food and population–and forging a society that
      was conservation-minded, waste-free, well-housed, well-fed and economically robust.

      From these stories, readers will gain insight into what it is like to live in a sustainable society, not so much in terms of specific technical approaches, but rather, in terms of how larger concerns can guide daily decisions and how social and environmental contexts shape our courses of action.
      These stories are intended to illustrate the environmentally-related problems that the people in both rural and urban areas faced, the conceptual frameworks in which they viewed these problems, and how they went about finding solutions. Included at the end of each section are a number of lessons in
      which the author elaborates on what Edo Period life has to offer us in the global battle to reverse environmental degradation. Topics covered include everything from transportation, interconnected systems, and waste reduction to the need for spiritual centers in the home.

      Just Enough, more than anything else, is about a mentality that pervaded traditional Japanese society and which can serve as a beacon for our own efforts to achieve sustainability now.”

      I will note that the population of Japan increased from the depressed levels during the civil wars and then stabilized at about 40 million. They managed to reforest Japan, which had been denuded. For sure, they still had an aristocracy, but the top tier put a strong control on the lower tier of the aristocracy. Read, for example, how the samurai turned to ‘umbrella repair’ and similar skills in order to survive in the absence of employment as fighters.

      Sharp contrast to current discussions in the US about how more industrial power plus a Space Force plus colonies on Mars plus GMO everything is the solution.

      Don Stewart

  36. Global merchandise trade as a percentage of GDP, peaked in 2008 and is now down about 8% from where it was.
    https://data.worldbank.org/indicator/TG.VAL.TOTL.GD.ZS
    World export value index appears to have been on a plateau since around 2010.
    https://data.worldbank.org/indicator/TX.VAL.MRCH.XD.WD

    Is this not a strong indication in itself, that the real goods economy has stagnated for the past decade? It does not account for goods produced within a country for consumption within its borders. But one the main distinguishing features of real goods as opposed to services, is that that can be exported to earn foreign currency and raw materials and parts are continuously exchanged between countries in the production of finished goods. A stagnation in aggregate merchandise exports either means that nations are becoming more self-sufficient, or it would appear to correlate with stagnation of manufacturing for the world economy as a whole. A peak in production of real goods value would appear to be identical to a peak in real global GDP, with financial distortions removed. Whereas currency based stimulation can inflate asset prices to give the illusion of growing wealth, a plateau in real goods production looks like a dead ringer for stagnation in real GDP. It suggests that growing real GDP in some countries is offsetting declines elsewhere.

    • Yes – and sales in a lot of product categories, including cars, smartphones and chips, had turned down well before the pandemic.

      I find it useful to divide economic output as follows:

      GMO – globally marketable output – things traded (and hence priced) on world markets
      ICS – internally consumed services – things can only only be sold within countries – these are residually priced
      and
      GMO X – GMO plus net exports of services – this is the hard-priced part of the economy
      Output less GMO-X – the part of the economy that is priced residually

  37. “There is fire activity happening in California that we have never seen before,” said Chief Thom Porter, director of the California department of forestry and fire protection, known as Cal Fire. “For the rest of you in California: every acre can and will burn someday in this state.”

    The recent reports say that ‘every available resource is being thrown at the Caldo fire’, and still Mother Nature is batting last. indigenous people mostly knew how to live with fire, use fire as a tool, and rebuild quickly what uncontrolled fires destroyed. E.g., the Aborigines in Australia who created The Largest Estate on Earth, and the multitude of other indigenous people who lived in fire adapted forests, and those who used fire as part of multi-generational succession farming plans. Is it time to actually look? My sister in LA would send me a news photo of people in LA driving very fast directly toward a fire, being quite unconcerned. I saw this decades ago. A fire was burning on the hillside above Malibu, and nobody seemed to care.
    Don Stewart

  38. Worth Contemplating
    Since the challenge we (but more out children and especially our grandchildren) face is so existential, it is worth stepping back and asking existential questions. Such as:
    “What was the “hard priced part of the economy” in Japan in the Edo Period?

    Well, pretty close to zero. There were some Dutch traders in a single port city, but the total trade was very close to zero. On the other hand:
    *they had a well-functioning sewer system in the cities
    *the population had increased from something like 8 million to around 40 million and then stabilized since the end of the civil wars
    *the arts and commerce inside the country were flourishing
    *the ecosystem had been restored
    *no CO2 and very little methane were being emitted

    Is the zero ‘hard priced part of the economy’ a sufficient indicator of collapse? Or is it merely a strong indicator of collapse if we ASSUME that an industrial economy is essential for humans to thrive?

    Stating the question in terms of black and white, of course, excludes all the grays in the middle….which is where I think the ideal balance lies. But I suggest that jumping to conclusions is obscuring much of what actually needs to be done. As, for example, the drumbeat of suggestions from careful observers that health requires disconnecting from the digital world…which is the part of the economy which has produced trillionaires.
    Don Stewart

    • The Feasta website, feasta.org, features this book review, recently translated into English from the original French. Very consistent, I think, with a study of Edo, Japan, to develop some ideas about potential avenues.

      The Age of Low Tech by Philippe Bihouix: review by Mark Garavan

      “the proposal being pushed forward is that the core challenge is simply to switch our energy source from carbon to various renewables and the issue of climate is solved. The current economic system then carries on and does so even better than before. Better because it is now rendered ‘sustainable’, that is, it can endure ad infinitum.

      Philippe Bihouix’s book is a sharp wake-up call that cuts easily through this facile analysis. His book shows in clear terms not only just how simplistic this narrative is but how plain wrong it is. Drawing on straight-forward engineering assessments, he shows how renewable forms of energy cannot in a physical, literal sense replace carbon. The tangible raw materials required to fully replace carbon sources with new energy production methods simply don’t exist. Even the attempt to extract and produce them will precipitate the very climate crisis that the endeavour is seeking to avoid. More generally, new technological solutions, including the proffered ‘green technologies’, inevitably require vast material resources that just are not available. The first Part of his book addresses this question in detail and concludes:

      ‘Let us summarize: wind, solar, biomass, biofuels, algae or modified bacteria, hydrogen, methanation, whatever the technologies, we will be caught out by physical constraints: by our inability to fully recycle materials (we make wind turbines and solar panels today using materials that we do not know how to recycle); by the availability of metals; by the land area that the technologies demand, and by intermittency and low yields.’ (31)”

      Bihouix explains why, in a complex adaptive system, it is impossible to specify in advance a specific plan for getting to where we need to go. But he estimates that Westerners will need to consume perhaps one quarter of what they currently consume.

    • Thanks for this, Don. Note that involuntary simplicity is what is seen as likely.[read the whole review at the Feasta site] Also there is no mention of population reduction which would ease adaptation.

  39. Dmitry Orlov has another interesting essay up on the messy American retreat from Kabul and its implications for the US and the Petrodollar: https://cluborlov.wordpress.com/2021/08/28/the-afghanistan-rout-and-american-glasnost/
    The US Dollar, along with all other fiat currencies are not backed by gold per se – effectively they are backed up by men with guns – a.k.a. the US military. Given the shambolic retreat from Kabul that echoed the flight from Saigon in 1975 the question is will these events trigger an existential crisis for the greenback and other fiat currencies?
    Worth noting too, the energy situation then and now. The US conventional oil production peaked in 1971 and was in decline during the tail end of the Vietnam War (or American War for those living in Vietnam). It appears that even with all the malinvestments as a result of record low interest rates in fracking, this (a) still has not made the US “energy independent” and (b) is on the decline in any case with depletion rates set to be far steeper than conventional oil.

  40. @Steven Kurtz
    Population and Edo
    Azby Brown notes that Buddhism was the dominant religion in Edo. The Buddhists believe in reincarnation. So infanticide was practiced by the midwives who would ‘send the child back’ to perhaps be born into more benign circumstances than to a farm family who already had as many mouths to feed as they could afford.

    Brown’s book was published in 2010, immediately after the Great Financial Crisis. If I explained to people the connection between religion and population control, they reacted with horror. I think that attitudes have hardened since then…there was a scared flexibility at that time that has morphed into “On To Mars” and “EVs everywhere” and “GMOs (animals, plants, and humans) solve the problems”.
    Don Stewart

  41. @Steven Kurtz
    Speaking of the GFC and Edo and how we might read the tea leaves. Immediately after the 9/11 attacks there was a brief moment of realism. Why did this happen? How did this happen? Why isn’t America different from other countries?

    But a couple of days later the attitude had morphed into one of vengeance. We were going to bash somebody, and Iraq and Islamic people in general sounded like good victims.

    Immediately after the GFC, Obama was elected to enormous popular approval. We then launched on an expanded version of what had gotten us into the fix to begin with. We might expect a reversion to financial excess, but what also emerged was the social movement that eventually led to Donald Trump.

    Now we have everyone scared of another financial debacle, some bad scenes coming out of Afghanistan, signs of the Sixth Extinction, extreme weather, polarization, a health crisis, and so forth. We sometimes see a few people treating these problems as indications that our methods are actually killing us…but any moments of clarity quickly get drowned out. For example, Ugo Bardi’s statistics showing that the half-life of the recent IPCC report was a couple of days.

    Don Stewart

    • Thanks Mark – I recommend that people read this, even though I’m not wholly in agreement with it. What’s missing, for me, is of course the economy as an energy system. When that’s understood, we can see various issues – such as the rise in the costs of food and other essentials – in a different context. As well as food prices, energy prices are already rising sharply, in part because of transition. That’s going to squeeze discretionary spending.

      One thing that isn’t mentioned here is the GDP deflator – the difference between nominal and real increases in GDP. Last year’s GDP-def for the UK was 5.7%. Also missing is the monetization of government debt – essentially all of last year’s huge deficit was monetized by the BoE.

      A further factor to consider is the fundamental weakness of the UK economy. This weakness is deflationary, offsetting ultra-loose monetary policy. That’s not a good place to be. The UK is on the life-support of cheap money. If people borrow less, that will reduce inflationary pressures, but it will also undermine economic activity. The UK doesn’t actually make very much. Consumption is propped up by borrowing, much of it secured against inflated asset prices, essentially property.

      So what we need to do is follow through on this. Does the rise in the cost of essentials – in the absence of borrowing – squeeze discretionary consumption? If so, what happens to sectors like leisure, travel and hospitality?

      Last time I was in small-town England, it looked very poor and run down. I suspect that’s an accurate reflection. That might not mean high inflation, but it does mean stagnation, and worsening hardship.

    • A bit odd that Richard Murphy states that QE has created asset price booms, but there are no signs of it boosting inflation, so it is ok to continue QE. I guess if your definition of inflation is very limited, then that is sort of true. But I have seen that inflation is currently 2.5% in UK – and rising. And that is using the CPI, which tends to drop anything that actually rises in price.

    • Also he talks about interest rates without any reference to ‘real’ rates. So with rising inflation even holding rates steady should be considered equivalent to a cut. He goes on to argue that raising rates is “class war” as it serves banks and the wealthy although also mentions the asset booms and growing inequality. These surely stem from low interest rates provided by QE, the chief beneficiaries being the wealthy of course as they have access to more credit to fund mortgages etc. Can’t have it both ways IMO. All signs of an unbalanced economy however. Some causes pandemic, some causes Brexit but resolving these issues won’t help the underlying energy problem.

  42. Aside from the energy price driven increases in essentials, and a few other supply-chain driven things like ‘chips and cars’, I think it is true that there really isn’t much long-term inflation in the ‘traditional sense’.

    Where we have seen massive inflation is in the price (but not necessarily value) of financial assets, such as UK residential property, and stocks and bonds. The former has been undoubtedly been distorted by short-term tax breaks and pandemic-triggered ‘big house in a village’ dreams (although the reality of this is perhaps less attractive when city ‘incomers’ find there isn’t much to do in the dark months of the year miles from the nearest city), the latter by QE and increasingly desperate income-seekers. The ‘income seekers’ are promised pots of gold by piling into stocks, utterly ignoring the fact that ‘blended’ income sources are likely a better approach. I meet far too many ‘little old ladies’ holding higher-risk tech and ‘ESG’ investments who have a limited understanding of the risks (and costs) they are exposed to.

    I’m certainly not arguing against holding equities, per se, but people need to go into this sector very carefully, as after a prolonged, artificial (spoken as an anachronistic old-fashioned ‘value investor’) boom, there will come a time when the bubble bursts.

    On average, we live about 4,000 weeks – a sobering way of looking at life spans (the Sumerians and Mesopotamians were around about 130,000 weeks ago!) – and time for riding-out volatility reduces sharply.

    • @Mark Andrew Seldon
      You might like to recommend to your “little old ladies” the recent carrot offered by Nationwide ( which claims rather mysteriously to be “a mutual” building society despite eye-watering rewards to their chiefs) .
      They are offering entry in a monthly prize draw to investors .
      Possibly just as beneficial as a punt on the stock market.
      I would presume when the interest rates are raised on the mortgages of the 25% of all UK mortgages that they hold , the investors have every right to anticipate proportionately higher “value” prizes.

    • Thanks – excellent.

      He makes two points that are particularly striking.

      The first is that we had a choice, and may have got close to getting it right, circa 1976. That, of course, was America’s bicentennial, but it was also the 200th anniversary of James Watt’s steam engine and Adam Smith’s ‘Wealth of Nations’.

      The second is that, in the LtG-World3 scenario, the broad category “industrial output” is the one that turns down pretty rapidly once things start to unravel.

      LtG used broad categories intentionally, because World3 is, as it says on the tin, a world model. By contrast, and at an altogether humbler level, SEEDS is an energy-based economic model.

      The point is that the W3 category “industrial output” is the nearest to the conventional measure GDP and the SEEDS measure prosperity. SEEDS shows prosperity turning down, much as “industrial output” is projected to do. The only reason why GDP hasn’t followed this same trajectory is that, being a wholly financial measure, it can be propped up by financial policies (fiscal and monetary).

      Where this puts us, I think, is at a point where the corporate/industrial sector as a whole faces “de-growth”, whilst the financial system (and sector) are dangerously exposed.

  43. @Dr. Morgan
    Agreed on the general alignment of LTG and SEEDS data. I would add that the accumulation of pollution was a very perceptive modeling on their part. We have been engaged in the degradation of the biological basis for life and then putting patches on the world by using more energy…a spiral downward. While we were engaged in that, we created memes which behaved like genes and created a rigidity in society from which we have had trouble breaking free.

    There have been some remarkable people who gave us ways of thinking about the world and life that we mostly ignored (or worse).
    Don Stewart

    • Thanks Don.

      It’s interesting, also, to look at timescales. LtG looks out as far as 2100. Conventional economic models can tell us what happens this quarter (unfortunately, what they tell us is mostly meaningless). SEEDS falls in between – it doesn’t do quarters, or 2100, but can do years.

  44. @Dr. Morgan
    RE: timescales. What humans mostly do is react to whatever their brain expects to happen in the immediate future. At the other end of the time spectrum is something like this essay from Chris Smaje:
    https://smallfarmfuture.org.uk/?p=1856
    In short, we should look forward to a future where most of us will be living on small, largely self-sufficient farms (very similar to the Edo Period in Japan?). But read the comment by Joe Clarkson taking a careful look at the likely transition steps. Timing and steps are important.

    Another important aspect of influencing a Complex System, which was a favorite topic of Donella Meadows, is trying to select the leverage points where we can actually change the system. For a current comment on the risks of monkeying with a system which is inherently not predictable, take a look at the Dark Horse Podcast number 94. Late in the Q and A Bret Weinstein fields a question about the proper procedure for making changes when we aren’t sure that the system will react the way we want it to. He suggests making small changes and then watching what happens. If the change is small, then it is more likely one can retrace the mistaken step and try something different. Combining Donella’s suggestion for using minimum power at a leverage point and Bret’s notion of trying to preserve enough of the old that we can retrace our steps…there might be some hope.

    The difficulty now is that, having ignored the clear signals for 50 years, we have to compress the changes which we need to make to respond to the inevitable grinding of the gears. And we have, IMHO, hardened the dysfunctional system with debt and its accoutrements.

    I think my grandchildren are in a very hard situation….Don Stewart
    PS. I ignore the possibility that there are no adults around to even perceive that there are problems which demand engagement.

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