#226. The siblings of misunderstanding


Though they would be the last to admit it, governments no longer have economic strategies worthy of the name.

On the single most serious economic challenge of the day – which is the escalation in “the cost of living” – the cupboard of answers is bare. What remains is a vague, fingers-crossed faith in continuity, reinforced by pious hopes that energy transition and technology will somehow reverse the palpable decline in public prosperity.

Ultimately, the only thing that now props up the orthodoxy – and similarly both supports artificially-inflated markets and stands in for the lack of a persuasive sense of direction – is TINA, the acronym for There Is No Alternative.

TINA may not seem particularly rational – until, that is, you meet TINAR.

Passing the buck

In economic terms, there’s nothing altogether new in this situation, since governments largely abdicated from economic policy back in 2008-09 when, during the GFC (global financial crisis), responsibility for the parlous state of economic affairs was dropped into the laps of central bankers.

Given what faces them now, these worthies might well wish that they could hand this burden back to the politicians. If central bankers don’t raise interest rates sufficiently, the inflationary spiral could very well get out of control. If, on the other hand, rates are hiked significantly, impairing the affordability of debt and stemming the flow of new credit, the consequences will include a major recession and a slump in asset markets.

Either way, the implications are so stark that not even the most Pollyanna-accredited optimist could spin them as ‘just a temporary problem’. 

Monetarily, by far the likeliest outcome is an unsatisfactory compromise. Western central banks’ policy rates might rise to, say, 3% or a bit more by the end of this year, by which time inflation could easily be into double digits.

Nominal interest rates (which determine how much borrowers actually have to pay) are thus set to rise, whilst real (ex-inflation) rates may simultaneously plumb new depths of negativity, worsening the economic distortion that this long-established anomalous condition has already created.  

The predicament of the ‘average person’ should be front and centre of any assessment of the economic situation. His or her discretionary prosperity is being compressed by the way in which the cost of essentials is rising much more rapidly than incomes. He or she is already heavily in debt – particularly so when per capita shares of government and corporate indebtedness are added to direct household debts – and faces the consequences of sharp increases in the nominal cost of credit.

One should not pick out any single government in this generalized crisis, but British policy does typify the bafflement of the authorities. The partial solution to painfully dramatic rises in energy bills is seen as a system of loans. The longer-term fix is presented as an expansion of renewable energy sources (REs), such as wind and solar power, with the possible inclusion of ‘fracking’, and of a renewed commitment to nuclear.

Neither solution can be expected to work.

Reliance on loans must reflect an implausible assumption that the cost of domestic gas and electricity will, somehow, and of its own accord, fall back to some kind of “normal”. Not even its most optimistic advocates, in Britain or anywhere else, claim that energy transition can reduce the burden on households in other than the long term.  

In these circumstances, it’s not unreasonable to assume that public dissatisfaction is likely to worsen, fostering increasing suspicion that the system is somehow loaded against the “ordinary” person.

This suspicion might or might not be well-founded, but it should not induce us to believe that governments have answers which only malign intent prevents them from enacting.

The fact of the matter is that governments have no solutions, palatable or otherwise, to a generalised deterioration in prosperity.  Still less have they solutions to the broader implications of prior economic growth going into reverse.

Explanations are not solutions

Since its inception, this site has had two objectives. The first has been to explore and refine the principles of the economy understood as an energy dynamic rather than a financial system.

The second has been to find out whether these principles could be incorporated into an economic model providing an improved interpretation of the present and the recent past, and an enhanced ability to forecast the future.

The basis of principle has been set out in one recent article, whilst projections produced by the SEEDS economic model have been outlined in another. April is a month particularly replete with new data, but it’s highly unlikely that the next iteration of the model (SEEDS 23) will reveal any significant shift in future trends that can now be predicted with a pretty high degree of confidence.   

At no point has it been anticipated here that the energy basis of the economy would prompt a serious re-think of the money-based economic orthodoxy, still less that decision-makers, in government or beyond, would accept a reality based on the emerging evidence that the economy is an eroding energy system, subject to material constraints, rather than an entirely financial one, capable of delivering ‘infinite growth on a finite planet’.

Even the acceptance of environmental constraint has been gradual and reluctant, leading largely to policy prescriptions chosen far more for their acceptability than for their practicality. Acceptance of economic limits would be a bridge too far, not just for decision-makers but for the general public as well.

The best that can be hoped for – at least until conditions become far worse – is shadow appraisal of the implications of the orthodoxy turning out to be mistaken. Scenario planning is helpful, in that it can build preparedness for the worst without requiring the adoption of that worst as a declared basis of policy.

Trust TINA

With the logical and empirical foundations of the continuity presumption falling apart, the best things that the orthodoxy has going for it now are two versions of TINA.         

In its economic dimension, TINA applies to a long-established penchant for buying time in the hope that ‘something will turn up’. Faced with the demonstrable failure that was the real lesson of the GFC, the decision was taken to compound credit with monetary “adventurism”.

Nobody seemed unduly troubled, either by the moral hazard thus unleashed or by the contradiction involved in trying to run a capitalist system without the essential pre-requisite of positive real returns on capital.

Hopes now are pinned on the proposition that rates can be raised by enough to tame inflation without either crashing asset prices or triggering a severe recession.

This situation confronts investors with a TINA of their own – the prices of equities, bonds and property may look extremely over-inflated, but, with rates deeply negative and likely to become more so, the only alternative, which is to be cash-long, is the sole sure way of losing money,

Put another way, deeply negative real returns on cash are now the only prop standing in the way of a market slump.

A cupboard empty of answers

The political version of TINA is the absence of a persuasive alternative to the ‘liberal consensus’ that has been in place since the start of the 1980s.

Even where they are in opposition rather than in government, centre-Left parties propose no systemic alternative to the precepts of economic policy that have been accepted since the interventionist, mixed-economy model seemed to fail in the 1970s, and the Soviet version of collectivism actually did fail at the end of the 1980s. 

Cassandra-style prophecies of collapse have zero appeal to the public, whilst conspiracy theories deter far more voters than they can ever persuade.  

This situation is, of course, inherently unstable.

Where markets are concerned, there are limits to how long the downside in discretionary sectors can be ignored by equity investors, and to how long the bond markets can dismiss rate pressures as nothing more than a short-term irritant. The relentless compression of affordability, and the inevitability of a rise at least in nominal rates, have unmistakable implications for property.

Politically, too, there are limits to quite how much hardship voters will accept without putting some tough questions to TINA. The tax base is being squeezed, because the only part of the economy that can really be taxed in a net-positive way is the margin that exists between top-line prosperity and the cost of necessities. There really is no practical mileage in taxing people to the point where hardship requires the hand-back of taxes through welfare.

Given the absence of alternatives, governments cannot really be criticised for a Micawberism which promises, and simultaneously hopes, that “something will turn up”, even if that “something” gets ever less realistic as time goes by.

The magic of monetary manipulation, and the alchemy of technology founded in denial of the laws of physics, may look implausible even to those most minded to put faith in them, but – yet again – the ‘rule of TINA’ applies.

It’s all very well to understand that the accessibility and affordability of essentials are the political battlegrounds of the future, but there are serious obstacles to an early recognition of this reality.   

As the soldier is supposed to have said in the First World War, “if you know a better fox-hole, go to it!”

The evil twin

In this situation, prognosis can become more than just unpopular, if prognosis lacks an effective prescription.

As just one example, the lack of practical alternatives means that, whilst the political Left might advocate imposing ever greater taxation on ‘the rich’, such proposals ignore the fact that much of the supposed wealth of the wealthiest is a notional product of market distortion, and cannot be monetized into taxable cash. 

We can reasonably infer that there can be no soft landing from a choice between market collapse and soaring inflation, and that the public cannot be expected to go on buying implausible long-term answers to worsening short-term economic hardship.

We are, likewise, at liberty to produce reality-based assessments of the present, and to set out probable trends in the future. We can demonstrate, for instance, that most of the “growth” of the past twenty years has been cosmetic, that prosperity is already in relentless decline, and that rises in the real costs of energy-intensive necessities are strangling the scope for discretionary consumption. We can point out that monetary policy has been driven into a cul-de-sac, and that there is no policy ‘fix’ that avoids both the Scylla of inflation and the Charybdis of recession.

How, though, does any of this help those burdened with responsibility for decisions?

We can go on to draw reasonable inferences, which include the probability that asset price delusions will fade away, and that popular patience may not much longer survive the solvent of worsening hardship.

None of this, though, offers a palatable alternative to TINA.

It might seem almost heartening that, in the absence of logic and evidence, TINA has become the sole prop retained by the consensus “narrative”.

We need to beware, though, that TINA may have a far less forgiving sibling, with the confusingly-similar acronym TINAR – There Is No Acceptable Reality.               

In other words, popular expectations may become ever more entrenched, and public demands ever more strident, even as the wherewithal for satisfying them ebbs away.           

112 thoughts on “#226. The siblings of misunderstanding


    I’ve been ‘missing in action’ for a week or so, partly finalising the latest version of the model (SEEDS 23), and partly upgrading systems.

    Apologies if you’ve been waiting for comments to be moderated, or for replies to questions. I’ll catch up as soon as possible.

    As well as incorporating a lot of new data, SEEDS 23 is a streamlined and more efficient version of the model.

    But its conclusions haven’t changed in any significant way.

    The pace of economic change, though, is accelerating. The focus is switching towards discretionary distress – which will intensify as covid-support liquidity drains from the system – and affordability issues, compounded by the inevitability of rising rates.

    Like Basil Fawlty when he was “fresh out of Waldorfs”, central banks are ‘fresh out of options’.

    Inflation is the game-changer, the one thing that can’t be remedied, but can only be made worse, by repeating the “innovations” of 2008-09. Many countries’ official rates now in or close to double-digits. Inflation can be traced to a combination of energy issues and over-loose monetary policy.

    It seems to me that things are panning out pretty much as many of us have expected. I hope that the new version of SEEDS will give us greater visibility, helping us to clarify the questions without, necessarily, supplying the answers.

  2. Necessities and discretionaries
    Worth a read and a listen to the linked video…especially for the British:

    For true necessities, the demand is inelastic, which means that a small reduction in supply results in a large increase in monetary costs. So, as an example, it is quite possible that the British could increase the percentage of income spent on food from 10 percent to 40 percent in a very brief period of time. The effect of the monetary shift would collapse much of the house of cards so enthusiastically erected by Neo-conservative governments and financial markets.

    Don Stewart

    • Thanks Don.

      For a long time now I’ve been endeavouring to emphasise the importance of essentials, and hence of discretionaries, within the overall allocation of prosperity. The latest version of SEEDS confirms that top-line prosperity and the cost of essentials are converging towards a moment, varying between countries, at which the prosperity of the average person is below the projected real cost of essentials.

      Since this “average” person is rather notional, what this means in practice is that ever-growing numbers of people are struggling to meet the cost of essentials.

      Your reference to “true necessities” underlines the point that the definition of “essential” varies over time, and for that matter geographically as well. For instance, most Westerners today would define a television, and perhaps a car, as necessities, whereas both were considered luxuries in the not-too-distant past.

      Therefore, as convergence (between prosperity and essentials) draws nearer, and cross-over looms, the probability is that the definition of “essential” will change, this time in a downwards direction. This has the effect of transferring some activities from the essential to the discretionary category.

      It seems to me that these processes are not remotely understood at the level of decision-making. If they were, at least three things would be happening.

      First, and most obviously, investors would flee from discretionary sectors.

      Second, businesses would start to change their models away from, for example, the “streams of income” model that has become increasingly popular in recent times.

      Third, politicians would start to recognise that the battleground of the future is the provision of essentials, available and affordable to all.

    • @Don Stewart.

      I liked the article. Especially the idea of government legislating that local councils have a mandatory obligation to provide allotments to anyone who wants one. “Compulsory leasing” being used to free up the land.

      The way we are going, seems to me, there are going to be lots of people wanting to grow their own food.

      Are allotments a “thing” in the US? I’ve always imagined them as a quaint British phenomenon????

    • @John Adams
      Historically, in the US we had single family houses on large lots, so there was lots of room for gardens. The production of food from “victory gardens” during WWII was quite large. I was a small child at the time, and remember working in the garden and feeding the chickens. We also had relatives with farms a few miles out in the country, and I remember visiting them and tending the cotton and helping with canning. David Holmgren in Australia has recently made some pretty detailed studies of the capacity for home grown food and fiber in what he calls “retro suburbia”.

      Unfortunately for food security, the US has been rapidly moving in the opposite direction in recent decades. We have seen a proliferation of apartment buildings with tiny balconies on which one can allegedly grow about 2 square feet of food, with poor exposure to the sun and no ability to use rainwater and no natural soil. We have seen a movement toward “community gardens”, but these are frequently built on degraded land, such as old parking lots, which require the building of “raised beds” with expensive “soil” brought in, drinking water used for irrigation, heavy use of synthetic fertilizers, etc. These gardens have given rise to the phenomenon of the “fifty dollar tomato”….tomatoes as an expensive hobby.

      It is possible to grow perishables on very small plots of land. When we moved to our current house 25 years ago, I fully expected to be pushing up daisies by now, and thought my gardening days were over. But after a couple of years of boredom waiting for death, I started to garden again. The soil is typically “old corn (maize) and tobacco field…topsoil gone and heavy clay left”. But by diligently building up the soil with household waste and cover crops, I can now produce an amazing quantity of perishables. The most productive staple crop is potatoes, which I grow in my portion of a community garden built on a gravel parking lot and which don’t require much daily attention.

      But my experience and determination are unusual. Our metropolitan area has a reputation for “local food”….but the statistics show that we grow less than 2 percent of our calories locally. The last time I saw statistics for metropolitan areas, Newark, New Jersey was the metro area which was most actively growing food. That is probably a result of their heritage of European and Caribbean immigrants who were used to growing food in even tiny spaces. I don’t think very many people in the community garden movement have any conception of the resource cost of the food they are producing. If fossil fuels go away, the community gardens as presently configured will simply vanish. Neither do people comprehend the difference between a perishable and a staple. It is vastly simpler to ship a barge of wheat from the Midwest than it is to ship a ripe tomato grown on irrigated land in California or Mexico. Neither do people understand that the density of food which can be achieved by a decorative planter on an apartment building balcony is simply not achievable using even the best “regenerative agriculture” practices which inevitably involve cycles of production and regeneration….since vegetables take nutrients and carbon out of the soil which needs to be replaced with non-edible crops such as cover crops or animal rotations. Lots of British farmers have written about the idiocy of the ‘rewilding’ movement whose advocates don’t seem to comprehend the necessities for actually producing food without fossil fuels.

      My wife and I did a bicycle tour of England in the 70s, and I was impressed by the British allotments.

      Don Stewart

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  4. Alasdair MacLaud on the collapse of the Japanese and European currencies, the appearance of commodity backed currencies in the Shanghai group of countries, and the geopolitical and financial fallout:

    My reservation: if the Euro and Yen collapse, why would Europe and Japan continue to be good markets for Chinese manufactures and Russian energy?

    I understand his point about the desire of Russia and China to avoid the monetary chaos of collapsing currencies, but I suspect he is under-estimating the damage to the real economies in Japan and especially Europe.

    I have also not been impressed by the European leaders’ grasp of their perilous situation. It seems to me that they are still stuck in political posturing. But I’m not a European expert by any means.
    Don Stewart

    • @Don Stewart.

      I agree. I find it funny that the EU talks about Russia using energy to “blackmail” the West!!!???

      Did they not think that stealing Russia reserves would have a reaction from Russia. Talking to people here and reading the national press, it seems that people still think that Russia will miss the income more than we will miss the energy!!!!!!!

      US seems to be pushing for military intervention. Do they think that Russia will keep the taps on whilst being attacked?

      I wonder which tap (faucet) Russia will turn off next?
      Has Germany agreed to pay in Roubles yet?

      Next few months are going to be interesting.

    • @John Adams
      If Alisdair is right about fiat currency collapse, then the desperate move is to attack Russia directly. I have suspected that, at least in the Security State in Washington, smart people understand the peril in our energy situation. I can’t really figure out London and Brussels. It seems like they really are clueless.

      As I have said before, my very limited personal connection with the Security State led me to believe that they think they know just exactly how to maneuver Russia into a corner and turn Russia into a subservient colony.
      Don Stewart

    • @John Adams,

      Re: Russia “missing the income” from the West’s sanctions, an article in today’s Guardian reports that “Russia has nearly doubled its revenues from selling fossil fuels to the EU during the two months of war in Ukraine, benefiting from soaring prices even as volumes have been reduced. . . . the higher prices Russia can now command for its oil and gas mean its revenues, which flow almost directly to the Russian government through state-dominated companies, have risen even while sanctions and export restrictions bite. Russia has effectively caught the EU in a trap where further restrictions will raise prices further, cushioning its revenues despite the best efforts of EU governments.”

      What master strategists we have making the decisions for us here in the West!

    • @Don Stewart.

      Have you any more info on how the US plans to break up Russia?

      Are they planning to encourage China to do a land grab in Siberia? I can’t see how the US can act on Russia from Europe without things going nuclear.

      Talk of Poland going into western Ukraine may be the start of it?

    • @John Adams
      I have no inside knowledge about what the US would like to do with Russia, other than make it a dependency. The US seems to currently favor “regime change”, which would involve attempting to put some sort of puppet in place of Putin and the Cabinet which currently governs. If the US could get Russia to shed its nuclear weapons, and put Western corporations in control of natural resources, then the political realm could be largely ignored. The US would not be pleased if Chinese corporations took control. (Note that Chinese oil companies are being driven out of the West.)

      Don Stewart

  5. @John Adams
    Think how different things might be if the German leadership had participated in a ribbon cutting creremony at the completion of NordStream 2.
    Don Stewart

    • @Don Stewart.

      I’m not familiar with the politics of Nordstream 2.
      Who paid for it? Was it a joint German/Russian project? If so, has Germany cut off it nose to spite its face?

    • @John Adams
      It started out as a straight Russian investment. Then Europe raised objections about Russian total control, so the Russians took in some partners. The construction took years. When the US would talk about LNG, Putin dismissed it by saying that “pipelines will always be cheaper than LNG”. As construction neared completion, Germany and the EU began to vacillate. They clearly did not want it to just be completed and replace the antiquated pipeline through Ukraine which had been subject to mismanagement for years. And so they stalled. My guess is that they wanted Russia to somehow figure out how to subsidize Ukraine by continuing to pay transit fees. Europe wants a “free Ukraine” but it is unwilling to come up with the subsidies that Ukraine needs.

      Russia had paid off Ukraine’s Soviet Era debts. Russia did offer some subsidies in terms of a trade agreement, and the then-President of Ukraine decided to establish closer trade relations with Russia rather than the EU. The initial reaction from the EU was “they just got a better deal from Russia”…but that quickly morphed into a Color Revolution, the secession from Ukraine of Russian dominant areas such as Donbass and Crimea, and a war of secession in Donbass. Donbass won that war, which was supposedly ended by the Minsk Agreement. Donbass would remain part of Ukraine, but would be largely independent and would be allowed to foster closer trade relationships with Russia. Putin had refused to negotiate in the name of Donbass, arguing that the government in Kiev and the government in Donbass needed to sit down and talk. In order to get something moving, he finally agreed to negotiate for Donbass.

      For 8 years, the Kiev government did absolutely nothing to implement the agreement, and instead resorted to low grade warfare. It’s no secret that the US strongly encouraged the warfare, with lots of high level politicians and military people visiting Kiev (including Joe Biden). Biden boasted about his control of the Kiev government. During much of this time, the NordStream 2 pipeline was under construction. Another complication was that the pipeline bypassed Poland…so no transit fees for Poland either. Poland has exhibited strong antipathy to Russia. Russia has tried to counter some of Poland’s propaganda about WWII by releasing formerly unpublished pictures of Soviet troops liberating Warsaw and other cities….with jubilant Poles in the streets. Not the story Poland want to tell now.

      So when it became apparent that Germany was going to stall for years on the pipeline, and the Kiev government got more aggressive in their attacks on Donbass, and Kiev got more aggressive in their talk about NATO, and Biden boasted that “I see no need to talk to Mr. Putin”, the Russian Cabinet held a televised session in which they discussed their options. Putin asked Lavrov, the foreign minister, whether there was any negotiated settlement possible. Lavrov told him “we can talk at them, but we can’t get them to respond”.

      The military minister advised an attack on Ukraine. And very quickly it happened. The rest is very recent history.

      Don Stewart
      PS. When the leader of Germany says that the attack was “completely unprovoked”, he is either stupid or just telling lies.

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