#231. Short and sharp

A SYNOPSIS OF DETERIORATION AND RISK

Might we very soon face a major financial crisis, at a scale exceeding that of 2008-09?

Are we heading for a global economic slump, or can current problems be explained away in terms of ‘non-recurring events’, such as the war in Ukraine?

Do the authorities have the tools and the understanding required to navigate the current economic storm? And what is the outlook for inflation?

These are valid questions, and I’m well aware that, whilst many visitors to this site are interested in economic principles, theory and detail, others prefer succinct statements of situations and prospects.

That’s understandable – these are deeply worrying times.

The aim with what follows is to (a) set out a brief summary of the economic and financial outlook, as seen through the prism of the SEEDS economic model, followed by (b) a succinct commentary on how these conclusions are reached.

Accordingly, what we might infer from these conditions is left for another day. Like me, you will have your own views on the political and other implications of what’s going on and what is to be expected, but the plan with this discussion is to stick to a strictly objective analysis of economic and financial conditions and prospects.

Data used here by way of illustration is a ‘top-line’ summary at the global level. We might, at a later date, look at some of this material in greater detail, and examine the circumstances of some of the 29 national economies modelled by SEEDS.

Where both the theoretical and the ‘succinctly-practical’ are concerned, urgency is being increased by what we can only call the ‘uncertainties and fears’ generated by current conditions.

In economic and financial terms, it’s becoming ever more obvious, not just that ‘things aren’t going according to plan’, but that decision-makers don’t have replacements for the tools and assumptions that have failed.

What’s clear now is that the shortcomings of money-based economic orthodoxy are becoming ever more apparent, evidenced principally by the failure of policies based on this orthodoxy.

The authorities have tried pretty much everything in the conventional play-book – plus quite a few ventures into the dangerously unconventional – and none of it has worked.

To use the contemporary term, this is a “narrative” of failure that starts with “secular stagnation” in the 1990s, and arrives – as of today – at the very real prospect of “stagflation”.

Where failure is concerned, the combination of high inflation and deteriorating prosperity is about as comprehensive – and as damning – as it gets.

Not too many years ago, the concept of the economy as an energy system might have been deemed a pretty radical ‘challenger theory’ to an established orthodoxy which insists that the study of economics is coterminous with the study of money.

Now, though, the case for the energy interpretation is gaining strength as the credibility of the prior orthodoxy is being eroded away by failure, albeit in a World that still refuses to acknowledge the inadequacies of conventional nostrums.

There are, of course, many different versions of the energy-economy interpretation, with differences of method and emphasis leading to differences of conclusions.

The main focus of effort here at Surplus Energy Economics has been on modelling the economy on an energy rather than a financial basis.

Modelling imposes a certain degree of caution, in that our conclusions should not be allowed to out-run what our models can tell us.

Inferences, of course, are a very different matter.

The outlook in brief

What, then, – and on the basis of what we know – should we now expect?

First and foremost, we can anticipate continuing declines in prosperity, with much the same deterioration already evident in the West now extending to those EM (emerging market) countries in which growth has, until quite recently, remained feasible.

This rate of deterioration can be expected to accelerate. The World’s average person is projected to be 6% poorer in 2030, but fully 21% less prosperous by 2040, than he or she was in 2021.

Meanwhile, the real costs of essentials will continue to rise, pointing towards a rapid contraction in the affordability of those discretionary (non-essential) goods and services which consumers ‘may want, but do not need’.

In real terms, discretionary consumption worldwide is likely to be 14% lower in 2030, and 52% lower in 2040, than it was last year.

Inflation has been driven higher by the rising costs of essentials but, looking ahead, is likely to be contained, to some extent, by deflationary trends in discretionary sectors.

The measure preferred here – which is RRCI, or the Realised Rate of Comprehensive Inflation – forecasts systemic inflation rising from 8.1% in 2021 to 8.6% this year, moderating to 5.3% by 2027.

These forecasts are summarised in fig. 1.

Fig. 1

Finally, in this brief list of projections, we can anticipate major financial dislocation, probably far more severe than the global financial crisis (GFC) of 2008-09. No attempt is made here to put a timescale on this, but it seems very unlikely that it can be long delayed.

The fundamental driver of this dislocation will be a dawning realization that the promises and assumptions incorporated both in asset prices and in forward commitments cannot be met by an economy that is not conforming to the consensus and official narrative of ‘growth in perpetuity’.

Along with this will go an invalidation of excuses and a discrediting of promises.

The public will cease to accept assertions that ‘everything would have been fine if it hadn’t been for’ the latest explanation du jour, which might be “the after-effects of the coronavirus crisis”, or “the war in Ukraine”, or “the dog ate my homework”, or whatever the next excuse might turn out to be.

At the same time, the public might come to realize that we cannot, for example, look forward, as promised, to ever-growing prosperity powered by ‘cheap’ renewables and the magic of technology.

The basis of projection

The foregoing has been intended for those who want a succinct statement of the outlook. You might wish to know how we arrive at forecasts which run directly contrary, both to the ‘official’ and the ‘consensus’ picture of the future.

If you’ve been visiting this site for any length of time, you’ll know the core principles on which the Surplus Energy Economics interpretation is based.

First, and in brief, we know that the economy is an energy system, because nothing that has any economic value whatsoever can be supplied without the use of energy.

We further know that energy is never ‘free’, and that, whenever energy is accessed for our use, a proportion of that energy is always consumed in the access process. This ‘consumed in access’ component is known here as the Energy Cost of Energy (ECoE).

The third core principle is that money, having no intrinsic worth, commands value only as a ‘claim’ on the material prosperity created by the use of energy.

It follows that we need to think conceptually in terms of ‘two economies’ – a ‘real’ or material economy of goods and services, and a ‘financial’, ‘proxy’ or claims economy of money and credit.

By measuring prosperity, the SEEDS model enables us to do two main things.

The first is to compare the real and the financial economies, calibrating the relationship between monetary claims and material substance.

Since, by definition, claims that cannot be honoured by the real economy must be eliminated, this indicates the extent of downside that must come into effect through a dynamic of returning equilibrium.

Second, we can use calibrations of changes in prosperity over time to restate prior trends as the basis for forward projection. Even if – for forecasting purposes – we accept nominal GDP (of $146 trillion) in 2021, as a baseline for projections, we don’t remotely need to accept a narrative that purports to explain, in glowing terms, how this number got to where it is.

It’s clear that a large proportion of prior “growth” has been a cosmetic property of stimulus, remembering that stimulus does increase the transactional (‘claims’) activity recorded as GDP, but doesn’t correspondingly increase the underlying value measured here as prosperity.

By restating past trends on realistic, prosperity-referenced lines – and by applying our knowledge of forward trends in prosperity – we are able to interpret past, present and future in a way that tells us a great deal about the prospects for the three critical segments of the economy.

These are the supply of essentials, the capability for investment in new and replacement productive capacity, and the affordability of discretionary goods and services.  

Three main conclusions emerge from this analytical approach.

First, and as shown in the left-hand chart in fig. 2, there has been a marked divergence between the real and the financial economies, a divergence that can be calculated, globally, at 40%. This gives us, in outline terms, a proportionate measure of the downside in the financial system.

Second, the aggregates of financial claims have increased enormously during a long period in which we’ve been trying – and failing – to use financial stimulus to boost material prosperity.

The application of the proportionate imbalance shown in the left-hand chart to the quantitative exposure shown in the middle chart reveals the truly enormous downside risk embodied in the financial system.

This is risk which we might be able to manage – but not if we continue to think of financial stimulus as a means to unattainable material objectives.  

Third, we can calibrate the relationship between prosperity – expressed in per capita terms in the right-hand chart – and trend ECoE.

Given the extreme improbability of ECoEs reversing their established upwards trend – and the virtual inevitability of continuing increases – further deterioration in prosperity becomes pretty much a certainty.

The rate of economic deterioration can be expected to worsen in accordance with systemic trends, including loss of critical mass (where essential inputs either cease to be available, or become prohibitively expensive), and adverse utilization effects (where unit costs rise as volumes contract).  

Again, deteriorating prosperity is a trend that we might be able to manage. But this will not be possible if, though a combination of wishful-thinking and adherence to orthodox nostrums, we remain in deep denial about its reality.    

Fig. 2

54 thoughts on “#231. Short and sharp

  1. Pingback: #231. Short and sharp – Olduvai.ca

  2. When TSHTF, things will get messy. Most people will be fortunate if that’s the extent of outcomes for them, their families, and communities. Violence and predation risks likely increase for many. Hopefully, communities can cooperate to minimize those risks. Humans have done so many times throughout history.

    • I don’t disagree with any of that, but my intention with this article was to keep to what I might call the economic “facts” of the situation, rather than their implications.

  3. There’s a lot of moving parts to the economies of the world, including the draconian political decisions outside of economics and energy. The models’ output is usually displayed with smooth lines between beginning and end points, but the path forward will be bumpy, with jerky movements up and down, and not all areas geographically or by specific businesses being affected equally. It’s therefore difficult to make accurate predictions for individual cases. But the model is excellent for demonstrating the overall picture, and where we’re headed.

    For example, the use of jet travel for pleasure, especially on the international front, will bump up against “green” energy and carbon footprint movements, as well as fuel prices and potential rationing, so I would expect a much sharper drop in the airline industry (and tourist destinations dependent on it) than say motor vehicle or train transport. I would not be surprised to see jet travel end for middle class and below people by the end of the decade. As for other factors like war, crime, new technology, conservation – each can have an effect on the overall model. My personal goal will be to reduce my energy use and live below my means, but that certainly won’t guarantee my life decisions will be completely all mine. The future of less energy use means we’ll all be more intertwined in other aspects of the decline of civilization.

    • You’re quite right, of course.

      As a general point, economic models can’t pick up unexpected events, but are used for scoping trends on a ‘best available information’ proviso as the basis for decisions. The same applies to modelling corporate performance, an area with which I’ve had quite a lot of experience. With orthodox economic models, the inputs are the (for me) frightening points of weakness.

      My point about this isn’t that conventional models get things wrong – or that outcomes are affected by the unexpected – but that the fallacy of their assumptions has rendered them useless.

      In this situation, we can either give up on modelling, which reduces us to blind guesswork, or we can attempt to model the economy on realistic principles.

      The present situation is that both governments and corporates still routinely predict “growth”, assuring everyone that this growth will return once current issues are resolved. I’m not doubting the sincerity of such statements, which may well be made in all good faith, but I think they’re mistaken, because their assumptions, and the methodology of their projections, are mistaken.

      To take one example, I’ve seen global transport projections showing a 75% increase in vehicle numbers, and a c90% increase in aviation traffic, in 2040 vs 2018. This stuff is from reputable sources, and reflects modelling, not guesswork. I disagree with it, but to propose an alternative scenario one needs projections, and trend modelling, because it’s not enough to just say “I think you’re wrong”.

  4. Dr. Morgan
    Can you say, from the SEEDS forecast, when does economic “growth” in the global aggregate become terminally negative, at measured by the size of underlying physical energy/material system? It seems like we might be there now with a possible peak in oil production in 2018. I am assuming a 100% correlation between energy production and materials extraction/consumption in the economy. So asked another way, when does the total global flow of energy and materials through the global economy begin to contract in a permanent way?

    • Good question!

      SEEDS projects global output and prosperity – the material economy, but expressed in money – and also expresses these per capita,

      The absolute top in aggregate prosperity is identified as 2026.

      This is in two parts. Output (before deduction of ECoE) peaks in 2031. But, from 2026, the annual increase in ECoE is greater than the diminishing annual increase in output.

  5. Dear Tim,

    Thank you again for your thoughtful article.

    40% is a big average exposure at World level. But geopolitics being the art of minimizing one’s exposure, is it not likely that some will fare better than others ? What does SEEDS offer in terms of predictive capacity in that regard?

    Best regards,

    John

    • You are welcome.

      40% is the gap (in 2021) between the financial economy of ‘transaction activity’ and the underlying economy of material prosperity as measured by SEEDS. The worst single number I’ve come across is China, at -54%. Ratios in some countries – for example, Italy – are a lot lower.

      When you think about applying this ‘on the ground’, as it were, patterns start to emerge.

      For instance, we know that China has enormous corporate and real estate debt, and we already know that this is threatening to unwind. We also know that a sizeable proportion of past growth and current GDP is a function of the use of this rising indebtedness – borrowing has funded activity, in everything from housing development to the building of factories and infrastructure, which provides jobs, but which only works on the assumption that all of these forward financial commitments can, in due course, be ‘honoured for value’.

      By ‘honoured for value’, I mean exchanged for material goods and services, which is the functional role of money (we don’t acquire money so we can count it or look at it, but so that we can get something for it). This is why I say so much about ‘money as claim‘.

      For instance, a Chinese person is employed building a factory, and is paid using money borrowed by his/her employer. He then uses this income as the basis for borrowing to buy a house or flat, so that’s yet more borrowing. Conventional economic modelling can make this look viable, in the sense that the ‘activity’ and ‘transactions’ are ‘real’, in that they do ‘really happen’.

  6. Thank you for your quick response.

    Can you post a comparative tableau of countries illustrating their different level of exposure ?

    John

    • I’m working on what I’m calling the SEEDS Databook, which I might be able to make available here as a download.

      From the sections completed to date:
      Netherlands -27%
      Italy -10%
      China -54%
      Australia -33%
      France -22%
      Greece -13%
      US -32%
      Germany -20%
      UK -27%

      I’m just re-checking Ireland, which shows up as -60% – I expect that number to be confirmed.

      These of course are percentage downsides, not absolute amounts of risk exposure.

  7. Thank you for the list. Are these the only countries for which SEEDS provides data?

    As the « exposure » data and the cost of energy data are too critical figures that are likely to influence the potential geopolitical moves of countries or of wider alliances, it might be interesting to be able to look at both sets of data on one tableau.

    In that regard, I would simply offer that « those who have the means to make a move » might be tempted to do so in such a way as to reduce their « exposure », in particular, by attempting to reduce their average cost of energy.

    John

    • You are welcome.

      SEEDS actually covers 29 economies. The 30th, Iran, is incomplete, because some data isn’t available.

      Obviously the data used to illustrate articles here is a tiny proportion of the total output of the model. I’m working on how to make some of the data available here.

    • France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain.

      Denmark, Norway, United Kingdom

      United States, Canada, Australia, Japan, New Zealand

      Poland, Russia, Turkey, Iran*, Saudi Arabia, South Africa

      Mexico, Argentina, Brazil, Chile

      China, India, Indonesia, South Korea

      * Incomplete – missing data

    • Many of whom are concentrated in the non SEEDS and poorest countries of all: Africa and Asia.
      A few years ago I was predicting great things for development in Africa, but with many friends in e.g. Ghana, all I sense now is pain and poverty: out-of -control weak currencies, massive underemployment, environmental degradation, water and food shortages, very low pay, and crumbling energy and transport infrastructure. Not a happy picture at all.

    • I share your concern. I would add that there would be more coverage of sub-Saharan Africa on SEEDS if I could obtain the necessary data.

  8. China
    According to a recent survey:
    “the countries considered most democratic by their citizens are China, Vietnam, and Taiwan.”

    Apparently, the process Dr. Morgan describes of going further into debt but acquiring more assets is seen as “democracy”.

    The Western people who do the surveys bend themselves out of shape trying to explain that the results are really not the results. Apparently, True Democracy involves giving people a choice between Trump and Biden or between Boris and (I forget the Labor guy’s name).

    I find the connection between borrowing and growth, which has worked well for China for several years, and the perception of “democracy” to be just as scary as the faux contests between two politicians who are both beholden to the same power structure.

    Mirages in the desert look very attractive.

    Don Stewart

  9. I have been thinking lately how it is probably a good thing that most of the world is not aware of or knowledgeable about the reality of our situation.

    Can you imagine the chaos if they all knew what we know?

    Nobody would buy stocks.

    Nobody would start a business (at least any based on discretionary spending).

    Nobody would buy a house as they would know prices will fall.

    This is why that if the movers and shakers do know what we know then they can never inform the public of the reality and why they must pretend all is well and make policies to give that pretense.

    It’s worth deep thought that perhaps ignorance is bliss and that to try and make drastic changes to manage our decline is only going to exacerbate the problem.

    • There are one or two currencies they might not want to own, either!

      Given the course of events, it does seem to me that we really can start to talk in terms of what we “know”, rather than what we “think”, about this.

    • I’ve also been struggling with this issue.
      I’ve just put most of my spare (inherited) cash into buying a nearby residential property to rent out: I already have an assured long-term disabled tenant, in receipt of housing benefit, and it seemed better than being screwed by the stock market or leaving cash in the bank. At least its doing something useful. People will always need somewhere to live, and many people will never be able to afford a house or even a flat.

  10. Hi Dr Tim, thanks for another article showing the problems ahead.

    Can I particularly draw attention to the second graph (Economy by segment) showing future discretionary, investment and essential expenditure. To me it highlights the problems dead ahead.

    We are in a world of increasing ECOE, while at the same time declining ore grades requiring more energy to extract the same amount of minerals. This is happening while any attempt at replacing fossil fuels requires a magnitude increase of investment in non- renewable renewables, (to paraphrase Tim Watkins), massive grid expansions to link up wider spaced renewables etc, all of which is ‘investment’.

    If the world wide ‘investment’ category is shrinking then there will be much lower levels of ‘renewables’ than most expect.

    My interpretation is that at some point during reduced oil supplies, and it is oil instead of all energy, we get to the point that future investment becomes too expensive relative to immediate needs of essentials and investment becomes very low to non existent, something that hasn’t happened over the last few centuries.

    Some of the earliest signs of lack of investment I see here in Australia, with the introduction of tertiary student fees going back 30 years, via a loan system. Prior to then we had free tertiary education in this country. Now the loan repayments on these fees are a huge burden on the young adults entering the workforce. Or there is the case where a single household income in the ’60’s/70’s could afford a 3 bedroom house, a car and holidays each year on a median income (I don’t use average income as it’s dragged up by the outrageous incomes of the top 1%-2%), yet today that is impossible in any major city in Australia!!

    Asset price inflation of the past is a real cost to median income young adults, but always gets left out of discussions in terms of inflation and GDP. I’m wondering if you included the cost of buying a house in inflation numbers and the cost of buying a retirement (also greatly inflated) into the seeds inflation numbers, it would show overall higher inflation, which reflects in much lower GDP over decades, and therefore make the gap between current discretionary income and essential income much smaller.
    The conclusion of course being investment expenditure gets squeesed much more rapidly in the near term future with all the consequences of this. Look at Sri Lanka right now needing IMF funds to just purchase essentials being the near term case. (Of course if they gets the resources they can’t afford, then someone else misses out in a depletion scenario!!)

    • Thanks, and you are quite right.

      Your household from the 1960s/70s, with their 3 bedroom house, car and holidays, probably had a mortgage, but not much other debt, and even the mortgage was probably modest as a percentage of income. It might very well have been that only one parent went out to work.

      Official stats, adjusted for inflation, probably state that the equivalent household today is ‘better off’, but I think we know that their material circumstances are actually worse, not better. Their level of stress (about their finances) is very probably worse today, too.

      What your comparison highlights is the difference between the ‘real’ and the ‘financial’ economies.

  11. Even if I use my rose tinted glasses things are starting to become undeniable.

    https://consciousnessofsheep.co.uk/2022/06/09/greens-unlikely-to-survive-the-coming-winter/

    So why might surplus energy fall? Three key reasons are important to us today. The first is the simple process by which we work our way from the cheap and easy energy through to the expensive and difficult. Nobody dug deep coal mines out beneath the North Sea when there were still seams of coal jutting out of the sides of Welsh hills, just as nobody spent a fortune hydraulically fracturing a shale deposit when they could knock a pipe a few feet into the ground to unleash a gusher of sweet crude. Second, we have been burning fossil fuels at a far faster rate than we have been discovering new deposits. As a result, we have already passed peak oil, and are rapidly approaching peak gas and coal too. Third, for green policy purposes, we have been disinvesting from further fossil fuel development while adding energy-expensive and difficult to incorporate energy-harvesting technologies into the energy mix.

    • Tim Watkins is so often proved right in what he says. What is it about thinkers called Tim?

    • And I think he, too, is Welsh!

      Seriously, though, I greatly admire his blog, one of the very few that I make time to read.

      Tim tends to concentrate on UK issues, where the situation is particularly dire, and where the outlook is extraordinarily grim – I can find almost no glimmers of light in the gathering darkness.

    • I watch closely what happens in Europe in general as well as in the USA. What happens in those areas finds its way to Canada eventually, if not immediately.

  12. Dear doc, it really is quite simple. The monetary plane is going down, and the physical plane is going up. In times of surplus, its all fun and games. In times of ever less (the tough cookie we have to adopt about, uhh, now) we start to worry. Too little, too late.

    Reality is a bitch. Especially for the entitled.

  13. This should help!
    https://www.zerohedge.com/commodities/european-gas-soars-after-us-freeport-lng-terminal-explosion

    “For those puzzled by the price action, US NatGas’s slump is in response to the prospect that fewer LNG exports would mean more supply domestically, though inversely, it would mean higher prices in Europe since the US has been increasingly sending LNG across the Atlantic to ween European countries off Russian supplies.”

    Like there’s enough gas to do that in the first place. The elites are playing checkers with a chess set and we get to experience the dismal display. The choice between heat and eat will be mute if there is neither gas nor food. Starving to death, shivering in the dark, makes for great reading in 50 or so years. Like reading about past famines, pandemics and wars today. Gripping stuff, til you find yourself in its grip.

    • There’s a lot of strange stuff going on, and some of the strangeness is things that should have happened but haven’t (so far, anyway).

      My view on politicians – and administrators – is that most are middle-management-grade types, who cope so long as (a) nothing too unusual happens, and (b) they can go by the book.

      As you’d expect, I tend nowadays to regard the energy interpretation of economics as demonstrable fact, and financial interpretations as fiction, disproved by events.

      From this point of view, very unusual things are happening, and governments can’t ‘go by the book’ because the book is being torn up.

      Efforts to sustain the status quo are destined to fail, but there’s a frightening lack of constructive planning for alternatives.

    • Dr Tim…
      “In some cases it will take a severe crisis for attitudes to change.”

      The only way current economic thinking and government circles (both sides wherever you are), and central banks think, is to grow out of crisis.

      There is no manual for de-growth in economics, no system of how an equable across society de-growth can happen. If you have a model that shows the ‘how’, I’m sure a lot more people than just myself would like to know it.

      Our current system relies on growth, and growth in debt to make it all work, always borrowing from the future. I’ve been looking for an alternative to this paradigm for decades, but every attempt at a bright future with no growth (not even de-growth) has very serious flaws in it, to make it impossible.
      For example the circular economy believers, miss out on how much energy it will take to recycle everything into usable products again, where it will come from, how do we build renewables from renewables, nor do they consider we need heat processes for many industrial applications, not electrical energy. How do farms replace galvanized fences without mining more zinc, in ever lower grades etc, etc?

    • Good points, but let me put this to you.

      My reading of the situation, which I mention with reluctance, is that the UK economy, in particular, is in the process of falling apart. If and when this happens, is that a sufficient shock to the public, and of course to politicians, for fundamental change to occur?

      The cost of necessities is rising, economic output is deteriorating, businesses are closing (because costs are rising whilst customers are getting poorer), services are fracturing (not least as employees seek wage rises in the context of high inflation). This is all going to get a lot worse as winter looms, and domestic energy prices rise again. Huge numbers are already having to choose ‘between heating and eating’, and debt distress is clearly worsening. People can’t rely on rail or aviation, and find it increasingly difficult to afford to drive. We might be talking about a re-run of 1976 (Sterling crisis, but with no IMF rescue this time) AND 1979 (‘winter of discontent’) both happening at once.

      Government is clueless, but the opposition offers no real solutions. Mr Johnson talks about tax cuts (with a big deficit, and public sector wage costs set to rise sharply?), and more “help” for people to buy houses – in other words, the same old drivel. Everyone seems to be peddling the same nonsense (EVs, windmills). “Brexit” has gone horribly wrong.

      So here’s the question – does enough of this prompt change? Is the British version of economic “liberalism” abandoned? Do people recognize that, to help the worst off, sacrifices have to be made by others?

    • “Severe crisis for attitudes to change”

      Dave Pollard’s monthly compendium of articles contains many that are particularly relevant to our concerns. I’ll cite just a few:
      *The utter irrelevance of mainstream economics…crossing 8 planetary boundaries will reduce output by 1 percent
      *How Fascism flourished in the period between the wars. Interesting to think about Ukraine after the Soviet collapse.
      *Chris Hedges on the slide of the US further into the sinkhole of militarism
      *The statistical moderation of the American people contrasted with the polarization in politics. There is a center, but can it hold?

      All of this is in the context of a still robust consumer economy (as the last of the federal largesse is being spent?). But consumer confidence is very low.

      Burning question: Will a severe crisis lead us into some sober re-evaluation of the way we produce and consume, or will it result in a bloodbath? And how will the Tic Tok generation react?

      Don Stewart

    • opps, apologies, this was meant to reply to Dr Tim’s post June 13, 3.51am….

    • Dr Tim, I don’t disagree with any of your points about the deterioration that should be clearly visible. My point or question is how?
      Economists don’t have the toolkit for de-growth, it’s the missing link. Exactly what can be done to enable an equitable situation for as much of the population as possible, while the economy de-grows??

      If a politician of any party starts to suggest rationing or de-growth for anything, they will quickly be voted out of office in preference of those that promise a bright future, probably based on renewables and/or nuclear to solve all the current energy problems, plus of course prosperity for all, higher living standards etc. It all involves more energy to get to whatever they will promise. In 1980 Jimmy Carter was voted out of office promising an energy constrained future, while Ronald Reagan promised there were no limits to American ingenuity and therefore no limits for American prosperity.

      Currently Sri Lanka is a forerunner to the problems many western democracies will face in a declining energy future. Here is what the World Bank thinks is the solution over time ….
      “As Sri Lanka emerges from the crisis, economic growth will be critical to restore livelihoods.”
      https://www.worldbank.org/en/news/feature/2021/10/16/accelerating-economic-transformation-and-poverty-reduction-in-sri-lanka

      We have plenty of mounting problems, but the same old thinking as if energy was not the limiting factor. Every economist that works for governments and central banks think along the same old lines of no limits of resources, the price mechanism of free markets will allocate new energy resources etc, etc.

      We know it doesn’t and can’t work like that! Modern economics is just a belief system that has worked in a world of growing energy availability to accommodate the growth forecast by economists.

      Since Limits to Growth came out 50 years ago we have been warned that we needed to get off growth and limit population because of dire consequences ahead if we don’t. It’s always been ignored. Even the 26 climate conferences and all the promises by governments has just seen CO2 levels rise every year as per the keeling curve.

      My take is that we just go over the seneca cliff with the pedal to the metal. There is no plan B. If you think you have one please write an article about it!! Plan B is not just what it looks like in the future, but how to get there. I’ve seen no credible plans yet.

  14. The analyst here implies that ‘USA, Inc.’ needs to declare bankruptcy
    https://www.zerohedge.com/markets/its-worse-many-can-imagine-kim-dotcom-sees-controlled-demolition-enabling-new-dystopian

    [N.B. So what about UK PLC …? ]

    In the USA, on the bankers’ own terms, i.e. counting money, not energy, it’s over.

    But I still don’t follow why countries can’t devise a new banking system not dependent on constant growth. Plus a lot of countries would be in default and the bondholders stand to lose some or all. This seems to have happened every year or so to one country or another for the past ~70 years … just not to ‘very important countries’, which the US and UK still think they are.

    • I think there are two related issues here. The first is that the established economic system is failing, much as communism failed in the USSR. The UK, in particular, is now very close to the edge.

      The second is that the banking system relies on the borrower paying back more than he or she borrowed. Whilst the circumstances of the individual or business can improve over time, making this possible, the system as a whole can only function if the generality of borrowers are better off at the point of repayment than at the point of borrowing. Only growth can make this possible.

    • @Dr. Morgan
      It seems to me that some things are true:
      *The debts and promises owed by the US government will never be paid in currencies with real values approaching current real values.
      *The bankruptcy system assumes that a court will simply convert all assets into some currency and divide them among the claimants. But if there is no acceptable currency, then how can the division occur? Wars, perhaps…but they simply destroy more of the assets.
      *The bankrupt country (the US) has the ability to destroy life on this planet.
      *The production system which is responsible for perhaps 90 percent of the global economic output is losing the ability to generate a surplus.
      *Long before humans invented the currently failing monetary and production system, there was a thriving system based on biology and powered by passive solar (e.g., heat and light from the sun) and photosynthesis.
      *But the biological system has been distorted to the point that instead of yielding a surplus of food for humans, it requires 10 calories of input to produce 1 calorie of consumable output. There is no way to return to the biological system through government edicts. Governments don’t have useful skills.
      *It is likely that a lot of people are going to starve, unless they are killed first in some sort of conflagration.
      *The only alternative does seem to be a “controlled demolition”. In broad terms, this would require changing the system from 90 percent fossil fuels and 10 percent passive solar to perhaps 10 percent fossil fuels and 90 percent passive solar.
      *The adoption of such a “controlled demolition” plan is going to sound insane to the people who hold the notional wealth. Since almost all citizens are used to “following the money”, we may be looking at a Seneca Cliff.

      I would really like it if someone can show me how wrong I am.

      Don Stewart

    • One other thing is there is no reverse gear, the system as it is can’t even stand still, i.e. a steady state economy will crash it. It is full steam ahead damn the torpedos or else!

    • I understand your comments about how the system is failing and that the banking system relies on borrowers paying interest and continuing to take on more debt forever. I agree the government (and central banks) seem to have no idea what they are doing and also seem unable to make up their minds which policies to pursue.

      What I am wondering is, what approach would you advise if you were in such a position? It seems that giving even a fairly honest appraisal of the situation in terms of energy and degrowth would lead to mass panic and could make the situation worse.
      Secondly, can I ask when you first came to the conclusion that the economy is entirely dependent on energy rather than being purely a financial entity? I believe that you worked in finance for many years and was wondering if you discussed your ideas with your colleagues and contacts and what their reaction was.

    • I think I’ve always understood that the economy is an energy system, but for much of my career I was an oil and gas analyst, not in a position to comment on macroeconomics. Colleagues and contacts have tended to be supportive.

      It’s not my job to advise governments, and I don’t envy them the task of trying to manage economies where the public, and influential interest-groups too, believe so emphatically in continuity and growth. My advice would to prepare ahead, even if not necessarily going public on everything; and to steer away from extremes, promoting a mixed-economy balance between private enterprise and the public sector.

      In some cases it will take a severe crisis for attitudes to change. That crisis is coming, perhaps most obvioiusly in the UK, where things are quite clearly ‘not going according to plan’ or, to be blunt about it, falling to bits. The arrival of a post-growth, post-liberal situation is going to be painful.

    • @TimMorgan- thank you very much for your reply. It is concerning that the current incumbents seem to be making things worse rather than better. Having said that, navigating this ‘well’ seems almost impossible.

    • You are welcome. I don’t want to labour the point, but unless there are, not just new ideas in government, but new attitudes amongst the public, I fear for the UK in the coming months.

    • I hear you about the UK. I have had a sense of foreboding about the UK economy since the start of the pandemic in 2020 and a serious lack of faith in the government so I started to read a bit which led me to your excellent blog. The energy system explanation made total sense and helped to explain what I could see around me.

  15. Pingback: Surplus Energy Economics #231 : Short & Sharp – Ch'am a Stouk

  16. A new G8!?

    Quote from Volodin: “The economies of the United States, Japan, Germany, Britain, France, Italy, and Canada continue to collapse under the pressure of sanctions against Russia.

    The breakup of existing economic relations by Washington and its allies has led to the formation of new points of growth in the world.

    The group of eight countries that do not take part in the sanctions wars – China, India, Russia, Indonesia, Brazil, Mexico, Iran, Turkey – is 24.4 per cent ahead of the old group in terms of GDP per capita.”

    https://www.pravda.com.ua/eng/news/2022/06/11/7351902/

  17. “The measure preferred here – which is RRCI, or the Realised Rate of Comprehensive Inflation – forecasts systemic inflation rising from 8.1% in 2021 to 8.6% this year, moderating to 5.3% by 2027.”

    Can you expand on where the assumptions used by RRCI come from Tim? Intuitively, I understand there will be deflationary pressure on the discretionary side, but I’m thinking the energy/non-renewable resource input of essentials (e.g. rock phosphate for fertiliser) might be understated here, and RRCI will be significantly higher five years from now. Happy to be wrong, but my gut tells me to be more pessimistic.

    • RRCI is a measure combining monetary activity and material prosperity.

      Historically, we have nominal monetary activity from official sources (GDP, not adjusted for inflation) and constant prosperity (from SEEDS). Comparing the two gives a measure of the systemic change in the purchasing power of money.

      Looking ahead, we have consensus expectations for nominal GDP and, again, SEEDS projections for constant prosperity. This gives the calculation of RRCI going forwards.

      I then seek to explain what emerges, but this isn’t the same as putting in specific assumptions. The logical explanation for declining (though still high) RRCI is recession (meaning less activity) in discretionary sectors.

      RRCI began as an experimental project, but it has worked very well, which is why I’m planning to use it in the SEEDS Databook.

      Let’s say governments decide on a massive round of stimulus. This drives nominal activity (GDP, unadjusted) upwards, but prosperity hasn’t changed. Systemic inflation therefore rises.

  18. @drtim, your work is fantastic, much appreciated.

    In the news, alongside all the stories about energy costs, supply chain, goods shortages, interest rates, asset prices etc there seems to be constant mention of labour shortages across a wide range of sectors in many countries. I was wondering what your take is on why this is occurring? Is it purely a demographic issue (baby boomers retiring)?

    • Near term, there is something of a cocktail of factors.

      First, rises in asset prices have made quite a lot of people feel financially comfortable enough not to work. This effect will fade as markets fall. But there are others for whom work simply doesn’t make sense, once costs (such as that of travelling to work) are taken into account. A lot of small businesses are failing, which is likely to release people for the employed sector. Where skilled work is concerned, employers aren’t prepared (or perhaps able) to pay enough.

      Fundamentally, underlying change is happening, but in ways that are not yet understood.

      Most work in the modern economy isn’t physical labour, but involves the direction of exogenous energy – by way of illustration, picture someone driving a tractor, rather than tilling the ground manually. Also, a large proportion of the workforce is employed in discretionary (non-essential) sectors.

      There’s an equation here involving (a) physical effort, (b) energy direction, (c) labour intensity, and (d) the balance between the discretionary and the essential.

      This equation is changing, with physical labour set to increase, more work in increasingly labour-intensive essential sectots, and discretionary contraction. Human skills are likely to become more important as the relative costs of materials and labour move in opposite directions.

  19. @Red.

    Thanks for the link. Sums up the political morras at the moment.

    Think we are in for a succession of “Snake Oil Salesmen/Women”
    (Trump, Farage etc) before public trust in politicians is totally eroded.

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