#236. The monetary conundrum


Following the Fed and the Bank of England, the ECB has become the latest central bank to adopt QT (quantitative tightening) and to raise interest rates, though the ECB’s 0.5% hike still leaves its deposit rate at zero. The ECB has also unveiled a mechanism – the Transmission Protection Instrument, or TPI – designed to ward off sovereign debt crises in some of the bloc’s weaker economies.

The details of these developments are set out very well in this Wolf Street article. The aim here is to discuss what policy actions – if any – make sense for the central banks.

Raising rates – and, by extension, putting prior QE into reverse – are straight out of the standard play-book for combatting inflation. It’s noticeable that central bankers are moving pretty slowly along this orthodox path, with each much-delayed rate rise far more than negated by the next surge in inflation.

But should they be tightening monetary policy at all?

The wrong response?

Some observers contend that raising rates isn’t the appropriate response under current conditions.

The argument runs that inflation isn’t being driven by internal demand excess, but by external factors over which the monetary authorities have no control. Rate rises in America won’t increase the supply of food to world markets, this argument runs, and QT in the Euro Area won’t ease shortages of oil and natural gas.

The argument against tightening monetary policy can be made either optimistically or pessimistically.

The optimistic line is that action isn’t needed, because the inflationary spike isn’t fundamental, but the product of happenstance. Given sufficient patience – and sufficiently accommodative monetary and fiscal policies – supply-lines ruptured by the pandemic will return to normality, as will the flow of energy, once the war in Ukraine reaches some kind of conclusion.

To the pessimist, the whole situation is hopeless anyway, so there’s no point in pulling forward the unavoidable crisis, or piling on the economic pain, when orthodox tightening policies cannot work.

Getting it half-right?

The view taken here is that central banks are right to pursue monetary tightening, though they might also be right in doing this fairly slowly.

Three lines of argument support this view.

First, inflation may have started with external factors, but could all too easily turn into an internal wage-and-price spiral. This kind of spiral is exactly what happened in the 1970s, even though the initial inflationary impetus came from events – the oil crises – outside the control of domestic monetary authorities.

To be sure, organised labour doesn’t have the clout that it had back then, and labour shortages aren’t likely to prove lasting. But the upwards pressure on wages remains, propelled by the need to ensure that employees can at least ‘make ends meet’.  

Second, this is a matter of degree.

Ever since ZIRP, NIRP and QE were adopted – as avowedly “temporary” and “emergency” expedients – in response to the GFC, nominal rates have been, almost always, below the rate of inflation.

But real rates, though negative, haven’t been deeply so. There’s a world of difference between rates that are negative to the tune of -2% or -3% and allowing them to fall to -8% or -10%, which could all too easily happen if central bankers don’t respond.

Negative real rates are anomalous, and harmful, and the damage is proportionate to the extent of negativity. Setting the cost of money below the rate of inflation invites debt escalation, which in turn leads to instability, such that deeply negative rates can be expected to lead to a full-blown crisis.

The market economy requires that investors earn positive returns on their capital, so an absence of these returns translates an ostensibly capitalist system into a dysfunctional hybrid. Letting real rates fall to extreme lows can only make this worse.

No good choices

Underpinning the view set out here, of course, is the understanding that prior growth in prosperity has gone into reverse because the energy equation that determines prosperity has turned against us.

This equation involves the supply of energy, its value and its cost, the latter measured, not financially, but as the proportionate Energy Cost of Energy.

Mainly because of the depletion of low-cost resources, the ECoEs of oil, gas and coal have risen relentlessly, pushing the overall ECoE of the system to levels far beyond those at which stability, let alone further economic expansion, remain possible.

You might believe that the ‘fix’ for the ECoE problem lies in transition to renewable energy sources. Even if you do believe that this is possible, though, it’s clear that it can’t happen now. The contrary point of view is that renewables can’t provide a like-for-like replacement for the energy value hitherto provided by fossil fuels.

Either way, inflation is one symptom of a divergence between the ‘real’ or material economy of goods, services and energy and the ‘financial’ or proxy economy of monetary claims on the real economy.

The further these two economies diverge, the greater the pressures become for the restoration of equilibrium between them.

The following charts summarize this dynamic. As ECoEs have risen, surplus (ex-cost) energy has contracted, and this effect is now carrying over into a decreasing total supply of energy as well.

The mistaken idea that we can boost material prosperity by stimulating financial demand has driven an ever more dangerous wedge between the financial or claims economy of money and credit and the underlying real economy of energy value.  

Fig. 1

The Fed – a shift in priorities

The third factor which helps justify conventional monetary responses to inflation is that each monetary area has its own idiosyncrasies and, where the Fed, the Bank of England and the ECB are concerned, these idiosyncrasies support the case for orthodoxy.

The Fed has, in some ways, the easier task of the three. Hitherto, rates have been kept ultra-low in the US in order to prop up and boost capital markets. Former president Donald Trump was wont to say that a high stock market was, ipso facto, indicative of a strong America. Mr Biden hasn’t repeated this nonsense – he can’t, whilst markets are correcting – but what’s really changed isn’t politics, but the context of intentions.

At times of low inflation, what monied elites fear most is a slump in asset prices. Once inflation takes off, however, this ‘elite priority’ shifts. A billionaire has a billion reasons for not wanting the purchasing power of the currency to be trashed.

This is why rate rises and QT aren’t taking America back to the “taper tantrums” of the past. The Fed might also hope that a commitment – albeit a much-delayed one – to the inflationary part of its mandate might help restore some public trust in the institution.

Britain – staving off the day

BoE priorities are different. For a start, the British fixation is with property prices rather than the stock market. Whilst the stock market “wealth effect” is an adjunct to the American economy, inflated property prices play a central role in supporting the illusion of prosperity in the United Kingdom.

The harsh reality is that the British economy is a basket-case. America might want stock market appreciation, but can get by without it. Britain needs property price inflation to keep the ship afloat.

The British economy depends on continuous credit expansion to produce the transactional activity, measured as GDP, which supports a simulacrum of ‘business as usual’. Inflated property prices play a critical role, providing both the collateral support and the consumer confidence required if credit expansion is to continue.

Fundamentally, Britain lives beyond its means, resulting in an intractable trade deficit. For a long time, this was bridged, at least in part, by income from exports of North Sea oil and gas. Once Britain became a net energy importer again, the emphasis switched with renewed force to asset sales.

Ultimately, though, this makes a bad situation worse, because each asset sale sets up a new outward flow of returns on overseas’ investors capital. These outflows are part of the broader current account deficit, which is dangerously high, and has become structural.

Former Bank chief Mark Carney warned about dependency on “the kindness of strangers”, but no realistic alternatives exist. Asset divestment – muddling through by “selling off the family silver” – is, by definition, a time-limited process.

The nightmare that must haunt the slumbers of British officials is a “Sterling crisis”. If the value of GBP were to slump, inflation would soar, vital imports could become unaffordable, and the local cost, not just of foreign currency debt but of servicing that debt as well, could soon become unsustainable.

Put simply, the BoE needs to show FX markets some resolve, even if that comes at the cost of some domestic economic pain. The Bank undoubtedly knows about – as some politicians seemingly do not – the price that could become payable for fiscal and monetary recklessness, if that recklessness were to trigger a currency crisis.

It’s a point seldom mentioned that, if a future leadership were to enact irresponsible tax cuts, the Bank might, as a compensatory measure, have no choice but to raise rates more briskly than would otherwise have been the case.

Some in Britain have dreamed, unrealistically, of turning the country into ‘Singapore on Thames’. The real and present danger is of turning into ‘Sri Lanka on Thames’, where a weak currency makes vital imports prohibitively expensive.

The prevention of a currency crisis has to be the overriding priority of responsible decision-makers. The balance of risk – no less than the balance of pain – has to be tied to the demonstration of sufficient resolve to stave off any such crisis.

The ECB’s camel

A camel was once described as “a horse designed by a committee”. A similar phrase could aptly describe the Euro system, created as a political ideal, and built on the most dubious of economic presumptions.

To work effectively, monetary policy needs to be aligned with fiscal policy. The Euro system doesn’t do this, but tries instead to combine a single monetary policy with 19 sovereign budget processes.

One of the consequences of fiscal balkanization is an absence of the ‘automatic stabilizers’ which operate in currency zones where the monetary and the fiscal are aligned.

If, for instance, Northern England was suffering a recession, whilst Southern England was prospering, less tax would be collected in the North, and more benefits would be paid there by central government, with the opposite happening in the South. Money would therefore flow, automatically, from South to North.

Critically, such regional transfers within the same currency zone are automatic, do not need to be enacted by government, and certainly do not depend on agreements between the differently-circumstanced regions.

By contrast, transferring money from, say, Germany to Greece isn’t automatic in this way, but depends on political negotiation, which is likely to be fractious, even at the best of times – which these times, of course, are not.

To be sure, Scotland and Wales have independent budgetary powers, as do American States. But there are, in both cases, over-arching sovereign budgets, set in London and Washington, which set the overall parameters. No such overarching budget exists in the Euro Area.

There are parallel problems in the Target2 clearing system. If a customer in Madrid buys a car made in Wolfsburg, Euros have to flow between countries, being debited in Spain and credited in Germany. But there are severe imbalances within the Euro clearing system.

As of May, Germany was a creditor of Target2 to the tune of €1.16 trillion, whilst Italy owed the system €597bn, and Spain €526bn. The official line is that this doesn’t really matter very much, but it’s hard to see how Germany can ever collect the sums owed to the country, via the system, by Italy and Spain.

One might argue that Target2 gives poorer EA nations rolling credit to fund imports from Germany.

The danger with a ‘one size fits all’ monetary policy, when applied in the context of a multiplicity of sovereign budgets, is that national bond yields can diverge, because each country, being responsible for its own budget, borrows individually on the markets.

Italy is a case in point. Prior to the formation of the Euro, Italy had a history of gradual devaluation of the Lira. Whilst this made Italians poorer in relative terms, it protected both employment and the competitiveness of Italian industry.

Once Italy joined the Euro at the end of 1998, this ceased to be possible.

This, in large part, is why Italian debt has increased, as the authorities have endeavoured to find other ways to deliver the support that would previously have been provided by gradual devaluation. This could, and does, make markets worry about Italian debt, putting upwards pressure on Italian bond yields.

If these yields were to blow out, Italy would encounter grave difficulties, not just in financing its fiscal deficits, but in maintaining the continuity of credit to the economy itself.

The ECB, in a rather belated effort to counter inflation, is committed to raising rates, and to letting its asset holdings unwind. This, though, could cause problems which culminate in drastically dangerous rises in bond yields in member countries such as Greece, Italy and Spain.

TPI – which the ECB must devoutly hope will never have to be put into effect – is designed to counter this process by varying the composition of QT. If rates spike in, say, Italy, the ECB could buy Italian bonds, simultaneously increasing its sales of German or Dutch bonds within the overall composition of QT.

This, though, presupposes that the Euro Area has “strong” as well as “weak” economies, a point that is now debateable.

The ultimate ‘strong economy’ in the EA has always been Germany, but the energy squeeze is putting that strength to the test. Moreover, much of Germany’s economic prowess is the trade advantage that the single currency confers on it. France has a moribund economy and elevated levels of debt, whilst Dutch financial exposure is uncomfortably high, with financial assets standing at 14.5X GDP as of the end of 2020, the most recent reporting date.  

In the final analysis

Ultimately, the challenge facing the ECB – and other central banks too – is to prevent two things from happening.

The first and most obvious is to guard against inflation taking on its own momentum, which could easily happen in a climate of apparent official indifference or resignation.

But the second is to ensure that the damage – and the crisis-risk – caused by a negative real cost of capital does not escalate, as it could if central banks allow real rates to slump into lethally deep negative territory  .

213 thoughts on “#236. The monetary conundrum

  1. Fragility of the US
    I have, on a number of occasions, mentioned the weakness of the United States’ Constitution as the basis for a modern strong state. Here is more evidence of that fragility:

    Republicans’ next big play is to ‘scare the hell out of Washington’ by rewriting the Constitution. And they’re willing to play the long game to win.
    The conservative movement isn’t done reshaping the Constitution from the ground up. Conservatives are now pushing an unprecedented convention to re-write the US bedrock text since 1788. So far, 19 GOP states have joined a rapidly-growing conservative movement to call a new convention.

    As one indication of some likely targets, Mitch McConnell, the Republican leader in the Senate and the odds-on favorite for Senate Majority leader come January, says he “does not believe for one minute that the climate is changing”. They would also likely write an abortion ban into the Constitution.

    The last time the conservatives tried this, they missed the required number of state resolutions by a small margin. The US might plausibly cease to exist. What would happen to the debt? Does Wall Street really control this movement, or might it turn into their worst nightmare?

    Don Stewart

    • Any such ploy will likely lead to secession movements as a Constitutional Convention is a de facto and possibly a de jure dissolution of the union

      Sounds like an excellent plan to render all Treasuries worthless, Don i.e., to eliminate all Federal debt. And render all Federal lands up for grabs under new control. I wouldn’t be surprised if – assuming this proposal were sincere- this were the real purpose of the gambit.

      However, this being politicians we are talking about, its about 99% certain that this is only a re-election and fund raising ploy. You know, the way the Democrats let 50 years go by using threats to Roe v Wade to whip up support and raise funds so that they would control S Ct appointees but never even tried to make abortion rights the statutory law of the land.

      The prospect of a CC is not worth the time and energy we just gave it.

    • @Don Stewart

      I’m not sure a country the size of the USA is viable in a post fossil fuel world.

      After all, the westward expansion all happened AFTER the start of the industrial revolution.

      It’s destined to split into smaller units.

      (And the strategic planners in the US have been thinking up ways of splitting up the Russian Federation!!!!)

    • @,Dom Stewart

      “They would also likely write an abortion ban into the Constitution.”

      In a post fossil fuel world, abortions along with most other medical procedures, may not be an option anyway.

    • @John Adams
      Abortion pills are now widely used in the US. The Right Wing are now planning to use social media type tracking to find women in, for example, Texas, who order the pills delivered by mail.

      If the right wing does actually rewrite the Constitution, it will likely abolish the privacy of the mails. If Trump is re-elected, I wouldn’t be surprised to see an Executive Order to the Post Office. At a minimum, the Right will put a lot of pressure on the manufacturers.
      Don Stewart

    • “If the right wing does actually rewrite the Constitution, it will likely abolish the privacy of the mails. If Trump is re-elected, I wouldn’t be surprised to see an Executive Order to the Post Office. At a minimum, the Right will put a lot of pressure on the manufacturers.”
      Don Stewart

      Why? What you’re saying is just a retread of some 1930’s rightwing scare tactic that we all suffered from hearing since 2016 thru today. Why would they do that? Where have you read that or who have you heard saying they would do that?

    • “Abortion pills are now widely used in the US. The Right Wing are now planning to use social media type tracking to find women in, for example, Texas, who order the pills delivered by mail.”

      Again, where have you heard that? I haven’t heard a single thing except maybe a few links on Drudgereport that mentioned something like that. So the Conservatives who were against mandatory injections of an experimental product and yelled about “my liberty” are now going to do the exact same thing they decried to the left? Maybe the politicians will try it but do you think people who are actually conservative are for this? If anything it just tells you that democrats and republicans serve the same master.

    • I’m not keen on discussing abortion here, as it’s a long way off topic.

      It seems to me that this should be a matter of choice, so it’s not for the courts to determine whether a woman can or can’t have an abortion. In a free society, it’s her choice.

    • “It seems to me that this should be a matter of choice, so it’s not for the courts to determine whether a woman can or can’t have an abortion. In a free society, it’s her choice.”

      That’s good and fine and i agree, but that wasn’t what i was asking Don. I’m asking him why he feeds the divide that everyone wants to take whats important to him? I don’t see any mainstream politicians saying this except those trying to rile up votes. If we’re going to make any progress in the future Dr. Tim and have a chance to get thru this bottleneck without killing ourselves, it won’t be by stoking the fake political divide. Go talk to the people you assume are against everything you stand for instead of reading the crap media is my advice.

    • @Don Stewart.

      It seems that there is a battle for the soul of America at the moment. Both sides believing in their particular myths. It’s not looking pretty and I share your pessimism.

      My abortion comment was really a reflection on a wider issue. Pharmaceuticals, medical procedures, and scientific research in general, requires lots of abundant cheap energy.

      In a post fossil fuel future, the energy may not be available for any of this to be possible. The battles being fought today, may not be relevant in our de-growth future.

      The Large Hadron Collider for example, may be a “luxury” we will no longer be able to “afford”.

    • @John Adams
      So far as I am aware, the Large Hadron Collider has pushed our knowledge about particle physics as far as it can go. While there are some who think we should build an even more powerful machine, I doubt that we will ever build it. Sabine Hossenfelder has just published a book on the mysteries of quantum mechanics in which she labels certain problems as probably “unsolvable”. So it seems to be that fundamental physics is now returning less benefit per dollar spent. Applied physics, such as more efficiently killing people, is a whole different question.

      Certain areas of biology, however, have suddenly opened up. For example, check out this current discussion between Peter Attia and Josh Rabinowitz:
      (My apologies that most of the discussion is behind a pay wall, and it’s really long.).

      The gist of the discussion is that the biology of metabolism (turning food into energy) reached an apparent dead end, but that now by considering it a dynamic process rather than a static collection of “good” particles and “bad” particles, and by using the abilities we now have to collect Big Data and process it with very fast computers, “we are just at the beginning”.

      Let me give one example. The old model identified LDL cholesterol as a bad guy and “the lower the better”. Now skeptics have always looked at that sort of mainstream medicine as ridiculous on its face. We have cholesterol in every cell in our body, and 90 percent of the cholesterol in our body is in our tissues…not in our serum. If we look at the dynamics, we can see cholesterol being made and used and then discarded in a biological system which operates according to the principle of “first, prepare for shortages” and second, “operate at the limits” (e.g., more glucose is better than less glucose, but with a limit). A very crude measure of the health of the cholesterol system then becomes the ratio of incoming (triglycerides) to outgoing (HDL). In my own case, a static measurement of LDL indicates borderline problems, but the dynamic measurement says “you will live forever”. (Having the experience of being an octogenarian, I am skeptical about that latter prediction.). Poisoning the ability of the liver to make cholesterol may go the way of bleeding sick people.

      The study of biology, which operates “at light speed” thanks to enzymes everywhere, may be set for the sort of explosion that physics got when Heisenberg spent some time on the desolate island of Helgoland almost a hundred years ago. Whether humans are evolved enough to use the new biology to manage the food to energy process rather than focus our physics on destruction is, I think, one of the watershed decisions we will make…probably without knowing we are even making it or had some choice in the matter. The potential for dynamic metabolism science is one of the reasons I try to respectfully demure on most of the segregation between “essential” and “non-essential” on this site. Blank checks for medical treatment are past their sell-by date.

      Don Stewart

    • @Mr House.

      In the US, is the vaccine rollout seen as a “left” policy?

      Here in the UK, it doesn’t have the same political “weight”. It was a right wing government that rolled it out here.

      (There are/were those that see it all as a dastardly plot by the “powers that be” but not of any particular political persuasion.)

    • @john Adams

      That depends on who the president is, all the Dems were against the jab before trump lost. Look up a video of many big name Dems saying they would never take the Trump jab. Then when they “won” (who knows these days) they all changed their tune and then tried to force their change of heart on the rest of the population by making your ability to earn money dependent on it. If anything it proves even more to me that neither republicans or democrats are calling the shots. They say what they’re paid to say and i’d be willing to bet that that money comes from Mega Corporations who get bailed out and the people screwed every seven to eight years or so since 2008.

  2. @Tagio
    I am not as dismissive of the danger as you seem to be. I see it as just more evidence that the US is going to continue spending its energies on fights over symbols…but those fights dissipate whatever energy is required to actually deal with our problems. The biggest surface problems are the elephants in the room such as climate change and debt and the slide into fascism. But underlying all of that is what I perceive as the inability to deliver what has been promised: a perpetually improving material standard of living. I fear that we are in a situation much like France on the eve of the French Revolution. Or, perhaps a better analogy, the words.spoken by the Italian aristocrat in The Leopard:
    “If we want things to stay as they are, everything will have to change” These words are spoken by young aristocrat Tancredi – in the novel The Leopard, by Tomasi di Lampedusa. These words are loaded with decadence, cynicism, resignation, and even despair. Change is self-defeating – it only leads to renewed stasis.

    But the death and destruction were real enough.

    Don Stewart

    • I’d like to add some words to your rather short post Don.

      Shortages seem to be everywhere.

  3. @Dr Tim.

    After reading some of the comments here, I’ve started to look at the UK government’s persistent attempts to privatise the NHS in a different light.

    I have always seen it as an ideological dislike of the idea of free healthcare at the point of need. The “nanny state” and all that.

    But maybe the motivation is more about the need for foreign investment since the UK manufacturing base was dismantled in the 1980’s.
    Pretty much everything else has been sold off. The NHS is the last big bit of UK infrastructure left to sell.
    Foreign investment and North Sea Oil being the only things that have allowed the UK to balance it’s books. NSO having peaked already.

    The private contracts awarded for running bits of the NHS seem to have gone to US private health providers rather than UK based.

    (Though I believe Branson has been sniffing around looking for a profit)

    • In general, there are two factors here. One is an ideological belief in privatization. The other is the economic need for overseas investment to fill the current account gap created by the UK consuming more than it produces. Asset sales plug the CA gap in the present, but worsen it going forward.

      It should be noted that Mrs T privatized industries. It’s at least arguable that things like BL, Jaguar, Britoil and shipbuilding should not have been in state ownership in the first place. She did privatize utilities – a bit of a grey area in a mixed economy – but not public services.

      Since then, everything seems to be up for grabs. The assumption is an extreme one, that profit should drive everything. In a balanced economy, the profit motive is very important, but not all-encompassing.

    • @,Dr Tim

      Am I right in thinking that over time, more money will leave the economy for foreign lands as the profits of all the privatised/foreign owned is given to the shareholders?

    • Yes, very good.

      I’m preparing an article on the specific issue of a financial crash, looked at mainly globally, but the UK is at the high end of the risk spectrum.

      There are a number of points I would suggest to you.

      First, with people (and businesses) borrowing ‘just to keep going’, who’s doing the lending?

      Anyone who needs (as opposed to simply wants) credit is high-risk. Therefore, default risk is rising. That should make lenders turn cautious – (a) restrict the supply of credit, (b) set tougher qualifying criteria, and (c) increase what they charge for it. I see no evidence of (a) or (b). Why?

      People needing credit seem to have no problems obtaining it. A lot of this credit, by the way, is coming from non-bank lenders. Do lenders somehow assume a rescue if things go wrong?

      Second, scale of exposure. The components here are (a) government debt + (b) private debt + (c) the ‘shadow banking system’. Globally, these tot up to about 575% of GDP (I’m working on these numbers now – they’re ‘somewhat complicated’, which suggests that they’re not widely understood).

      Further, on the UK, I note the idea being touted that ‘by borrowing now, we create growth, and this growth pays off the debt’. Not true. Businesses can do this, but national economies can’t – and haven’t.

    • Also, I take his point about rate rises now being a mistake but, for me, the big mistake was slashing them to zero, supposedly as a “temporary” and “emergency” measure, and then keeping them there. Capitalism requires positive real returns on investment.

    • @Mark Meldon

      Richard Murphy’s ultimate solution to our economic woes is GROWTH. His analysis may be pertinent but he is still stuck in a world of growth.

    • Dear doc, a ‘Sterling crisis’ won’t happen. A worldwide currency crisis will.

      A stiff upper lip doesn’t get the pie out of the oven, does it?

  4. Richard Murphy is always an interesting read as is John Harris at the Guardian but their underlying “solution” to all these issues is apparently to print more billions. Even more thoughtful left-leaning commentators (Larry Elliott too?) seem to think that the UK can deficit-spend on an unlimited scale, over and above the massive money-printing of recent years. This is nonsense as a prescription, not least because it amounts to throwing petrol on the inflationary fire. Of course they also advocate more redistributive taxation, as would I…….but this is simply not going to raise enough to fund what they propose. We will have to make do with less, even after redistribution.

    And surely the main reason why the BOE is having to raise interest rates now is that there will be a Sterling crisis if rising inflation makes Sterling returns even more deeply negative?

    • I agree entirely with your analysis.

      The UK depends entirely on two things – continuous credit expansion, and the funding of the AC deficit with asset sales.

      The first is why government can’t borrow to create growth and then use that growth to pay down the debt. Businesses can do this, and they do, but an economy dependent on credit expansion can’t.

      The Bank must show determination to protect the value of GBP. This isn’t 1976, and the IMF can’t provide a lifeboat. A “Sterling crisis” would be an end-game.

  5. Indi from Sri Lanka on fossil fuel addiction:

    The only big country actually doing anything is China. Russia just tells the truth, and marches on. Everybody else lies or just suffers.

    It is curious that the U.S., which controls the Petro Dollar, may be able to loot the rest of the world to actually do something domestically.

    Don Stewart

    • Thanks Don,

      Curiously, when making mention of China, is the fact that China intends to build 150 nuclear reactors up to to 2060, prototypes are all ready operational for these 4th Gen. reactors and I’m in no doubt that China will build these out as planned. The upshot of this, depending how well their Thorium prototype performs, is that China will corner the market for uranium, which like oil, is not in unlimited supply – these too will cause geopolitical issues as FFs deplete further and costs go ever upwards.

      As a side issue, the UK is unable to build a nuclear reactor on its own anymore and when it does team up with other nations (France & China) the cost of construction is significantly higher than what our Korean friends can achieve.

    • Chris, please explain further. Claiming is not explaining.

      And better make it good.

      Very good.

  6. Dr Tim,

    Hope I’m allowed to add a few links that fit in with our conversation in this particular thread, although its highly focused on the Euro, Prof Mark Blyth: https://youtu.be/MWjKvehIumg
    and Nat Hagens talking with Steve Keen, and Steve has given his most dire assessment on Limits of Growth and coming financial/ecological crisis – both mention the UK a fair bit: https://youtu.be/_Q23wwyksdY

    • Indeed.

      I’ve not looked at these – yet – but things are indeed in a dire condition.

      If we had known about what’s really happening, we might have prepared for it and managed it. But we’ve had leaders who don’t get it, advised by conventional economists who believe that the economics is ‘the study of money’, and that energy is ‘just another input’.

      Politicians are still promising growth, but most Western economies have been getting poorer since the early 2000s. Debt expansion creates financial transactions, these are totted up as activity for the purposes of measuring GDP, so borrowing creates a simulacrum of “growth”.

      No society can get away with this much ignorance driving this much folly for this length of time. People are criticizing the BoE today for raising rates, but they seem to have no idea of what a Sterling crisis would look like.

      The real mistakes made by central banks were QE, ZIRP and NIRP – maybe OK as a stopgap in the GFC, but keeping them in place ever since has been utter idiocy.

      Neither, by the way, can we ‘borrow now to create growth that then pays off the debt’. Possible for companies, but not for economies, which have come to depend on continuous credit expansion.

    • Dr Tim,

      Most of the economists I’ve kicked around with, particularly those of a Left-of-Centre bent, were wholly opposed to the alleged emergency monetary policy actions taken during the GFC and continued after – indeed, many considered interests rates under 3% rather dangerous, from a risk management perspective, ZIRP & NZIP caused many investors, that’s Institutional, to increase risk by investing in asset classes they’d not have touched prior to the GFC – still, the Elite were happy and that’s all that matters!!!!

    • I knew some right-of-centre people who thought the same way – purist market liberals think markets should be left to work through to their own results, not bailed out by intervention.

      Being neither left nor right, I felt that QE, ZIRP and NIRP should have been eliminated within 3-5 years – “tantrums” notwithstanding.

  7. Fascinating discussion on economics and energy with Nate Hagens and Steve Keen.
    Of particular interest are the energy driven dire economic predictions starting at the 54 minute point.

    Enjoy !

    • I did post and reference this myself a few posts back, unlike you, mine displayed but a link rather than a nice photo to link into. That said, Keen covers a lot of his own background in his discussion with Nate and suggests, without irony, that changing the mindset or orthodox economics ain’t gonna happen, one reason he now pushes systems engineering and systems analytics. Further, Keen both here and in many other podcasts does reference Limits of Growth, one reason he’s not positive in his personal outlook – for those of us who believe only managed ‘de-growth’ is the answer to preserving our planet Keen is one to follow, together with Tim on this Blog and Tim Watkins – obviously, many others to follow also, one reason I appreciate links supplied by readers of Tim’s Blog.

    • From a ‘neoclassical economist’!
      “38:10 This recent paper by Rudy Bachmann and friends of course said that 10% fallen energy for
      38:16 Germany, at most 2% of GDP, . . . “?

  8. Consumer Debt in the US
    “Mortgages: $11.4 trillion
    Student loans: $1.6 trillion
    Auto loans: $1.5 trillion
    Credit cards: $890 billion
    “Other” (personal loans, etc.): $470 billion
    HELOCs: $320 billion.
    Mortgages is where the big systemic risks used to be due to the sheer size of the market and the high leverage. But now, commercial Banks in the US only hold about $2.4 trillion of residential mortgages, including HELOCs, on their balance sheets, and those are spread among 4,300 commercial banks. ”

    Both mortgages and student loans are mostly guaranteed by the US Government. So there is very little risk to lending institutions. It does give the US government a stake in keeping housing prices elevated. The penalty for failing to pay a student loan is quite severe.

    This suggests to me that a bail-out like 2008 is unlikely. However, the stock market might collapse and employment might shrink drastically and the US government’s ability to float new debt might become impaired.

    Don Stewart

  9. For all interested and due to the fact it fits in with the topic of Tim’s post, namely monetary policy and central banking, I’d not realised that their was a decent gathering in Berlin mid July actually focusing on central banking and monetary policy – I’ve now listened to most of the posted YouTube segments and can recommend, if only because of the input of Mark Blythe, however, its fascinating that unlike the Nate Hagens/Steve Keen discussion we had no reference to ‘limits of growth’ or increasing costs of energy or returns of investments in energy, be this financial returns or surplus energy returns – so, whilst we hear a lot about carbon reduction and green energy transitions, no limits seem to be placed on these, despite, as Keen has stated clearly, we have very real limits. One other interesting factor is that Blythe actually talks positively about China transitioning away from total reliance on fossil fuels, although it would appear that ultimately they are cornering markets that will have all sorts of unintended geopolitical implications. Here’s the first link to five lectures and they follow on from each other, duration is 7.5hrs in total: https://youtu.be/A56aC_5fk_k

    • Just a quick note. The Nate Hagens/Steve keen podcast actually does reference limits to growth very briefly. At one point they just say limits to growth was right. I am assuming they are in agreement with main points of the book.

  10. Rudy Bachman and co-conspirators
    Steve Keen could give the exact date and circumstances when he became convinced that the mainstream economists were in a fantasy land. I am wondering if the simultaneous publishing of the Rudy Bachman paper at the same time as I hear there is real stress in Germany may cause business people especially to wake up? As I have made clear here on many occasions, I believe that the security states all understand the importance of physical resources. Business people frequently just follow the money trail…for example the companies in the US pursuing whatever it is that the government is subsidizing. But the business community might be having a “Steve Keen moment”? If so, that leaves a public which, at least in the US, has become more and more cynical about government. If we put those ingredients together, we might expect a revolution of some sort. In the UK, it might be the last doubling down on Neo-liberal economics, while in other places it might be getting a religious revival focused around some Napoleon or Hitler or Mussolini.

    Don Stewart

    • What we are seeing is absolute proof that the economy is a material system determined by energy. As I’ve said many times, we need to draw a conceptual distinction between the ‘real’ or material economy of energy and the ‘financial’ or proxy economy of money.

      Because GDP is simply a total of financial transactions, it can be inflated artificially by pushing ever more credit into the system. The adoption and retention of negative real rates signalled that growth was over – we didn’t need QE, NIRP or ZIRP in the 1950s, because back then real growth was possible, so gimmickry to create cosmetic growth wasn’t needed.

      SEEDS indicates that Western growth peaked and turned down in the decade preceding the GFC. This gives a structural explanation of why the GFC happened and why ZIRP became necessary to sustain a simulacrum of “growth”.

    • Don,

      Keen has been a critic of neo-classical economics since he was a first year undergraduate, his objections are found in his book “Debunking Economics” which shortly will be on its third edition. Originally Keen was big on debt jubilees, since leaving academia he’s been focusing on Climate Change and Limits of Growth.

  11. @Christopher Rogers
    I am trying to remember exactly what Keen was trying to do with his Minsky model back in the crisis of 2008. I guess he is still working on it, but it seems like he is now firmly in the Systems Dynamics camp. As I recall, Minsky was a monetary model…all about growing or shrinking private debt.

    In 2008 it still made sense to talk about some private individuals accumulating some money and then loaning it to those who needed money (e.g., to buy a house). But now, in the US, the government has become the backstop for the housing market. So it is really about the government creating money out of thin air to keep the housing market going. We no longer live in Jimmy Stewart’s “building and loan” world…and angels are.in short supply.

    The Keeling Curve changed the conversation about CO2, and it seems to me that Tim Garrett’s model of energy and wealth has changed the way Steve Keen thinks about economics.

    Don Stewart

    • Don,
      It looks as if Keen & Garrett share a lot in common and have cooperated together, the question you poise is a good one, so good indeed we need Keen to answer it – lets see if he’ll jump on this Blog post.

    • As far as I know, neither Keen nor Garrett mention that population (doubled in the past half century, quadrupled in one century) is a major factor in the bottlenecks we face. The multiplier of demand is undeniable. Population will reverse trend. It’s just a matter of when and how.

    • The SEEDS comments section agenda seems to be ‘Baffle them with Bullshit’.

      Its like reading a history book full of red pen addiction by fact checkers that got kicked out of their billiard communities.

  12. What is the US Federal Reserve’s Plan?
    “On the June 2022 Money Supply front, there was no noticeable slackening in headline money growth suggestive of any pending Inflation relief.” From ShadowStats

    Since whatever the US Federal Reserve does has global implications, it is curious that they seem to be trying to increase interest rates and depress stock prices while also not restricting money growth. I’m not smart enough to figure this out. But my speculation is that they hope that higher interest rates will attract foreign capital to the US, which can cover the federal deficit and the trade deficit. But money will still be plentiful to power consumer spending. The net result could be financial debacles around the world for those with dollar denominated debts and continued domestic inflation as people spend the money they’ve got.

    Don Stewart

    • According to this ‘economist’ the US Federal Reserve is ‘relatively impotent?
      “Federal deficit now at $979 bln, high for the year. Up $457 bln from April low. Stated another way, $457 bln has been ADDED to the financial balances of the non-gov’t. (Economy.) Bullish. It’s why stocks and economy are recovering. (*Monetarists…keep selling.)”?

  13. @Joe Clarkson
    Thanks for the link. It will take me a while to work through the finished Minsky model. It seems that Keen has done a lot of work since the last time I looked at it years ago.
    Don Stewart

  14. More regarding the Garrett/Keen/Grasseli model and it’s limitations:
    A review of a Degrowrh book:


    “It is an integral part of degrowth’s definition that it does not necessarily mean less, but rather, and mostly, different.

    It is important to note, as the authors do, that the required changes are not only economic or political. In addition, potentially even more challenging changes at the psychological level will be required as well.”

    The notion being expressed here is similar to my “conversion to Christianity” quip. If the psychological future is nor like the present psychological underpinning of behavior, then all bets are off and historical relationships will likely no longer hold. So the GKG model may be useful to tell us where we can’t go, but it is unlikely to be a good guide to where we need to go. Studying subsistence agriculture might be a better guide than statistics and models derived from our current system.

    Don Stewart

  15. As a master of the obvious, policy is not going to save the current system that keeps almost 8 billion people alive with the lowest percentage in total abject deprivation of any time in history. Say 30,000 years? And with that I am saying we, collectively, are not living in some kind of hell as so many would have it. That everyone is convinced things are bad defies belief.

    So “policy”, the dominance of institutions, public and private, on the model of the modern business corporation, isn’t going to allow for 8 billion people if there is not more energy. And the failure of policy is relentlessly reducing support for policy.

    The thing is I don’t see how this leads to anything but barbarism.

    • My problem with the current debate is that everyone in mainstream politics and the media proposes financial fixes. Rate rises, rate cuts, QT, QE, cut taxes, borrow more………………..

      None of this can work, because none of it can produce lower-cost energy.

      I’m putting together an article on this.

  16. Regarding the UK, is it better to cut taxes and raise interest rates compared to increasing taxes and lowering interest rates.

    I thought perhaps the former in order to get interest rates into the territory where they are working for savers and cooling the housing market as well as providing a buffer for rate reductions in the future.

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