#245: 2023 – Navigating the narratives

FACING FACTS, RELYING ON REASON

At the start of 2023, an impartial observer could easily conclude that ‘the world has gone mad’. This is most evident in what is sometimes called ‘the public discourse’. Where our economic prospects are concerned, what we are witnessing must rank as the most extreme case of collective denial ever experienced.

Few would dispute that the economy went badly awry last year. In concrete terms, there were widespread and severe falls in living standards, whilst the cost of mortgages and credit rose markedly. Asset prices started their descent from absurdly over-inflated levels.

But there’s a lot that didn’t happen in 2022, but may be lying in wait in the year ahead. Air has started to leak out of the “everything bubble” but it hasn’t, thus far, actually burst, as most bubbles do. We’ve yet to see a cascade of defaults on credit commitments, though this could be a logical corollary of asset price slumps (which impair collateral), and of declining household disposable incomes and falling corporate profitability, most obviously in discretionary sectors.

This is for real

This isn’t intended as a forecast, and we cannot rule out a gradual retreat from the excesses fuelled by a combination of economic deterioration, cheap credit and cheaper money.

Rather, the point is that we need to take this very seriously indeed, and that’s the intention here. The world is awash with “narratives”, and this combines with two factors – the rapidity of change, and the highly elevated levels of risk – to require a focus on what we can know, rather than on what we can only speculate about.

Where “narratives” are concerned, the orthodox line remains that, once the pandemic and the war in Eastern Europe are behind us, the global economy will return to perpetual growth, with technology delivering a shiny new world of prosperity powered by limitless amounts of climate-friendly renewable energy.

This, both in detail and in toto, is at the far end of implausible. Growth in material prosperity has gone into reverse, and claims to the contrary are in direct conflict, not just with logical analysis, but with the lived experiences of millions as well.

De-globalization is already underway, and the much more serious process of the de-financialization of the economy comes next.

This situation presents us with choices. We can participate in collective denial, or we can analyse the economic and broader situation from a rational point of view, founded in first principles. The latter approach is preferred here. Effective analysis of the economy is perfectly possible, but its results are unpalatable to what we might term ‘the generality of opinion’.

The facts of the matter are simply stated. The harnessing of abundant, low-cost energy from coal, oil and natural gas triggered two centuries of remarkable economic growth. Now, though, fossil fuel energy has ceased to be low-cost and can be expected, in consequence, to become a lot less abundant as well. With no complete replacement available for the energy value hitherto sourced from fossil fuels, the economy can only contract.

In no particular order of priority, our second problem is the environmental and ecological harm inflicted by historic and continuing use of carbon energy. On the basis of fossil fuels, the economy has evolved into a dissipative landfill system. Energy is used to process raw materials into products whose ultimate (and usually rapid) destination is disposal. This involves the conversion of energy from concentrated into diffuse form. The latter is waste heat which, in a system powered by fossil fuels, contains climate-harming gases.

None of what we are experiencing now has happened without prior warning. The remarkably prescient The Limits to Growth (LtG), published back in 1972, used system dynamics to forecast declines in industrial output and the supply of raw materials, combined with a worsening in what was then termed “pollution”. These warnings were very largely ignored, not because they were wrong, but because they were inconvenient.

At a humbler and less ambitious level, the SEEDS economic model provides a nearer-term, financially-calibrated interpretation which accords with the prognosis of LtG.

SEEDS draws two important distinctions. One of these is the difference between economic output and material prosperity. The other is the distinction between the ‘real’ or material economy of energy and the ‘financial’ or proxy economy of money and credit.

The interpretation and projections produced by SEEDS are unsettling, in that they involve a continuing deterioration in material prosperity and the fracturing of a financial system entirely predicated on the assumption that prior growth in the economy could never go into reverse.

A series of outcomes follows from this. The first is that, whilst prosperity erodes, the real costs of energy-intensive necessities will rise. This process of affordability compression has two principal effects. One is that consumption of discretionary products and services will contract, and the other is that payment streams from households to the corporate and financial sectors will be undermined.

The latter takes us into the financial system, where successive exercises in denial-gimmickry have created an enormous bubble in asset prices, and a gigantic network of interconnected financial commitments that cannot be honoured. Where these liabilities are concerned, we don’t even have complete data, let alone plans for managing a contraction which seems likely to be disorderly. One consequence is that, whilst the onset of ‘de-globalization’ has started to gain some notice, the process of de-financialization has not.

As assumptions degrade, narratives proliferate

During two centuries of rapid economic expansion, various observations have taken on the status of certainties. Quite naturally, people have come to believe that economic expansion is the natural order of things. Few may pay much attention to announcements about rising GDP – the metric which purports to measure prosperity – but it has long been taken for granted that the material circumstances of individuals and families will improve over time, and that children will be better off than their parents were at any given age.

What we have been experiencing in recent years has been the rapid degradation of such certainties. How individuals react to this dislocation necessarily varies. Some take a “Pollyanna” stance, embracing denial, and accepting the line that growth will resume once the sheer bad luck of a pandemic and a war in quick succession is behind us.

Others, translating “Bond villains” from book and screen to real life, seek someone to blame, which could be anyone from Mr Putin to schemers plotting in the shadows. Still others side with Cassandra, predicting imminent collapse and dusting off the old sandwich-boards of “The End is Nigh!”

It seems likely that there’s a large and growing fourth strand of opinion which, whilst uncommitted to any of the above, is mystified and increasingly suspicious. For many, bafflement and mistrust may be just a few short steps from anger.

The approach preferred here is that of rational analysis and informed debate. I believe that the best process for the advancement of understanding is courteous, informed and reasoned discussion, and I am deeply grateful to everyone who has contributed to our conversations over the past twelve months. A notable milestone was passed in 2022 when, for the first time, more than 80,000 different people from around the world – to be exact, from 154 countries – visited this site at least once.

The immediate plan is to set out a comprehensive statement of what we know about the economy and the financial system from the energy-based perspective. This cannot be accomplished in a single article, but it seems important that we codify our understanding.

Finally, it’s worth remarking that the dissipative-landfill model isn’t some kind of eternal verity. It isn’t the only way to manage the provision of goods and services to the public, and it didn’t exist in anything like its current form before the Industrial Revolution.

The pre-industrial economy might be described as sustainable, but there are two big snags with trying to create “sustainable 2.0”. The first of these is that the global population now numbers eight billion, up from about 660 million in 1776, when the first efficient mechanism for converting heat into work was unveiled.

The second is that the immaterial end-product of the dissipative-landfill system is a set of entrenched attitudes, assumptions which are now colliding with the reality of resource and environmental limits.

Life in agrarian times wasn’t a bucolic idyll and, in any case, we can’t go back to it. What we can do is to analyse the unfolding situation objectively, looking for rationally-based visibility on how events are likely to unfold.

Whilst anyone can leap to conclusions and assumptions, knowledge can only be reached through plodding and faltering steps.