#137: Malice in Wonderland


“Show me a man who can join in a laugh at his own expense,” says a character in Nicolas Blake’s 1940 novel Malice in Wonderland “and [you] show me one of nature’s gentlemen”. Blake’s writing often hits the spot – not surprisingly, perhaps, since ‘Nicholas Blake’ was the pseudonym of poet laureate Cecil Day-Lewis – and I hope that my experiences over the last week or so pass this particular test. Laughing, as the saying goes, was the only alternative to tears.

Though few articles here are composed in the first person, what follows necessarily runs from the personal to the general. Whilst the “wonderland” of the title refers to the island where I live, the “malice” has no human agency, referring instead to the workings of the weather, and of inanimate objects.

This story begins with an inanimate object – recognition that my computer, which gets extremely heavy use, was in the process of falling to bits. Its replacement having arrived, I set aside last Saturday for installation, only to discover that the new machine was faulty, and required return and replacement.

So far, so bad, but much worse was to come. On Sunday, the temperature here dropped from a balmy 25°C to an unseasonal 11°, accompanied both by torrential rain and by winds which, over the coming week, were seldom to fall below gale force. Midway through that morning, a tornado took out a key part of the electricity distribution system, leaving most of the island without power. By Tuesday, the authorities had installed generators in some of the main conurbations, though even this was hardly trouble-free, with several of the generators reportedly bursting into flames, apparently under stress of excessive demand.

Obviously enough, this event denied me, not just light and power, but music, hot water, computing and hobbies. Things didn’t end there, though. Water supplies failed through lack of pumping, and even the front gates remained shut until I could figure out how to open them manually. First task after that was to find out which, if any, shops (one) and restaurants (none) had backup power supplies. The presence of mind of one bar-owner enabled locals to revel in Barcelona’s 5-1 annihilation of Real Madrid, though this generator didn’t extend to hot drinks, let alone meals. Fuel in cars had to be used sparingly, because lack of power shut down the filling stations.

Put simply, normal life ground to an almost complete halt. Almost all business and official premises remained shut, depriving the public of postal, banking and most other services. Loss of internet connection deprived me of contact with the outside world. I didn’t miss television (since I never watch it), but I did miss my music, my DVDs, my books, and working on my latest project (a 1/72nd exact scale model of a Type 12 frigate). All that one could really do was to eat snacks, fight an impending cold with soluble vitamin C, sit around in the cold darkness – and think.

Since I’ve contended for very many years that the economy is an energy system with an artificial financial adjunct, I should have been less surprised than most at the near cessation of all normal activity by the simple interruption to the supply of electricity. Even so, the lesson taught by this event was the sheer totality, and the rapidity, too, with which the absence of energy brings normal life to a halt.

Let’s, then, summarise the predicament of the population of the island during the power hiatus. The immediate effects were loss of domestic electricity supply (and, with it, light, power, cooking facilities, refrigeration, water supply and communications). In the business sector, activities in almost all categories ceased, most obviously including financial services, retailing, distribution and the supply of energy. Most aspects of government, including administration, revenue raising, defence, policing, health care and social services, seem to have kept going, but only by courtesy of generators.

The nearest generator to me had to be refuelled at intervals of between five and six hours. This particular generator was kept supplied with fuel by tankers small enough to negotiate some very narrow streets, and generators sited in broader thoroughfares might have been serviced by larger vehicles, extending the resupply interval somewhat. Presumably, the generating capacity itself was supplied, by sea, either from the mainland or from a much larger neighbouring island, neither of which was affected by the outage.

Ultimately, three factors made the situation survivable. First, the community here has particularly strong social cohesion. Second, the loss of power was always known to be temporary, and unlikely to extend for as much as a week. Third, and critically, outside help was available, because the power loss was strictly localised to most of one small island.

It doesn’t take much imagination, though, to picture what might have ensued if none of these favourable conditions had prevailed. Even with outside support, the duration over which anything approximating to normality would prove sustainable is strictly limited – and this brief and incomplete sustenance of normality could not have happened had the rest of the country been affected simultaneously. It takes little imagination, either, to envisage the erosion of social cohesion had neither limited duration nor nearby support characterised the outage.

Let’s be quite clear about this. If energy supply is cut off, and is cut off in way that is of unknowable duration, and for which there is no outside help, economic and other normal life ceases to be possible.

Could money solve this problem? Well, if you will, imagine that, whilst unable to offer physical succour, Madrid or Barcelona had been able to supply the island with money – you might even picture airdrops of bank notes by the air force, or the delivery of millions of euros by naval auxiliaries. You will appreciate that this purely financial support would have had absolutely no positive effect on the situation. All that it might, conceivably, have achieved would have been to trigger massive inflation, with more money chasing an extremely small supply of goods and services.

Let’s be clear that weather-related outages like the one experienced here are not going to deprive even a sizeable national economy of energy, and neither are we, in any meaningful sense, going to “run out of” energy. There are, though, two very real threats which we should consider.

The first of these is a simple inability to purchase energy, even if global supplies remain generally accessible. This is what happens to an economy if the value of its currency collapses. Picture, if you will, a country relying on imported energy (or, for that matter, imported food, itself an energy product), and imagine that the country’s currency experiences a sudden 75% fall in its international value. What this means is that the local cost of energy has quadrupled. A variation on this theme is a situation in which the country’s currency ceases to be acceptable to foreign suppliers, who perhaps see reason to question its viability. Both scenarios are distinctly possible, given the sheer scale of credit and monetary risk adopted, as a sequential matter of policy, over the period since the late 1990s.

The second (and likelier) scenario involves an erosion of surplus energy, a situation which arises when, within any given quantity of accessible energy, the amount available for all purposes other than energy supply itself becomes squeezed by a rise in ECoE (the energy cost of energy). We don’t have to imagine this scenario, because it’s already happening – according to SEEDS, world ECoE has now risen to the point where global average prosperity per person is in decline.

Thus far, we’ve done a pretty good job of collective and official denial over this reality. We have poured huge amounts of debt – and, latterly, of cheap money as well – into the system in order to retain a misleading semblance of economic normality. We’ve told ourselves, along the lines of a bedtime story for frightened children, that renewables will rescue us from the economic and environmental follies of burning up fossil fuels at the maximum rate possible, heedless of the future.

In short, what happened here this week may, in itself, have been a freak occurrence – but it is no less unreal than the stories we tell ourselves about infinite growth on a finite planet.



#136: The challenge for government


The underpinning assumption of continuous growth has framed the entirety of the economic debate in politics since long before current systems of Western governance came into being.

Now, with the economies of the West characterised by an ongoing deterioration in prosperity, wholly new rules apply. Whilst sharing out the benefits of growth has seldom been easy, allocating hardship is going to be a very much harder call. As things stand, the incumbent elites have no answer to a question that they do not even know they need to ask – how do we govern societies that are getting poorer?

This puts us in a strange situation in which the general public knows more than the political elites. The official line is that people are continuing to enjoy growing prosperity, but people themselves recognise increasingly that this isn’t the case. The elites believe that traditional parties, and established ideologies and methods of conducting government, remain valid, but the public is well advanced in the process of repudiating all of them. Where elections are conducted proportionately, insurgent parties are making huge inroads – but where, most obviously in America and Britain, the system is structured in ways which entrench established parties, those parties are becoming the target for capture from within

Two humdrum issues in fiscal policy illustrate quite how dramatic the economic change is going to be. For a start, there’s no point in anyone proposing to increase public spending, because this is ceasing to be affordable. Likewise, there’s no point in asking whether or not governments should “tax the rich” more than they do now, because doing so is becoming unavoidable.

This change invalidates much of the economic thinking of the respective ‘conservative’ and ‘Left’ political persuasions. Additionally, the conservative side is now about to discover the price of two disastrous mistakes made within the last decade, whilst the Left is losing the ability to present a viable alternative to “austerity”.

Politics and government – the children of growth   

Although the American Constitution dates from 1787, most forms of government operating around the world today are of much more recent origin – and, even in the United States, governance has undergone huge changes since the Founding Fathers put quill to paper.

What this means is that virtually all Western systems of government and politics are products of an age of growth, and this history frames the policy debate, in economics and in much else. The Industrial Revolution is generally dated from about 1760 and, though it took a long time to spread around what we now call ‘the West’, it’s fair to say that no system of government in the advanced economies pre-dates the start of growth.

This is not to assert that there has been an uninterrupted continuity of growth because, of course, there have been periodic downturns, some of them deep and protracted. However, even in the midst of the best-known slump – the Great Depression of the 1930s – the assumption of expansion remained, stated in a consensus faith in the eventual restoration of growth.

The dominance of distribution

If, for now, we ignore the purely ideological dimension, economic management in an era of expansion becomes fundamentally a question of distribution. This poses one basic question: ‘if economic output is going to grow by X over the coming Y number of years, how are we going to share out this growth?’

Generally speaking, those on what we might term the ‘conservative’ side have tended to favour letting the fruits of growth fall where they may, which is to say in an unequal and somewhat haphazard fashion, not unrelated to the ‘lottery of life’. Those on the ‘Left’, on the other hand, have favoured skewing the distribution to favour those at the lower end of the prosperity spectrum. For the Left, this then poses a subsidiary question. Should redistribution mean taking from the better off and handing it to the less prosperous, much as Robin Hood is said to have done? Or are the resources to be redistributed better bestowed in kind (in the form of public services) rather than as a simple financial transfer?

It’s in the nature of popular discourse that both sides have endeavoured to construct a moral case buttressing their persuasions. For the Left, allowing extreme wealth for some in the midst of grinding poverty for others is morally unacceptable. For conservatives, taking money from the energetic, successful or simply lucky and handing it to those who may lack ability, or may be feckless, or are just plain unfortunate, encroaches unacceptably into private preference.

The aim here is to avoid this moral stand-off, not because it doesn’t matter, but because it’s largely insoluble. If someone feels that it’s morally wrong for the state to take his money and give it to others – or, conversely, if he finds it offensive that some people own multiple palatial dwellings whilst home for others is a cardboard box under a railway bridge – it is unlikely that he or she is persuadable to the other point of view.

Moreover, it’s of diminishing relevance if, as is argued here, ‘sharing out growth’ has ceased to be the decisive political issue in politics.

With growth come choices – but de-growth replaces them with imperatives.

The game-changer

As you’ll know if you’re a regular visitor to this site, a central finding of Surplus Energy Economics is that two centuries and more of increasing prosperity are in the process of going into reverse. The main reason why this is happening is that the energy-based economy is being undercut by an upwards trend in ECoE (the Energy Cost of Energy). To observe how this is taking place, it’s necessary to see past financial gimmicks which are designed, if not to affect, then at least to disguise what is going on.

This, it must be stressed, is an interpretation, not a prediction, at least as far as almost all Western economies are concerned. According to SEEDS, prosperity has already declined markedly in most advanced economies, having peaked at various points between 2000 and 2007. Italian prosperity, for example, has declined by 13% since 2001, British people are typically 11% poorer now than they were in 2003, and Americans have become 7.5% less prosperous since 2005.

America, the United Kingdom and Italy are used as exemplars here because of circumstances specific to each. In Britain, where prosperity is deteriorating particularly rapidly, voters have decided to defy the establishment and pull their country out of the European Union. Nationalism has certainly come to the fore in the United States, where it’s plausible that the Trump administration is the first government to understand that prosperity is becoming a zero-sum game. Italy’s new insurgent coalition clearly plans to challenge EU strictures on spending and deficits.

Trends in prosperity and GDP per capita for these economies are illustrated in the first set of charts. In each case, the official line is that GDP is growing, but, in each instance, this perception has been sustained only by the spending of huge amounts of borrowed money. People in all three countries are getting poorer, and, politically, this is exerting mounting pressure for change.

Critically, this downturn isn’t temporary, so there’s no point in waiting for prosperity growth to resume.

#136 prosperity & governmentjpg_Page1

The authorities in these and other countries have tried to circumvent the deterioration in prosperity using credit and monetary adventurism. But all that this has done has been to create a first global financial crisis in 2008 (GFC I) and, now, to set in motion a process that will bring about a second and much larger crash (GFC II) in the near future.

Where politics is concerned, the ending and reversal of the upwards trend in prosperity is a game-changer – instead of debating the sharing out of growth, politics is now becoming the much tougher matter of allocating hardship.

The establishment’s existential errors

The ending of prosperity growth is something that the existing structure of politics will struggle to address, even when the reality of shrinking prosperity becomes so obvious that it can no longer be denied or ignored. The problem for incumbent regimes is exacerbated because, during and after GFC I, the establishment managed to shoot itself in both feet.

First, the powers-that-be underestimated the popular anger that would be triggered when they combined the necessary rescue of the banks with the arguably unnecessary rescue of the bankers. Second, they introduced monetary policies which handed huge gains to those who already owned assets in 2008, and made asset accumulation very much harder for those – a majority – not in that fortunate position.

Both problems were compounded by supplementary errors. Where inflating asset values was concerned, no measures were introduced to even try to capture at least some of the winners’ upside in order to compensate the losers. Since the winners tended to come from an older demographic than the losers, this gaffe set in motion a process of change that is corroding away popular support for the established system.

The compounding problem with rescuing the bankers was that this was done by governments whose default position is opposition to intervention, which is why they find reasons not to act whenever the idea of rescuing, say, steel-workers or retail employees is proposed. Bankers, apparently, are worthier of rescue than manual or clerical workers. This is a view for which there is little or no popular support.

Put simply, then, the authorities made two existentially bad calls in 2008. If these mistakes are added to a deterioration in prosperity – denied by the authorities, but experienced by ‘ordinary’ voters – it becomes very easy indeed to see why insurgent or “populist” parties are enjoying steadily growing support. Part, at least, of the explanation for this shift lies in the establishment’s spectacular failure to recognise the consequences of making itself unpopulist.

How bad?

As we’ve seen, prosperity is declining markedly in Britain, America, Italy and most other Western economies. By 2025, people are likely to be a further 6.0% poorer than they are now in Britain, 5.4% poorer in America and 3.1% poorer in Italy.

This necessarily impinges on the ability to pay tax. Though taxes tend to be levied on incomes, consumption and returns on investment, the only thing that can really be taxed is prosperity.

To understand why, picture somebody whose income is £30,000, but whose prosperity is only £22,000. (In SEEDS terms, two components explain the difference between these numbers. One is the proportion of income financed by financial adventurism, and the other is the trend cost of ECoE, experienced by the individual primarily through the cost of household essentials).

If the state imposes taxes totalling 40% of this person’s income, the resulting £12,000 tax represents 55% of his or her prosperity. Now, move this on to a point where income has increased to £35,000, but prosperity has deteriorated to £20,000. If tax is still being levied at 40% of income, the proportion of prosperity now going in tax has climbed to 70%.

The starting figures are not dissimilar to the actual situation in Britain. In 2017, government primary expenditures (which exclude interest on debt) totalled 37% of GDP, but this was already more than half (52%) of aggregate prosperity. If the government is, in 2025, still spending 37% of GDP, it will need to tax 60% of prosperity to finance it. The numbers for Italy are similar, and, whilst America has rather more fiscal elbow-room, the trend towards the government seeking an ever-growing share of national prosperity is just as firmly in place there.

Another way to look at this is that, taking the UK as an example, tax equated to 51.8% of national aggregate prosperity in 2017. If that ratio is maintained, the tax take (at constant values) in 2025 is likely to be about £736bn, rather less than the £760bn likely to be raised this year.

These points are illustrated by the next charts, which illustrate government primary expenditures as percentages both of GDP and of prosperity.

#136 prosperity & government 2jpg_Page1

Less room for choice

A clear implication of SEEDS analysis is that no government, irrespective of its political colour, is going to be able to increase public spending to any material extent – and, in the longer term, is going to have to push expenditures down, not up – unless it wants to appropriate an unacceptably large proportion of national prosperity. Yet both the Left and much of the insurgent sides of politics predicate their policies on higher state spending, whilst the only parties favouring restraint seem already to be heading towards political irrelevance.

Before conservatives draw any comfort from the conclusion that public spending cannot realistically be pushed upwards as prosperity falls, they need to recognise that their own resistance to higher taxes on “the rich” is becoming equally untenable.

The reason for this is that, whilst the deterioration in prosperity is a generalised phenomenon, its effects are felt from the bottom up. This observation is already writ large in the visible widening of hardship, not so much amongst those in absolute poverty but amongst the large and growing numbers variously described as “just about managing” and “struggling to keep their heads above water”. As the number struggling increases, the ability to collect taxes from these people declines. Before very long, only those described in varying degrees as “rich” will be able to pay much in the way of tax.

Lastly, there is a nasty budgetary sting in the tail contained within the ECoE process and the consequent deterioration in prosperity. Ultimately, these processes mean that each pound, dollar or euro delivers a declining quantity of discretionary spending capability over time, as the cost of essentials absorbs a growing proportion of income.

But this doesn’t just affect households – it affects government as well. Accordingly, the amount of activity that public services can deliver from any given budget is on a decreasing trend.


If SEEDS is correct in identifying diminishing prosperity, the implication is a total game-changer in politics and government. Increasing government spending is ceasing to be a viable option, whilst “the rich” are going to have to pay much more in tax, however just, or unjust, one happens to think this is.

No existing party is equipped to handle this new reality, and neither, for that matter, are the insurgent movements sometimes dubbed “populist”. Political conservatives cannot hope to preserve the economic status quo, whilst the Left’s dreams of bigger state spending are becoming ever less realistic.

If “populism” means anything, it means giving the voters what they want – but this, too, in hard economic terms, is ceasing to be plausible. The spread of insurgent politics is likely to put a growing emphasis on “taxing the rich”, which, apart from being something that government can do, is going to become inevitable in the future. Conversely, though, insurgent promises to counter “austerity” by increases in public spending are rapidly ceasing to dwell in the realms of the possible.

This in turn suggests that insurgent, “populist” politicians are likely to put greater emphasis, not just on “taxing the rich”, but on non-fiscal issues including nationalism and immigration. As both the ‘Left’ and the ‘conservative’ persuasions struggle to come to terms with new realities, the insurgents can be expected to move in new and more radical directions.


#132: The revenge of the spider


If you’re a regular visitor to this site, you’ll know that we’ve covered a lot of themes, varying from the plight of individual economies to the madness of economic policy both before and – especially – since the 2008 global financial crisis (“GFC I”). You’ll probably know, too, that the expectation here is for “GFC II”, a far larger sequel to the events of 2008.

You might also know that the coming autumn sees the opening of a window in which this second crisis might take place (though, in their very nature, the timing of such events cannot be predicted). So the aim now, with autumn approaching, is to summarise how things stand.

Let’s start with the economy. Ever since the late 1990s there have been clear signs of deceleration in the pace at which underlying economic output has been growing. The interpretation put forward here is that this deceleration has been caused by an exponential uptrend in ECoE (the energy cost of energy). At least two other material headwinds can be identified – environmental stress, and mistaken economic policy – but a worsening in the energy equation has been the critical factor undercutting the potential for growth.

As modelled by SEEDS, these trends in energy have already put prosperity growth into reverse in the majority of Western economies, where prosperity per person generally peaked between 2000 and 2007. On this basis, the average Italian has become 12.3% poorer since 2001, the average American is 7.7% less prosperous now than he or she was back in 2005, and prosperity in the United Kingdom has fallen by 10.3% since 2003.

Where the West is concerned, the outlook is for more of the same. Mr Trump may or may not be able to “make America great again”, but neither he nor anybody else can ‘make Americans prosperous again’. Much the same, varying only in rapidity of deterioration, applies to virtually all developed economies.

In recent years, the Emerging Market economies (EMs) have become more prosperous, though sometimes at rates nowhere near claimed expansions in GDP per capita. According to SEEDS, this improvement in EM prosperity looks likely to continue, albeit at fading rates. In theory, this leaves global prosperity pretty flat, with progress in the EMs offsetting impoverishment in the West. In practice, though, EMs may not be able to carry on growing their prosperity at all in a world in which their Western trading partners are becoming poorer.

Unfortunately, policymakers have never understood the processes undermining prosperity. Worse still, any concept of coming to terms with deceleration is wholly unacceptable, not least because the financial system is predicated entirely on perpetual growth. Of course, you might think that basing anything on perpetual economic expansion in a finite world is pretty crazy – but whoever said that either politics or finance has to be limited by rationality?

A direct consequence of the collision between resource reality and a commitment to growth in perpetuity has been an attempt to ‘cheat’, using financial adventurism in an ultimately futile attempt to get around the ending of growth.

This has taken two main forms. The first, adopted in the years before GFC I, was “credit adventurism”, making credit cheaper, and easier to obtain, than ever before. Since GFC I, this has been compounded by “monetary adventurism”, which has involved pouring mind-boggling amounts of liquidity into the system.

To a certain extent, the latter was a consequence of the former. By 2008, “credit adventurism” had created debt of a magnitude that was impossible to service under “normal” monetary conditions. Barring “reset” – ruled out because of the short-term pain that it would have caused – the only way to cope with such gargantuan debts was to make them ultra-cheap both to service and to roll-over.

Just as there have been two forms of adventurism, there are two forms of crisis. “Credit adventurism” led naturally to a credit (debt) crisis, which was why banks were in the eye of the storm in 2008. “Monetary adventurism”, on the other hand, leads to a monetary crisis, which is why fiat currencies will be at risk in GFC II.

These forms of adventurism have succeeded in creating an illusion of growth, convincing enough so long as we wear blinkers where underlying fundamentals are concerned. World GDP increased by 35% in the seven years between 2000 and 2007, and by 31% in the decade between 2007 and 2017.

But the escalation in debt alone gives the lie to any claim that this “growth” has been genuine or sustainable. Between 2000 and 2007, growth of $25.5 trillion (at 2017 values) was accompanied by a $52tn increase in debt, meaning that just over $2 was borrowed for each $1 of “growth”. Since 2007, the ratio has worsened markedly, with “growth” of $29.8tn accompanied by $99tn in borrowing, a ratio of $3.30 of new debt for each growth dollar.

Escalating indebtedness has not been the only consequence of financial adventurism, of course. The crushing of returns on invested capital has created huge shortfalls against the amounts that we ought to have put aside for retirement, all but destroying the viability of pension provision for all but a wealthy minority. Monetary adventurism may not – yet, anyway – have created a spike in consumer inflation, but it has led directly to massive bubbles in asset prices.

Critically, the worsening ability of the economy to carry these excesses has been disguised by the phoney “growth” created by the simple spending of borrowed money. Everyone appreciates that an individual does not become more prosperous simply because he or she runs up an ever-bigger overdraft, and spends it. Unfortunately, observers – including policymakers – do seem to believe that economies can prosper by racking up ever bigger debts, and mortgaging the future, and then pushing the proceeds through consumption.

There are even those who believe that the inflated prices of stocks, bonds and property constitute “wealth”, even though the only people to whom such assets can be sold are the same people to whom they already belong.

If we strip away the simple spending of borrowed money, SEEDS calculates that claimed “growth” (of $55tn, or 76%) since 2000 falls to less than $21tn, with the remaining $34tn an illusion conjured out of adventurism. Meanwhile, the deterioration in trend ECoE, from 4.0% back in 2000 to almost 8% now, means that aggregate prosperity increased by just $16.4tn, or 24%, over the period as a whole.

Unfortunately, world population numbers expanded by 22% over the same period, so growth in average prosperity has been just 2.3%, over seventeen years. All and more of that increase has gone to the EMs, leaving the average Western citizen poorer.

What we are left with, then, is deteriorating Western prosperity, faltering underlying output in the world as a whole, unprecedented levels of debt, grotesquely inflated asset markets, and huge hostages to fortune, not least in the destruction of pension provision.

In simple mathematical terms, SEEDS estimates that “reset” in 2008 would have required ‘value destruction’ – a fall in the aggregate prices of assets – of the order of $84tn, equivalent to almost $100tn today. Of course, monetary adventurism was used to avoid reset in GFC I – carrying that value overhang forwards – and we’ve gone on adding to it, at steadily rising rates, ever since. SEEDS puts scope for value destruction today at over $400tn, which should be treated as a (very approximate) order of magnitude of the extent to which asset values have to fall.

This, of course, is ‘first order’ value destruction. If the prices of your shares, bonds and property fall, you still own them, and no money has actually flowed out of your bank account. The real problem is ‘second order’ value destruction, which is what happens when the value of your assets falls to a level lower than the sum you borrowed to acquire them.

Though the scale of the sums involved is almost impossible to calculate, we can conclude that the world will face vast ‘second order’ value destruction when GFC II happens.

We can be equally certain that, rather than accept the necessity of value destruction on a scale roughly four times larger than 2008, the authorities will resort again to adventurism, pouring liquidity into the economy at rates which dwarf anything experienced during and after GFC I. The strong likelihood has to be that adventurism on this scale will undermine the value of fiat currencies, destroying many whilst inflicting hyperinflation on those which survive.

The public, on the other hand, can hardly be expected to like getting ever poorer, especially whilst the distortion of the relationship between incomes and asset values seems to have made a minority wealthier whilst imposing austerity on everyone else. Whether, during GFC II, they will turn increasingly towards insurgent (“populist”) politicians, or opt instead for the collectivist offer of a Left made resurgent by popular adversity, is a second-order question. What we can anticipate, with high levels of confidence, is political and social change at least commensurate with the scale of economic and financial upheaval.

Those with long memories might remember a song for children called “there was an old lady who swallowed a fly”. After the fly, she swallowed a spider (“that wriggled and jiggled and tickled inside her”), the point being that she swallowed the spider in order to catch the fly. Thereafter, ever larger animals were ingested to catch the one swallowed previously – “she swallowed the bird to catch the spider”, and so on – finishing up with swallowing a horse (“she’s dead – of course”).

By this analogy, the system “swallowed a fly” in the years before 2008, then “swallowed a spider” during GFC I in an attempt to deal with it. In real life, swallowing a fly can happen to anyone, and swallowing a spider is at least feasible. Swallowing a bird, however, is not.

In this sense, GFC II is set to be the spider’s revenge.

#127: Quantum of risk, part three


Here’s a test of the imagination. First, picture someone asking you to write off a debt of €100,000 that he owes you. Next, picture this same man, with his next breath, asking if you will also act as guarantor of his next overdraft. Oh, and he would like to rewrite all the rules governing the financial relationship between you, too.

Though this stretches the imaginative faculty, it’s pretty much what the incoming Italian government is asking of the European Central Bank (ECB). As well as agreeing to write off €250bn of Italian public debt, the ECB is expected to watch benignly as Italy then embarks on a new fund-raising exercise, implicitly guaranteed by the ECB.

The chances of the ECB agreeing to this must be close to zero, not least because of the precedent that it would set for other Euro Area (EA) borrowers.

Yet it seems equally unlikely that the new coalition in Rome will back down over ambitious plans seemingly endorsed in large numbers by the electorate.

In short, what we have here are the makings of a full-blown EA financial (and political) crisis, yet the markets have seemed neither stirred nor shaken by it. Right now, the apparent softening of the Trump line on trade with China seems to be the only game in town. It may be a characteristic of markets that they can focus on only one issue at a time, and this might help explain seemingly relaxed reactions to events in Italy.

It doesn’t help that a media focus on “populism” is obscuring what is really happening as a new coalition prepares to take office in Rome.

The aim here is to investigate what might be called ‘the Italian gambit’. The main conclusion is that this situation is a direct result of systemic weaknesses within the Euro.

SEEDS – the Surplus Energy Economics Data System – is used here in two main ways.

First, SEEDS tracks the long-running erosion in prosperity which has led Italy to this juncture, discrediting the political establishment and paving the way for radicalism.

Second, SEEDS is also deployed to calibrate the degree of financial risk posed by Italy.

All change in Rome

Even if the fundamentals are improperly understood, what ought to be influencing bond markets now is a dawning recognition that genuine political change is on the cards. The sparring is over, and Italians really are about to get a radical new government, formed by a coalition of two parties, the Lega and the Five Star Movement (5S).

Both are often labelled “populist”, but the term preferred here is the more neutral ‘insurgent’, meaning ‘challengers to the established order’.

The new government certainly seems set to merit the ‘insurgent’ label, if what we know so far is anything to go by. Apparent plans to deport as many as 500,000 undocumented immigrants are likely to prove highly controversial, as are proposals for rolling back sanctions against Russia. The new administration may be hoping that its migrants plan might push its EU partners into taking a larger share of immigrants for whom Italy has been the primary point of entry. Relaxing or even scrapping sanctions on Russia, on the other hand, amounts to a direct challenge, not just to the EU but, implicitly at least, to the uneasily-shared stance of Europe and the United States.

But the real meat in the policy sandwich is economic and fiscal. What the new government appears to want is a major house-cleaning exercise, intended as the basis for radical reform of taxation, public expenditures and debt.

Essentially, the Lega and 5S are planning a repudiation of the Euro Area doctrine of austerity. Just one of the many snags with this is that Italy is already one of the most indebted governments in the EA.

On the revenue side, the coalition proposes a flat tax, levied at 15% and 20%, and offset by a flat €3,000 tax deduction. Planned increases in excise and sales taxes are to be scrapped, which alone will cost about €12.5bn (within current revenues of €800bn). A key spending plan is to introduce what looks a lot like a universal basic income (UBI) of €780 per month for poor families. The coalition is also likely to rescind the intention to start raising pension ages.

All of this is likely to push the fiscal deficit sharply higher, which is why the government will seek a relaxation of EA rules which restrict budget deficits to 3% of GDP. But this proposal is just the thin end of a wedge of challenges to the EA system.

Most strikingly, the coalition partners have called on the ECB to “forgive” (meaning write off) €250bn of Italian government bonds. They also plan to start issuing short-term credit notes (sometimes labelled ‘mini-bots’), which means that Italy will be adding to its public debt at the same time as asking a big creditor to let it off the hook.

How did things get to this impasse?

The Euro – faults in the system

We should be in no doubt that the challenge to the architecture of the Euro system being posed by the incoming Italian government needs to be taken extremely seriously.

Fundamentally, this situation is a direct consequence of weaknesses in the Euro system. From the outset, a model which combines a single monetary system with a multiplicity of sovereign budgets has always been an exercise in economic illiteracy, and a clear case of political ambition trumping economic realism. Putting politics ahead of economic reason usually comes at a price – and, for the Euro system, Italy is about to present the bill.

Here’s how the faults in the Euro have led Italy to where she is now. Over a very extended period, Italian competitiveness has eroded. Before Italy joined the Euro in 2002, gradual devaluation acted as a cushion, shielding Italians from the worst effects of diminishing competitiveness. With each successive decline in the value of the lira, living standards decreased slightly (which is a stealthy sort of “austerity”), in line with rises in the cost of imports. But this very modest (and, incrementally, barely-noticeable) inflationary impact on prosperity was more than countered by falls in the relative prices of Italian goods and services, supporting jobs and activity in the Italian economy.

Abruptly, however, joining the Euro took away this long-standing cushion of stealthy devaluation. Critically, loss of the ability to devalue was not countered by the automatic stabilisers customarily provided by the combination of monetary and fiscal systems.

These stabilisers work like this. If, for example, the economy of northern England were to deteriorate, whilst that of the south was prospering, southerners would pay more tax and receive less benefits, whilst the reverse would happen in the north. This process creates transfers between prospering and struggling regions which help to counter imbalances created by divergences in competitiveness. Most importantly, this process happens automatically in any properly-functioning monetary area, and does not require decisions by government.

No such automatic process exists in the Euro area. Denied the ability to devalue, and without the cushion of automatic stabilisers, the only way that a country like Italy can defend its competitiveness is through a process of internal devaluation, whereby the costs of production (essentially, wages) are reduced. This process has become synonymous with “austerity”, and the unmistakable lesson of recent political events is that Italians want no more of it.

Prosperity and risk – the SEEDS reading

SEEDS analysis underscores an interpretation based on dwindling prosperity within the straitjacket of monetary inflexibility.

According to SEEDS, average prosperity in Italy peaked in 2001 (on the eve of Euro membership), and Italians have been getting poorer ever since the country joined the Euro. Prosperity in 2017 is put at €24,130 per person (compared with GDP per capita of €28,300), and the average Italian is now €2,680 worse off than he or she was ten years ago. The trend decline in average prosperity is 0.4%. Though not drastically out of line with what is happening in some comparable countries, this is certainly bad enough to sustain popular discontent.

From this, you can see why developments in Italy are likely to become a direct challenge to the Euro, even though the incoming administration in Rome hasn’t – quite – committed itself to debating Euro membership. Assuming that neither the ECB nor the new Italian government gives way, what may very well result is a rethink of Italy’s membership of the single currency.

Nothing encompassed by this confrontation can possibly stop at the Italian border, making this a challenge which far exceeds the implications of “Brexit” for the EU.

SEEDS and the quantification of risk

As well as underlining the decline in prosperity which has pushed Italy to this impasse, SEEDS can also calibrate the level of risk involved. Interestingly, Italy doesn’t come out too badly on some of the risk metrics applied by SEEDS. But the last of the four metrics contradicts this finding in very serious ways.

For starters, Italy does not score too badly on financial exposure tests. With aggregate prosperity of €1.46 trillion – 15% below reported GDP – debt, at 245% of GDP, equates to 288% of prosperity, a number that is not particularly high compared with similar economies.

Likewise, financial assets (a measure of the size of the banking system) are estimated at 465% of prosperity (and just under 400% of GDP). This, again, is not a worrying outlier.

Third, and despite its reputation as a highly indebted economy, Italy’s credit dependency is comparatively modest, with annual borrowing averaging 1.9% of GDP over the last ten years. Other countries would suffer a lot more than Italy from any interruption to the continuity of credit.

Italy doesn’t score too badly, then, on three of the four main benchmarks used by SEEDS for risk assessment:

  • Debt/prosperity (Italy 288% versus an EA average estimated at 300%)
  • Financial assets/prosperity (465% for Italy, against an EA average close to 600%, which reflects very large exposure in countries such as Ireland and the Netherlands)
  • Credit dependency – measured in relation either to GDP or prosperity, this calibrates exposure to disruptions in credit flow, a metric on which Italy isn’t badly exposed.

There are, though, two very major flies in this ointment.

First, Italy scores badly on the fourth SEEDS risk metric, which is “acquiescence risk”. What this means is the willingness of the public to support measures which might be both necessary and unpalatable.

Even if it were not already clear (from election results) that Italians have lost patience with anything which sounds like austerity, a decline in prosperity of 12% since a peak as long ago as 2001 can only have eroded voters’ preparedness to go along with the sort of painful proposals which might emerge from conventional politics. On “acquiescence risk”, then, SEEDS puts Italy in a pretty high-risk category.

As well as “acquiescence risk”, the second snag lies in the quality (rather than the scale) of the Italian banking system, where anecdotal evidence suggests a very high level of potential toxicity.

What happens now?

As we have seen, Italy’s central problem is an inability to address competitiveness through conventional devaluation, forcing the country into the painful process of internal devaluation known as “austerity” instead.

Just as monetary rigidity has been a major cause of these problems, it also complicates any search for a solution. Were Italy monetarily sovereign, the issues would at least have the merit of clarity. Bonds yields would soar and the currency would weaken, effects which might very well be enough, in themselves, to deter the new government from pushing ahead with its plans.

As a member of the EA, however, the stresses shift from the bond and FX markets to the arena of politics. It has hard to see how the ECB and the EA authorities can possibly give ground over the apparent demands of the incoming government in Rome, not least because whatever might be conceded to Italy could prove almost impossible to deny to others such as Greece, Portugal, Ireland and Spain.

Seen, as it must be, as a test case, the likelihood has to be that, far from helping Italy to restore la dolce vita, the EA might have to take a tough line on Italians continuing to accept la vita dura represented by “austerity”.

The next move will then be up to Rome, with the new government having to decide whether to succumb to EA diktats, or ask voters to support unilateral action.

This story will run, then, and the stakes – for the Euro, as well as for Italy – could hardly be higher.


Please note: the latest SEEDS dataset for Italy has been placed on the resources page.



#126: What’s next for SEEDS?


With SEEDS (the Surplus Energy Economics Data System) now fully operational, it seems logical to wonder about the uses to which it can or should be put. If this discussion doesn’t provide answers, it can, at least, set out some thoughts which might be of interest. As ever, readers’ comments will be very welcome.

For starters, SEEDS wasn’t built with any commercial end in view, still less from any wish to influence policy. Rather, the aim of the project was “to see if it could be done” – could the principles of an economy determined by energy (and not, fundamentally, by money) form the basis of a new way of interpreting events, and forecasting outcomes?

Accomplishing this turned out to be even more difficult than had seemed likely at the outset.

I was prepared for the ‘linguistic’ challenge of expressing energy-based concepts in the financial language customarily used in economics.

But what I had not anticipated was the extent to which, even within the purely financial sphere, it would be necessary to reimagine much that is taken for granted within conventional approaches to the economy.


Whether SEEDS has succeeded is a matter for others to judge, and the real ‘verdict’ on the effectiveness of the system is likely, in any case, to be delivered by events. But there do seem to be sound reasons for cautious optimism.

If conventional economic interpretation is correct, what we should have been seeing, long before now, ought to have been a combination of steadily improving prosperity and progressively diminishing risk.

The SEEDS interpretation, in stark contrast to this, is that prosperity has plateaued on a global basis – and has gone into reverse in most advanced economies – whilst risk continues to increase.

Moreover, SEEDS differs starkly from the consensus in pointing unmistakeably to a sequel (here called “GFC II”) to the global financial crisis (GFC I) of 2008.

It isn’t going to be all that long before we find out which interpretation is the right one.

Prosperity examined

What can be done, here and now, is to give you a single example of SEEDS interpretation which you can compare with the consensus or conventional view.

The British economy serves as well as any for illustrative purposes.

Comparing 2017 with 2007 – and with all numbers expressed at constant 2017 values – the GDP of the United Kingdom has increased by 11%. Population numbers have also risen over that period (by nearly 8%), but GDP per capita remained modestly (3.3%) higher in 2017 than it had been back in 2007.

If conventional interpretation has any validity at all, this rise in GDP per capita should mean that the average person in Britain must be more prosperous now than he or she was ten years earlier. Average prosperity certainly shouldn’t have deteriorated over a period in which GDP per capita has risen.

The SEEDS interpretation could hardly be more different from this conclusion.

SEEDS starts by noting that, whilst growth of 11% has added £206bn to British GDP since 2007, this has been accompanied by a £1.23 trillion increase in aggregate debt.

One way of expressing this is that each £1 of growth has come at a cost of £5.45 in net new debt. Another is to note that annual borrowing averaged 6.0% of GDP over a period in which annual “growth” was barely 1.4%.

This necessarily prompts a number of questions.

First, has growth since 2007 been ‘genuine’ and organic, or has it really amounted to nothing more than a cosmetic process of ‘spending borrowed money’?

Second, is taking on £5,450 of new debt in return for a £1,000 rise in income a rational choice, favourable to prosperity?

Third, can this can kind of equation ever be sustainable, or does the rise in indebtedness turn, of necessity, into instability?

Before we can answer these questions, we need to take the energy issue into account. According to SEEDS, 9% of the economic output of the UK in 2017 should be allocated to the provision of energy (in its broadest sense, as the foundation of all economic activity). This is a higher number than that for 2007 (4.8%), a change which exerts a further adverse influence on prosperity.

Altogether, according to SEEDS, the average person was 9.2% worse off in 2017 than he or she had been in 2007. SEEDS can put a number on this deterioration in prosperity (£2,230 per person), enabling comparison with the increase in average per capita indebtedness (of £12,400) over the same period.

Finally, shifting from GDP to prosperity enables us to recalibrate risk exposure. In the British instance, debt at the end of 2017 is likely to have been 250% of GDP, but 349% of prosperity. Likewise, total financial assets (which measure the scale of the banking sector) rise from about 1135% of GDP to about 1580% of prosperity. Both of these risk ratios, measured on the basis of prosperity as analysed by SEEDS, are appreciably higher now than they were on the eve of GFC I back in 2007.

Very different interpretations

These numbers – which, it must be emphasised, are replicated, to a greater or lesser extent, across most other Western economies – supply an interpretation of the national or global economy which could hardly be in starker contrast to a consensus line based on “synchronised growth” and controllable risk. It need hardly be added that these very different conclusions about prosperity can be assumed to be of considerable significance, too, in the political arena.

If SEEDS is – or even simply might be – right about this, then this is information that people need. It further implies that conventional interpretation is failing those who rely on it. This, in turn, seems to require at least some consideration of the uses to which SEEDS should be put.

These possible uses seem to fall into three main categories.

First, there seems a lot to be said in favour of continuing to pursue this approach, and making its findings available to those members of the public who are interested in it.

Other possible applications are less straightforward. Logically, SEEDS interpretation ought to be of use to the policy process, but it is highly unlikely that any government is going to ask for it.

I am not in any sense a ‘zealot’, and I’m certainly not set on convincing anybody of anything. So I’m not going to be promoting SEEDS as a tool that government ‘ought to be’ using. I’m not even sure that I would want to co-operate with government, even in the extremely implausible event of being invited to do so.

This leaves us with the potential for commercial use of SEEDS. I’m not opposed to this in principle, but I do have a set of parameters which, I think, can act as useful guidelines.

The first is that any co-operation with business could extend only to output from the system, and would never involve disclosing matters of process. The second is that SEEDS interpretations must remain available to the public, much as they are now.

In practical terms, this means that SEEDS datasets will be placed on the open access resources page of this site whenever they are relevant to a topic under discussion.

On the other hand, anyone wanting more comprehensive data (for instance, the numbers for all 27 countries covered by SEEDS, in their latest form), or requiring any kind of greater detail or tailored output, cannot expect this material to be made freely available. Much the same would apply to any licensed use of SEEDS output, again within the guidelines of (a) no disclosure of process, and (b) continued public access.

These are simply thoughts on what might be done with SEEDS, now that the system has been completed, and seems to be delivering useful results. Any comments on these ideas will be most welcome.


#122: A tale of two ditties


In The Arabian Nights, the heroine Scheherazade told one thousand and one tales. We, on the other hand, need only choose between two songs.

The first, cheerfully whistled by the consensus, is that the world economy is enjoying “synchronised growth”. We needn’t worry about debt and other measures of financial exposure, because a financial crash is very unlikely – and, even if it happened, the authorities would know what to do about it.

The alternative refrain is that most of the “growth” claimed by the authorities is cosmetic; that we really should worry about financial stress indicators; that a crash will happen, because it’s hard-wired into the system; and that plans for dealing with it probably won’t work.

Which of these is the true music – and which is off-key?

The aim here is to weigh the evidence, which comes in many shapes and sizes. The first conclusion is that the consensus view is a Pollyanna song (and Pollyanna, you might remember, found “something to be glad about in every situation, no matter how bleak it may be”). The optimistic consensus is every bit as complacent now as it was back in 2007, when growth was to be celebrated – and debt, we were told, didn’t matter.

The second conclusion is that the odds are shortening on a crisis happening a lot sooner than most people think – it could, indeed, happen latter this year.

Third, and from what we can surmise about them, the plans for responding to a crisis probably won’t work.

GDP – eggs in one basket

When you come down to it, the optimistic consensus is based on a single indicator – growth in GDP. This puts a lot of eggs in one basket, but the conventional line is that GDP is the only basket which matters.

If GDP is growing – and is expanding at a rate faster than population numbers, so that per capita GDP is rising, too – then people are becoming more prosperous. (It’s worth remembering that, for an individual or a household, prosperity increases when income grows more rapidly than essential outgoings such as housing, food and the cost of energy and travel – in short, prosperity is that “discretionary” income which you can spend as you choose).

Rising GDP serves to offset fears about expanding debt, because what matters about debt isn’t the quantum amount, but the ability of the borrower to service and repay it.

Put simply, the assumption – and an article of faith in conventional economics – is that growth in per capita GDP makes people better off. This means that productive output is increasing. Rising GDP gives people more money to spend on things that they want, rather than simply need.

This is great for anyone supplying these wants, so retailers, restauranteurs and other ‘customer-facing’ businesses are in clover when consumers are getting more prosperous. Growing prosperity also means that demand is expanding, which, if you’re a producer, makes a compelling case for investing in expansion. As well as spending more day-to-day, the prospering consumer is likely to buy more capital items, like cars or domestic appliances. The prospering person may or may not increase how much he or she saves for the future, but is certainly unlikely to need to take on more credit.

All in all, then, growth in prosperity, as betokened by increasing GDP per capita, is a cheerful situation. Consumers are happy, having (and spending) more money. It’s great for producers of anything from cars to chocolate bars, whilst shopkeepers, restauranteurs and others have “never had it so good”. Happy and prospering citizens may not express gratitude towards politicians – and politics is a thankless task – but they’re unlikely to turn rebelliously against the establishment that has presided over all this prosperity.

A true note?

It’s interesting, to put it mildly, that this happy refrain, played on the magic flute of growing GDP, isn’t exactly what we’re seeing in the world around us.

Far from raking in bigger profits, customer-facing businesses like shops and restaurants are going through a firestorm, with even the survivors typically closing sites, laying off workers and renegotiating rents downwards. New York’s Madison Avenue hasn’t had this many vacant storefronts since 2008.

This, by the way, cannot be blamed on rising on-line purchases – the numbers don’t add up, and no one has yet found a way to eat or drink through a laptop or a smartphone. Incidentally, too, sales of smartphones themselves seem to have peaked.

Sales of cars, meanwhile, aren’t expanding – indeed, are shrinking in many markets. Car makers are cutting their production lines and trimming their rosters of distributors. The boom in car purchases fuelled by specialised credit seems to have peaked.

If customer demand is increasing, as growth in GDP says it must be, then commercial space should be rising in cost, but evidence strongly suggests the onset of severe downwards pressure on rents – and this, moreover, is bad news for any investment or debt predicated on future streams of rental incomes.

Meanwhile, business should be in an expansionary mood. In fact, the trend now is towards cost-cutting and “zero-based budgeting”, something particularly evident in advertising expenditure, which is an important lead-indicator.

The growth in prosperity indicated by rising GDP should have financial as well as commercial implications. People should be putting aside more money for the future, yet a ground-breaking report by the WEF (World Economic Forum), studying a group of eight large economies, identifies an unprecedented shortfall in pension provision, a “global pension timebomb” set to expand from $67tn in 2015 to $428tn by 2050. In the United States alone, says the WEF report, the gap is worsening by $3tn annually, which is 17% of 2015 GDP, and roughly five times what the US spends on defence.,

Politically, the West’s happy and prospering voters, far from letting the establishment get on with building a materialist’s nirvana, are kicking that establishment in the teeth whenever they get the chance, be it Mr Trump, “Brexit”, votes in France and Italy, or even in Germany. The establishment, of course, routinely derides its insurgent opponents as “populists” – which, presumably, means acceptance that established politicians and parties have become unpopulist.

Governments, too, are acting in ways consistent with hardship, not prosperity.  Protectionism and trade wars are a hallmark of seeking someone else to blame, whilst geopolitical belligerence is a time-dishonoured way of distracting the domestic electorate from hardship. Both protectionism and belligerence were rife in the depression conditions of the 1930s. Additionally, and as Charles Hugh Smith has explained in an excellent article, protectionism is a wholly logical consequence of “financial repression” as incorporated into the policy responses to the GFC.

A numbers racket

How, then, can we square the evidence around us with the claim that, because of rising GDP, people are prospering? After all, final data for 2017 is likely to confirm that the world economy (measured in PPP dollars at constant values) has grown by 29% since 2008, equivalent to growth of 17% at the per capita level after allowing for the 11% increase in population numbers over that period.

Regular readers, of course, will know the answers, which needn’t be spelled out in detail here. (Anyone wanting a refresher should read Interpreting the post-growth economy, a guide to Surplus Energy Economics which you can download here).

Essentially, we’ve been faking “growth” by pouring ultra-cheap credit into the economy. Each $1 of growth since 2008 has been accompanied by $3.40 of net new debt, and has also been accompanied, according to SEEDS estimates, by $3.40 of erosion of pension provision. We’ve been keeping up the illusion of “growth” by spending borrowed money and raiding our savings.

Anyone who thinks that this is sustainable needs to re-imagine economic reality.

As we’ve seen, hardly any (in America, less than 1%) of this “growth” has shown up in manufacturing, construction, agriculture or the extractive industries put together. We’re moving money around more rapidly, through finance, real estate and insurance activities. Government is spending more, and people increasingly are “taking in each others’ washing” through low-value service activities, which are saleable only at home.

This pattern of activity is wholly consistent with boosting statistical measures of activity using borrowed money. It is not consistent with “growth” in any meaningful sense of that word.

This cheap money, of course, has created huge bubbles in asset markets such as stocks, bonds and property. These are no offset to debt, of course, because they cannot be monetised. The only people to whom a nation’s housing stock can be sold are the same people to whom it already belongs, so you can’t turn the theoretical value of that stock into money. Using marginal transaction prices to put a value on the aggregate stock of assets is pure sleight of hand.

As regular readers will also know, the SEEDS system generates underlying output numbers, and these are diverging ever further from reported GDP. According to SEEDS, the estimated end-2017 measure, which puts world debt at about 218% of GDP, rises to 336% when debt is measured against aggregate prosperity.


We can’t really predict the timing of economic or financial shocks, because they wouldn’t be shocks if we could. We may not get advance warning from stock markets, because debt-financed buy-backs, and relaxed investor attitudes towards “cash-burn”, might not change until after the roof has started to cave in.

But the strong likelihood now is that hardship in sectors like retailing and restaurants will broaden out into other customer-facing activities, perhaps including travel bookings, car rentals, hotel occupancy and other areas of “discretionary” spending.

A strong downtrend may already have set in where commercial rents are concerned, and we need to watch for vulnerabilities in commercial as well as consumer debt.

The critical point, however, is that what is already happening is likely to prove to be enough to discredit the “growth and prosperity” mantra underpinning consensus complacency.

It’s also worth remembering that complacency reached its previous peak in 2007. It may be, in the natural world, “always darkest just before the dawn” but, in the economy, it can often seem “brightest just before the crash”.

……and what (can be done)?

Finally, what might the authorities do if the GDP-based ballad of complacency gives way to the discordant reality of weakening prosperity and escalating debt?

It seems reasonable to surmise that policy rates will be cut, though rates are now so close to zero that cuts of the magnitude of 2008-09 are no longer possible. We can expect a lot more QE, though, like most drugs, its effectiveness diminishes as doses rise. Governments can also be expected to try to underpin the banks, but this is made harder by sharp increases in governments’ own indebtedness since the GFC.

Additionally, this time, we might expect “bail-ins”, which amount to taking money from depositors to plug gaps left by failed borrowers. If implemented, bail-ins would probably have lower limits (to protect the poor), and upper limits (to protect the rich). The authorities might also resort to the blatant monetisation of their debts (and it’s worth remembering that the Japanese central bank has already purchased almost half of all outstanding Japanese government bonds, using money newly created for the purpose).

If these are the plans for coping with a crisis, there are at least two reasons why they won’t work.

First, the assumption is likely to be that the main stresses will be confined largely to banks, as they were in 2008. But the GFC put the pressure on banks because it was a crisis caused by “credit adventurism”.

This time around, though, the main cause of a crisis is likely to be the “monetary adventurism” practised since 2008. The implication is that, in the next crisis, fiat currencies might be in the front line – especially if bail-ins and debt monetisation are invoked.

Second, governments are likely to assume public acquiescence in their rescue plans. But politics has changed fundamentally since 2008 – and any government which thinks it can sell another “rescue of the bankers” to the public is probably practising one of the worst types of complacency imaginable.





#121: Interpreting the post-growth economy


For some time now, it’s been clear that we need a succinct (though sufficient) guide to Surplus Energy Economics (SEE), something that summarises the thinking and is suitable for sharing with others. Such a guide needs to combine readability with comprehensive coverage of relevant points.

This guide is now complete. It is entitled Interpreting the post-growth economy. You can download it in PDF form at the end of this article.

Readers will already be familiar with Part One of this report, which is based on the previous article. Part Two adds an extensive commentary on many of the issues involved in applying the principles of SEE to our current circumstances and outlook.

It is hoped that readers will find this document useful and informative. As ever, comments will be most welcome.

Surplus Energy Economics – Interpreting the post-growth economy