#88: SEEDS to go live?


In recent times, it’s fair to say that three broad themes have dominated discussion here.

The first of these, of course, is surplus energy economics – the philosophy which says that the economy is an energy system, not a financial one. Money may be the map of the territory, but the territory itself is energy.

The second “hot” topic is Ponzi finance. In the early years after the millennium – and for reasons which the surplus energy interpretation can alone explain – real economic growth petered out. Since then we’ve been faking it, spending borrowed money and calling this “growth”. All the while, of course, debt (and informal “quasi-debt”) has escalated. Essentially, the powers that be have been busy destroying the future, not just by accumulating debt but also by crippling other forms of provision for the future, most obviously pension funds and other forms of saving.

Third, the general public has started to smell a rat. I don’t mean that the public understand surplus energy theory, or spend their time comparing growth with borrowing. But the public does have an intuitive sense of when things are going wrong, and this is one of the reasons why they are busy repudiating the “liberal” elites, along with much of what these elites stand for.

The bottom line of these three themes is that policymakers and economists – as some of the latter, to their credit, acknowledge – don’t understand what is happening. To tackle this, we are in urgent need of new economic understanding.

This is urgent, because what the authorities have been doing for a decade and more has been akin to carrying out brain surgery with carpenters’ tools. They can’t fix the economy because they don’t really understand how it works.

And this is where SEEDS comes in. To explain why, I need to digress a bit.


After publishing Perfect Storm (when I was head of research at Tullett Prebon), I embarked on writing what was to become Life After Growth. Throughout that project, I realised that there was a glaring need for a comprehensive mathematical insight into the energy economy. For the book, I was able to include general trends in ECoE (the energy cost of energy), and had data to illustrate, for example, the progression of energy, population and economic output over time. What I did not have, however, was a level of granularity enabling evaluation of individual economies – and the world economy as a whole – with any level of detail.

This was why SEEDS – the Surplus Energy Economics Data System – was developed. Initially, the aim was to estimate ECoEs across fuel sources and economies. At first, SEEDS simply provided estimates of ECoEs on a country-by-country basis over time. The thinking was that, once we had a grasp of ECoEs, we could deduct them from GDP to work out what the “real” economy of goods and services was really doing behind the public facade of recorded output. This has been developed to the point where twenty-one countries are covered by the system – these are the United States, Canada, Mexico, Brazil, France, Germany, Greece, Italy, the Netherlands, Norway, Poland, Portugal, Russia, Spain, the United Kingdom, Australia, China, India, Japan, Saudi Arabia and South Africa.

At the same time, it became apparent that a lot more economic content was required. The “wish list” at this point included debt and borrowing, trade and external flows, government finances, and measures on a per capita basis. Above all, the aim was to get into the dynamics of borrowing and growth, and pull all of these together with the fundamentals of ECoE and surplus energy.

With all of this accomplished and just a few tweaks remaining after several years of effort, the latest version – SEEDS 17 – has become an extremely valuable interpretive tool. To use a motoring analogy, SEEDS has evolved from a Morris Minor into something reasonably akin to Mercedes.

But even the best car achieves nothing whilst it remains in the garage.

Going public?

The next objective, logically, is to make SEEDS generally available.

Broadly, there are two main “audiences” for SEEDS. The first are individuals concerned about what is happening, and keen to further their understanding. The second are professionals, engaged either in making decisions or in providing advice. (There is actually a third category, comprising academics and non-profit organisations, but how to meet their requirements remains to be decided).

This argues for two kinds of product. The current plan is that, for the general public, comprehensive data will be available as PDFs which can be downloaded free of charge. The working name for these is SEEDS Snapshots. For professionals, a more detailed data package (known as SEEDS Pro) will be made available at what I hope will be a pretty reasonable price.

This project is still under development, and it may be some while before SEEDS Snapshots and SEEDS Pro go live. Also, as you may know, I’m planning a sequel to Life After Growth.

Meanwhile, of course, I’ll continue to post articles here – and please do keep making your very helpful comments.




#87: A world economy snapshot


Some readers have expressed interest in the data used in articles here and, as we have been discussing growth and borrowing on a global scale, this seems a good opportunity to make a SEEDS dataset available for download. You will find it at the end of this article.

First, some basics. There is nothing very mysterious about SEEDS (the Surplus Energy Economics Data System). As its name suggests, it’s a system designed to manage information from a surplus energy economics perspective. The database covers over fifty years, stretching back to 1980 and delivering projections out to 2030, though some classes of data go back well before 1980. In addition to aggregate global coverage, SEEDS operates at the regional and national level. When the 2017 version (“SEEDS 17”) is launched, coverage will increase from 19 countries to 21, with the addition of the Netherlands and Poland.

The cost of energy

The energy component of SEEDS contains data on consumption and production of primary energy, broken out nationally and by fuel type. To each series have been attached estimates of EROEI (Energy Return On Energy Invested) and ECoE (the Energy Cost of Energy). As you may know, data availability in these categories is patchy, so SEEDS uses a lot of estimates and cross-referencing, and results are not to be regarded as definitive. Rather, the aim is to provide an indicative guide to important trends.

This set of volume and cost numbers delivers global and national matrices. Put simply, if one knows the energy consumption by fuel of a given country in a specific year, one can calculate an estimated overall trend ECoE. This is known as the consumption ECoE. But what really matters is the overall ECoE, which adjusts the consumption calculation for net imports and exports. Thus, in 2000 the United Kingdom had an estimated consumption ECoE of 3.7%. The overall number was lower (2.8%), because Britain was a substantial net exporter of energy. By 2015, the consumption ECoE for the UK had risen to 7.5% (in line with a worldwide increase), but the overall number was now higher than this (at 12.2%) because Britain had become a big net importer of energy.

Globally, of course, there is only an overall ECoE number, and this is included in the dataset attached here. World trend ECoE is estimated at 7.8% in 2015 – up from 6.4% in 2010 – and is projected to rise to 10.0% by 2021. The latter corresponds to an EROEI of just 9:1 which, if you understand EROEI, spells very big trouble. ECoEs are already high enough to help explain why the world economy is now stuck in “secular stagnation”.

ECoE is best understood as an economic rent. It is a “cost”, but not in the conventional sense of that word because, of course, no money actually leaves the system. Rather, a rising ECoE compels us to spend more on energy and, therefore, less on everything else.

This shows up most obviously in household budgets as a rise in the cost of essentials, which leaves the individual or household less to spend on everything else. Again taking Britain as an example, the cost of household essentials rose by 48% between 2006 and 2016, far outstripping much smaller increases in wages (+21%) and general CPI inflation (+25%). At the level of national economies, much the same occurs, with the cost of essentials outpacing both income and broad inflation as ECoE increases.

This is one reason why seemingly-positive data on the economy as a whole increasingly clashes with individual experience – the data says the economy is growing, but the individual feels poorer, not wealthier. An increasing ECoE – and its transmission through the cost of essentials – helps explain this apparent contradiction. As neither conventional economics nor governments understand this mechanism, policymakers find themselves baffled by trends which do not seem to accord with the data available to them.

The economy – output and borrowing

As you will see from the first line of the datasheet, world GDP increased by 11% (to $114tn, from $102tn) between 2010 and 2015, and is projected to be 20% higher (at $136tn) by 2021. The latter number is essentially based on consensus estimates. It needs to be understood, first, that these are “constant” numbers, stated at 2015 values, adjusted for inflation. Second, non-American GDP has been converted into what are known as “international dollars” using the standard convention of “purchasing power parity”, or PPP.  The conventions of constant value and PPP conversion are used throughout the datasheet, for debt as well as GDP.

So global GDP increased by an aggregate of $20.1tn in the ten years culminating in 2015. But, as you will also see, world debt increased by far more – $76.5tn – over the same period. This means that, aggregated over a trailing ten-year (T10Y) period, $3.81 was borrowed for each $1 of reported growth in GDP.

Obviously, this trajectory is not sustainable – over ten years, economic growth of 22% was far exceeded by an increase of 45% in debt. If the projected increase of $23tn in GDP between 2015 and 2021 happens, and is accompanied by borrowing at the same ratio as the T10Y number (of $3.81 per growth dollar), debt would increase by $87tn, or 36%, over that period.

Ominously, the T10Y measure has been rising steadily – back in 2010, the T10Y ratio was only $2.84 of borrowing for each growth dollar. Even at the $3.81 multiple, however, the ratio of world debt-to-GDP would rise from 216% to 244% – and even this number requires acceptance that reported GDP numbers are an accurate reflection of underlying output.

Borrowed consumption and underlying growth

In fact, this assumption must be open to considerable question. It seems pretty clear that the enormous rate of borrowing in recent years has flattered GDP by creating “growth” that is really no more than the spending of borrowed money. This, of course, brings forward consumption at the cost of increased liabilities in the future.

SEEDS uses country-by-country estimates of what proportion of aggregate borrowing is used to inflate consumption in this way. For the period between 2005 and 2015, the global estimate is that, of the $76tn borrowed globally, $12tn (or 16% of all net borrowing) was used to fuel consumption. The remaining $64tn of borrowing was, therefore, used for purposes other than funding consumption.

On this basis, underlying world GDP in 2015 was $95tn, 17% below the reported $114tn. Just as important, trend growth is far lower when measured on an underlying basis, where world economic output is growing at about 1.2% annually.

This figure is nowhere near a consensus in the range 3-4%. That consensus rate of growth may be deliverable – but only if we carry on spending borrowed money.

A world in denial

Logically, the practice of inflating GDP by spending borrowed money cannot continue indefinitely. This is not a “new normal”, but a “new abnormal”. Most obviously, the aggregate amount of debt is rising much more rapidly than economic output, making the debt burden ever harder to support. Since the global financial crisis (GFC) of 2008, the economy has only managed to co-exist with this debt mountain at all thanks to the slashing of interest rates to near-zero levels.

ZIRP (meaning “zero interest rate policy”) has its own costs, some of which are only now gaining recognition. Savers have suffered very seriously from monetary policies designed to keep borrowers afloat, which, perhaps, is why the concept of “moral hazard” seems to have fallen out of the vocabulary. Last summer, after the most recent cut in interest rates, the deficit in British pension funds rose to £945bn, more than 50% of GDP, and evidence of pension value destruction has emerged on a worldwide basis. Ultra-cheap money keeps afloat businesses which in normal times would have gone under, creating space for new, vibrant enterprises – so the necessary process of “creative destruction” has been stymied by monetary manipulation.

In short, we are living in an unsustainable “never-never-land”, in which cheap debt both misrepresents and undermines real economic performance. It is hoped that this first dataset will help readers to see what is happening in an informative context.


#86. In pursuit of safety


Although I’ve committed myself to publishing a “rescue plan” for the British economy, I’m hoping that readers will accept, for now at least, a broader reading of the economic and political situation. Recent developments have yielded a specific point worth of discussion, and a general one as well.

The specific point is that extremely wealthy people, mainly from the United States, have been buying-up “survival properties” in New Zealand. Though billionaires as such are a small group, the number of American inquiries about emigration to New Zealand is running at 13,000 a month, which is six times the year-earlier level, and property prices in favoured parts of New Zealand are soaring. The most desirable properties are said to be those self-sufficient in food, water and energy, and the country is, of course, a long way from the places where nuclear war is likeliest to break out. The implication, not missed by observers such as The Financial Times, is that the rich are buying bolt-holes.

The general point is that the self-styled “liberal” elites are still in deep denial over what is happening politically. One reason for this is that the economic data available to decision-makers is disconnected from reality as it is experienced by the general public.

A key point made here is that the economy is a great deal weaker than conventional data suggests, which in turn makes public dissatisfaction that much more understandable.

As well as heaping derision (and more) on Brexiteers, Donald Trump and others castigated for “populism”, the mainstream media are also doing their best to convince us (or perhaps to convince themselves?) that Marine Le Pen cannot win the forthcoming presidential election in France. After that, they will doubtless turn their fire on Holland’s Geert Wilders.

Whilst I don’t feel qualified to comment on the electoral prospects of Ms Le Pen and Mr Wilders, I’m convinced that popular candidates (a term I prefer to the pejorative “populist”) are going to go on winning. The elites, who prefer denial and derision to self-examination, haven’t learned yet, and voters are going to carry on dishing out lessons until they do.

Together, these trends encapsulate what is happening. Whilst the public continues to vent its dissatisfaction, and whilst the elites as a whole continue to bury their heads in the sand, some amongst them are preparing for a future which, they feel, might not be very nice.

They are probably right, even if their preparations may be based on faulty logic.

The public are revolting

Though history never repeats itself, there are recurring patterns. One of the most striking is the way in which elites, whatever their initial merits, decay into unpopularity. “Familiarity breeds contempt”, it is said, and familiarity with power certainly has a history of breeding contempt for the general public. The tendency is for elites to become arrogant, greedy and corrupt, and, because they also become disconnected from reality, they are most unlikely to reform themselves unless forced to do so by popular pressure.

Leaving aside – for now – the military “wild card”, one of three things can happen from here. First, the ruling elites may bow to popular pressure, voluntarily yielding real (not cosmetic) reforms which salvage their leadership at a significant cost in terms of surrendered power, wealth and privilege. This is the best outcome, and worthy of further examination, but it does not look the likeliest.

Second, the general public may give up, accepting that they’ve made their point, and recognising the futility of trying to reform incorrigible elites. This is highly unlikely, again for reasons that merit consideration.

Third, the irresistible force of public anger may collide with the immovable object of elite intransigence, the result being social unrest. Those seeking refuge may believe this to be the likeliest outcome. They may well be right.

The “wild card”, of course, is global military conflict. There were at least two occasions during the Cold War when this came close to happening. The first was the 1962 Cuban Missile Crisis, and the second occurred in 1983 with the downing of a Korean airliner. On both occasions, the threat was averted. The danger of “third time unlucky” might be another reason for acquiring a bolt-hole in the Antipodes, though this precaution seems unlikely to prove successful.

A mass capitulation?

The cherished hope of the elites is that the tide of public anger may recede, leaving the elites in full control with their wealth and privileges unimpaired. This hope is futile, so much so that it is really an exercise in denial.

Though other issues are involved, the main cause of public dissatisfaction is widespread economic hardship, set alongside the conspicuous flaunting of wealth and power by a privileged minority. Economists who seem baffled by the weak performance of the world economy would be even more baffled if they were aware of what is really happening behind the published numbers.

Over the decade to 2015, official figures imply a 1.8% rate of compound growth, a figure which includes the post-2008 downturn and which, the consensus says, is likely to rise to an annual growth rate of between 3% and 4% going forward. Both of these readings are fallacious, because they take as reality GDP numbers inflated by the spending of borrowed money.

Revised numbers from SEEDS show that world GDP, measured at constant values and with non-US data converted into international dollars using PPP (purchasing power parity) exchange rates, grew by $20tn (21%) between 2005 and 2015. But world debt, similarly measured, increased by $76tn (45%) over the same period. This is a “trailing ten-year” (T10Y) rate of borrowing of $3.81 per dollar of growth. This T10Y number is lower than the provisional number ($4.50) published here previously, but has been rising relentlessly – back in 2009, the T10Y number was $2.89 per growth dollar.

A stumbling economy

Given that almost $4 has been borrowed for each $1 of growth, you could be forgiven for supposing that, over an extended period, there has been no “real” growth at all. This is likely to be an exaggeration, but not much of one. Stripped of debt-fuelled consumption, growth in world GDP between 2005 and 2015 was probably about $7.6tn (rather than the reported $20tn), and trend growth may have been as low as 0.5% over that period as a whole. This, of course, includes the post-2008 recession, and current underlying growth is probably about 1.5%.

On this basis, world GDP in 2015 was probably nearer $94tn than the reported $114tn, which would make the global debt-to-GDP ratio about 280%, rather than the published 216%.

All of this, of course, is before adjustment for the trend cost of energy (ECoE) to define what Surplus Energy Economics terms “the real economy” (as opposed to “the financial economy”). In 2015, underlying output was $87tn on this basis, and ongoing growth in “real”, ex-ECoE terms is about 1.0%. That is still a positive number, but it is dwarfed by the rate at which debt continues to be accumulated.

Real pain – the deterioration in living standards

The underlying weakness of the economy is already showing up in the day-to-day experience of the public. On an underlying, “real economy” basis, the countries whose economies are now ex-growth include Britain, France, Italy, Spain, Canada and Japan. The American economy may still be growing, but at a rate nowhere near official figures. China and India are probably the only major countries enjoying significant growth but, even in these instances, underlying growth is a great deal below the rates reported officially.

This deterioration can be expressed in per capita terms, but it shows up in the day-to-day lives of the public in two distinct ways. The first is that the rise in the cost of household essentials continues to out-strip growth in nominal incomes. This is happening, primarily, because these essentials are highly leveraged to energy prices, and to commodities which are traded on world markets. Economists tend to assume that such commodities are priced in the same way as internally-consumed services, but the reality is that there is a huge difference between local and global pricing pressures.

As well as the cost of essentials, the other way in which economic deterioration is showing up in the lives of the public is in deteriorating provision for the future. Ultra-low interest rate policies, adopted to enable the world economy to co-exist with its debt mountain, are keeping borrowing cheap (and asset prices inflated) whilst destroying returns on capital. This is becoming glaringly obvious in pension fund deficits, but is also showing up in the continued escalation of debt.

What happens next?

The elites’ fervent hope, which is that popular discontent dies down, looks increasingly like a pipe-dream. As we have seen, the public is suffering in ways which are very real, but are not readily apparent in the data used by policymakers. This is leading those who take the key decisions into a position of genuine bewilderment – the data at their disposal simply does not tally with the popular mood, leading them to the false assumption that it is the public (rather than the data) which are wrong.

If the public do not back down, the other way to restore smooth relations between governing and governed would be for the elites to reform themselves. Since this would require significant relinquishment of wealth and power, this seems an unlikely policy to be adopted by an incumbency whose principal characteristics include arrogance and greed. Reform is rendered even less likely by the false comfort that the establishment seems to derive from an over-optimistic reading of the economic situation.

Marie Antoinette’s famous remark – that, if people are without bread, “let them eat brioche” – is probably apocryphal. But the point of the anecdote is that she was wholly ignorant of the circumstances of ordinary people, and this does seem to have been the case.

Today’s policymakers seem to be being lulled into similar complacency by economic data flattered out of all reality by the practice of mortgaging the future in order to inflate the present.

If the public are not going to back down, and the elites are determined to hang on to all of their power, wealth and privileges, the odds on social unrest may be pretty high.

Ultimately, this never does anyone much good. The noble aims of the French Revolution led directly to the Committee for Public Safety and “the terror”, with a wrought-iron “tree of liberty” sitting in mute irony beside the guillotine in the centre of every sizeable town. The Russian Revolution led to Bolshevist rule and Stalinist purges.

The only way of averting unrest may be for the elites to awaken to the causes of popular discontent, and implement far-reaching reforms. This is not going to happen unless their complacency over the economy can be punctured. If that happens, then they might switch from denouncing “populism” and turn instead to tackling the root causes of popular discontent.


#85. Perfect Storm gets nearer


If you have read Life After Growth (2013 and 2016), or before it Perfect Storm (2011), you will be familiar with the thinking on which the theory of surplus energy economics is based. Though the next article here was to have been a rescue plan for the British economy, it seems more important to update you on surplus energy economics.

My perception is that things are starting to stir, and that the climate is becoming much more receptive to ideas which challenge the traditional interpretation of economics.

What’s happening now?

Though less than six years have elapsed since Perfect Storm, a great deal has changed. Back in 2011, many found it disconcerting that the head of research at a major City institution would put his name to a report stating that a tightening of the energy equation might be bringing 200 years of economic growth shuddering to a halt. Though there were exceptions, much of the mainstream response varied between the dismissive and the derisive. Many, I felt, did not want to accept an analysis which would challenge their fundamental assumptions, as well as predicting an end to a relatively satisfactory state of affairs.

Now, though, this is changing – in two main ways. First, if the Perfect Storm thesis had been wrong, we should know by now, because the economy should be growing strongly, indebtedness should be decreasing as we implement the lessons learned so painfully in 2008 and, above all, there should have been a return to normality.

Instead, we have “secular stagnation”, where such growth as does occur reflects nothing more than the spending of borrowed money. Debt continues to escalate, and the extreme abnormality of ZIRP and other forms of monetary manipulation is doing a great deal of harm. (Even if rates creep up a little, by the way, we will remain a very long way from normality).

Second, economists are now starting to question their prior certainties, with some members of the profession prepared to admit that they may have got it wrong. The credibility of economics itself is in the spotlight.

In short, the economy is moving on in ways that refuse to conform to conventional theory, but bear a closer resemblance to the surplus energy interpretation. The thesis that the real economy would stumble, and that we would go on driving an ever-wider and more dangerous wedge between the “real” and “financial” economies, does seem to be happening.

What is Surplus Energy Economics?

Very briefly, SEE says that the economy is an energy system, not a monetary one. Prosperity is determined by surplus energy – that is, the energy available after the deduction of the energy which is always used up whenever we access energy.

Our entire history can be seen in this way. As hunter-gatherers, all the energy that people obtained from food was consumed obtaining that food, so there was no surplus, no economy and no society.

Agriculture was the “first great breakthrough” because it created the first energy surplus. Put simply, the greater efficiency of farming compared with hunter-gathering, plus the use of animal labour, enabled twenty people to be fed by the labour of nineteen, freeing the twentieth to do other things. This first energy surplus was small, and most people continued to undertake subsistence activities. But there was now an economy of sorts, and a society developed in parallel with it. People could now, for the first time, invest, sacrificing current consumption to create capital assets (such as barns, bridges, agricultural implements and rudimentary workshops) which would improve their lot in the future.

A vastly bigger energy surplus was created when we learned to tap fossil fuels, such as coal, oil and natural gas. This triggered two centuries of exponential growth, not just in economic output, but in population numbers and energy consumption as well. So sophisticated have economies become that, most notably in the West, very few people are engaged in producing food.

The end of growth?

For decades, people have speculated about the relationship between exponential growth and a finite planet. This debate rages on, but the balance is tilting, in two very obvious ways.

First, we are discovering the limitations of the earth as an ecosystem and, second, the surplus energy which has driven growth in economic output and population numbers is coming under mounting pressure.

Where fossil fuels – still well over 80% of our energy consumption – are concerned, two factors are in play. Depletion is robbing us of the gigantic, ultra-low-cost sources of energy which hitherto powered economic growth. Technology is endeavouring to offset this, both increasing the efficiency with which we access conventional fuels, and enabling us to tap energy from renewable sources.

Technology will doubtless continue to progress, but we are in danger of complacency over technological solutions. Renewables still account for barely 3% of global energy consumption, and no-one has yet worked out how to power a 747-size jet using renewables, or how to extract 1 tonne of ore from 500 tonnes of rock without using fossil fuels.

We should be optimistic about renewables, but also realistic. Renewables can supply energy more cost-effectively than fossil fuel sources discovered and brought on stream today. But my interpretation of the thermodynamic balance is that renewables are not going to take us back to an age of vast, low-cost, high-surplus energy from giant fields.

Measuring the state-of-play

If the economy is fundamentally an energy system, we need to assess our situation using measures which are energy-based, not financial. One such measure is EROEI (Energy Returns On Energy Invested). Another is ECoE (the Energy Cost of Energy).

I have long postulated an ECoE curve which is trending upwards relentlessly. I want to be quite clear about the lack of available data, which reflects a lack of financial support for research. The trend ECoE curve used here has been developed and refined over several years, and is subdivided by fuel and location. The system I use is called SEEDS (the Surplus Energy Economics Data System). It can only be a “best estimate”, but I derive encouragement from its seemingly good fit with what is happening to the economy.

This overall curve suggests that ECoE has been on a rising trend since the 1960s. Initially, increases were pretty modest, with ECoE increasing from 1.2% in 1970, via 1.9% in 1980 and 2.8% in 1990, to 4.2% in 2000. But, because this is an exponential progression, the rate of increase is rising markedly. My estimate for trend ECoE in 2010 is 6.4%, and this is projected to rise to 9.6% by 2020.

In short, we have now moved into territory where ECoE, once a number so small that we could afford to ignore it, starts to destroy the capacity for growth.

The concept of ECoE is best understood as “economic rent”, a charge levied on the economy by the limitations of the earth’s resource set. It is not the same as financial cost, because cost is a closed-system – money spent by, say, a company developing an oil field or a solar project, is a cost to that company, but an income to others, such as contractors, suppliers and employees.

Rather, ECoE is an economic rent, levied by resource limitations but not accounted for when we measure the economy. It can be thought of as a restriction of choice, forcing us to spend more on energy and, therefore, less on other things. It is in some ways analogous to taxation – tax does not reduce gross income, but it forces the recipient to use some of it in a way that might not be his or her preference, reducing how much can be spent in ways that the person might like.

In case this seems remote and theoretical, ECoE is already, and noticeably, eating into our discretionary incomes. As a direct corollary of rising ECoEs, the cost of household essentials has long been rising much more rapidly than general inflation, undermining how much of our incomes we can spend as we choose. I have explained before how prosperity is not a function of how much money someone has, but of how much choice (“discretion”) that person has after paying for essentials.

Finally, ECoE is only tangentially related to the current price of energy to the end-user. As prices soared between 2000 and 2007, and remained high until 2014, massive investment was poured into energy supply. This created a glut which, as well as driving prices down sharply, resulted in a slump in investment. In due course – and depending, of course, on demand – this dearth of investment could drive energy prices sharply higher. But pricing, ultimately, is a cyclical process acting as “noise” around the trend determined by the interplay of depletion and technology.

What next?

If the surplus energy interpretation of the economy is correct, growth should continue to prove elusive. But our system is so predicated on growth – a topic for another article – that we cannot accept even stagnation, let alone adjust to decline.

So we have been faking growth by borrowing. By 2008, the debt mountain had become so big that we could no longer afford to pay a normal rate of interest on it, so the authorities adopted ZIRP (zero interest rate policy) in order to prevent the economy being engulfed. But ZIRP, and other forms of monetary manipulation, cannot resolve the situation, and have their own costs. At zero- or near-zero rates, the economy cannot function normally, and it certainly cannot provide for the future, which is why huge deficits are now imperilling pension provision.

In theory, we might go on faking growth for many more years yet, and I’m pretty sure the authorities will be mightily tempted to try. But this would result in a further escalation of debt, which would also mean that raising interest rates significantly – let alone restoring them to something resembling normality – would become out of the question (which may already be the case). Comparing 2020 with 2015, and taking inflation out of the equation, the world seems likely to grow its GDP by close to $10tn, but to add at least $50tn to its $151tn non-financial debt mountain.

If (or, rather, when) debt escalation reaches crisis point, some kind of write-off might be tried, unless the authorities decide to unleash high inflation in an attempt to destroy the real value of debt. Inflation, which has been described as the “hard drug” of our economic system, can very rapidly get out of control.

So here we have some pointers to the future – debt escalation, and/or hyper-inflation, both of which would be insane choices, but neither of which are beyond the short-termism of the political class.

Ultimately, and whichever folly is chosen, faith in fiat currencies is likely to collapse, to which I will only add that there are already at least two major currencies that I, for one, would not want to hold. In the normal course of events, inflation strips money of its value, but this tends to be gradual – we have little widespread (though plenty of local) experience of what happens when a fiat currency falls apart.

People cannot be expected to accept any of the post-growth consequences described here with a resigned shrug. They are not doing so now – instead, and naturally, they are beginning to blame, and repudiate, established political leaderships, and this was the most significant trend to emerge in 2016.

If the economy – and, in the first instance, the financial system – does start to implode, governments are highly likely to resort to coercion, spouting precious claptrap about “the national interest” as they try to maintain their hold on power.

Though the financial and real economies are different concepts, it is impossible for finance to collapse without inflicting grave damage on the real economy.  Our economy is essentially fragile, depending on attenuated systems, most obviously for payment and clearing. If you try to envisage running an economy without payment systems, banks, insurance or even trusted money, in a climate in which no one knows who owns or owes what, you will appreciate that the real economy is a hostage to finance.

Meanwhile, I’m continuing to refine the SEEDS system, with a new version now almost ready for roll-out. Clearly, it would help if this system, like the broader interpretation of the economy as an energy equation, reached a mainstream audience. My belief is this will happen – as the scale of our predicament, and the shortcomings of conventional interpretations, become ever more obvious, there will emerge a pressing need for a new understanding.

Governments are unlikely to adopt this, though trans-government organisations might. It seems likeliest that a major financial corporation, seeking commercial advantage from “getting there before the competition”, might be the first big player to act.

How things may unfold, and when, remains conjectural – but I do feel that I now have more than enough material for a sequel to Life After Growth.

#84. Looking ahead


It is customary to use the start of the year to set out some forecasts. Though I’ve not previously done this, I’ve decided to make an exception this time – mainly because I’m convinced that the wrong things are being forecast.

Central forecasts tend to focus on real GDP, but in so doing they miss at least three critical parameters.

The first is the relationship between growth and borrowing.

The second is the absolute scale of debt, and our ability to manage it.

The third is the impact of a tightening resource set on the real value of global economic output.

Most commentators produce projections for growth in GDP, and mine are for global real growth of around 2.3% between 2017 and 2020. I expect growth to slow, but to remain positive, in countries such as the United States, Britain and China.

It’s worth noting, in passing, that these growth numbers do not do much to boost the prosperity of the individual, since they correspond to very modest per capita improvements once population growth is taken into account. Moreover, the cost of household essentials is likely to grow more rapidly than general inflation through the forecast period.

What is more intriguing than straightforward growth projections, and surely more important too, is the trajectory of indebtedness accompanying these growth estimates. Between 2000 and 2015, and expressed at constant 2015 dollar values, global real GDP expanded by $27 trillion – but this came at the expense of $87 trillion in additional indebtedness (a number which excludes the inter-bank or “financial” sector). This meant that, in inflation-adjusted terms, each growth dollar cost $3.25 in net new debt.

If anything, this borrowing-to-growth number may worsen as we look forward, my projection being that the world will add almost $3.60 of new debt for each $1 of reported real growth between now and 2020. On this basis, the world should be taking on about $5.8 trillion of net new debt annually, but preliminary indications are that net borrowing substantially exceeded this number in 2016. China has clearly caught the borrowing bug, whilst big business continues to take on cheap debt and use it to buy back stock. Incredible though it may seem, the shock of 2008-09 appears already to be receding from the collective memory, rebuilding pre-2008 attitudes to debt.

On my forecast basis, global real “growth” of $8.2 trillion between now and 2020 is likely to come at a cost of $29 trillion in new debt. If correct, this would lift the global debt-to-GDP ratio to 235% in 2020, compared with 221% in 2015 and 155% in 2000.

Adding everything together, the world would be $116 trillion more indebted in 2020 than in 2000, whilst real GDP would have increased by $35 trillion.

Obviously, this is not a sustainable way to behave. Taking individual economies as examples, the United States would have added $30 trillion in debt for $6 trillion in growth. Britain would have grown by £620bn but borrowed £3,340bn in the process. China’s debt would have increased by $32 trillion for a $12 trillion gain in real GDP.

Moreover, these numbers relate only to formal debt, excluding the financial sector whilst taking no account of quasi-debt obligations such as pension commitments. These are likely to become ever more onerous, particularly in those Western economies in which the population is ageing.

Pretty obviously, we are deluding ourselves where growth is concerned, spending borrowed money and calling this “growth”. Someone does not become more prosperous by increasing his or her overdraft and then spending it – he or she merely looks more prosperous to those who gauge prosperity by looking only at a lifestyle impression conveyed by consumption.

Meanwhile., the global resource set continues to tighten against us, adding to the “economic rent” which we experience, but fail to measure. According to the SEEDS system, the trend energy cost of energy (ECoE) cost us 4% of GDP back in 2000, but now accounts for 8.2%, and will reach 9.6% by 2020. Adjusting real GDP for this indicates that, between 2000 and 2015, the amount of debt added for each “growth” dollar was $3.80, not $3.25 – and that, from here on, each $1 of growth is going to cost us over $4.70 in new borrowing.

Altogether, what we are witnessing is a Ponzi-style financial economy heading for end-game, for four main reasons.

First, we have made growth dependent on borrowing, which was never a sustainable model.

Second, the ratio of efficiency with which we turn borrowing into growth is getting steadily worse.

Third, the demands being made on us by the deterioration of the resource scarcity equation are worsening.

Fourth, the ageing of the population is adding further strains to a system that is already nearing over-stretch.

One thing seems certain – we cannot, for much longer, carry on as we are.


#83. Backlash, part 2


These are disturbing times for those of us who believe in free market economics, and are followers of Adam Smith. After more than three decades in which the West has been governed by regimes claiming adherence to the principles of the market, the economy is locked into “secular stagnation” and massively in debt, and the public is in the process of repudiating incumbent regimes.

How have things gone so horribly wrong? Have events proved our faith in the virtues of competitive markets to be misplaced?

The reality is that the principles of the free market economy have not failed. Rather, these principles have not been followed. The regimes that are now being rejected by the voters have never paid more than lip-service to the principles associated with Adam Smith.

There have been two critical departures from these principles. First, governments have failed to break up the domination of key sectors (including electricity, gas, water, cell-phones and the internet) by small numbers of companies. Second, there has been a failure to enforce honesty and transparency. The principle mechanism of the market – free and fair competition – has therefore failed to operate.

At a time when “capitalism” is being condemned by people who are in fact victims of corporatism, there is a pressing need to restate the case for market economics, distancing it from those who have stolen its language to clothe a creed of selfish cynicism which is now ending in abject failure.

An exercise in failure

That things have gone wrong is surely undeniable, and is evident in two critical ways.

First, the public across the West are in open revolt against the self-styled “liberal” elites. Though widening inequalities, and the sheer arrogance of self-serving regimes, have contributed to this anger, a critical motivation is economic. Real wages have declined steadily, even when measured against official inflation, and even more markedly when set against the cost of essentials – whilst secured and unsecured household debts are at uncomfortably high levels.

In Britain, for example, real wages have been declining since 2007, and are projected to go on falling throughout an official forecast period which runs to 2021. In the United States, middle class real incomes have declined, arguably over an even longer period. Italian real GDP is now 12% lower than it was in 2007. At the same time, security of employment has deteriorated, and millions have been pushed into a “precariat” whilst millions more are now described as “JAMs” (“just about managing”). This is a track-record of failure.

Second, governments and central banks have contrived to run near-zero interest rates for more than seven years. This, too, is evidence of failure, because negative real rates are not consistent with a healthy economy in which investors can earn returns, and provision for retirement can be accumulated. Again, Britain typifies this malaise. Government continues to borrow heavily, despite sustained “austerity”, whilst official forecasts link projected growth to an assumed further expansion in household credit. Immediately after the most recent cut in interest rates, deficits in pension schemes were reported to be £945bn, more than 50% of GDP.

As well as crippling pension provision, ZIRP – zero interest rate policy – has destroyed returns on capital, created a massive bubble in the value of assets, saddled the economy with enormous debts, stymied the necessary process of “creative destruction”, and failed to deliver the stimulus which was supposed to push the economy out of “secular stagnation”.

Between 2000 and 2014, each dollar of nominal global “growth” came at a cost of $2.50 in additional debt. Even this ratio understates the problem, since “growth” has really amounted to nothing more than the spending of borrowed money. The ratio of borrowing-to-growth, which was 2.2:1 before the GFC (global financial crisis), has been 2.9:1 since then.

The dependency on borrowing has become so absolute that it can, without hyperbole, be stated that the global economy has been transformed into a giant Ponzi scheme – and such systems can only ever end badly.

This is failure on a gargantuan scale.

A question of blame

This situation presents a stark choice between two possible explanations.

The first is that the implementation of market-based policies has been an abject failure.

The second is that the supposed market-oriented policies of the Western establishment have, in reality, been no such thing.

To resolve this issue, the obvious starting point is with Adam Smith, the Scottish economist rightly regarded as the pioneer interpreter of the market.

It was Smith who stated that competition is the dynamo that drives the economy, not just in goods and services, but in employment and investment as well. He asserted that competition is so important that any departure from it is damaging.

In the story of economics as Smith tells it, the villains are monopolists, cartels, and anyone else seeking to undermine competition. Any such interference, Smith says, is “a conspiracy to defraud the public”.

The incentive for corrupting the market is, Smith says, self-evident. By ensuring best value for customers, competition obviously limits profitability. Accordingly, Smith makes it abundantly clear that markets need to be kept competitive, fair and honest, despite the incentives which promote malign interference. This is a pretty good description of the regulatory function. Far from proposing an economic equivalent of an unfettered free-for-all, then, Smith is an advocate of vigilant regulation, a clear implication being that only the State can provide it.

It is worth remembering that the great man was born in 1723, and died in 1790. This was an era when government did very little. In Smith’s Britain, time-zones differed even between London and Bristol. There was no income tax, and no national police force. There was certainly no welfare state, very much a twentieth-century innovation. Obviously, Smith could only have looked puzzled if he had been asked about “the public sector”. It simply didn’t exist – and wouldn’t, for more than a century after his death.

The Adam Smith whom we meet in his writings – the advocate of competition and avowed enemy of monopoly and other market distortion – becomes a very different (and lesser) figure in the policies advocated by “the neoliberal right”, and followed by governments since the 1980s.

Now he is an inveterate opponent of “the public sector”, a cheer-leader for “the private sector”, an advocate of “deregulation”, a believer in minimal government, and the high priest of “law-of-the-jungle” economics.

It is a massive transformation.

In plain English, it is simply piffle.

Of course, Smith is not the only victim of the ideological air-brush – Keynes is claimed as an advocate of deficit stimulus in adversity (which indeed he was), but his matching tenet (that governments should run a surplus if the economy threatens to overheat) is seldom if ever mentioned. In the hands of “semi-Keynesians”, the great man becomes a cardboard cut-out, forever demanding stimulus and unconcerned, presumably, about exponential growth in public debt.

But it is on the misrepresentation of Smith that the self-serving creed of “neoliberal” economics bases its flimsy case.

Nonsense compounded by greed

If we once accept Smith falsified into the arch advocate of unfettered private ownership and deregulation, much else follows, particularly if the simulacrum of Keynes can be invoked as well whenever the system needs to be juiced-up with fiscal deficits and cheap money.

For starters, if The Public Sector is A Bad Thing, privatisation follows, not just of businesses like car manufacturing and airlines (which arguably should never have been in state hands in the first place), but of public services as well. The proven concept of the mixed economy is abandoned. Whilst it is not quite the case that The Private Sector can never do anything wrong, the presumption is of innocence in the absence of overwhelming proof to the contrary.

Though lip-service is paid to competition, comparatively little is actually done about it, and the probity required by the real Smith’s concept of the honest and transparent market becomes at best a ‘desirable, but not essential’ characteristic. This is a vision of the market as “law of the jungle”, “red in tooth and claw”, “caveat emptor” and “the devil take the hindmost”. It also follows that deregulation is a public good, and that banks’ managements, not regulators, are the best judges of shareholder interest.

Above all, this is a mind-set. Though the tenets of the falsified Smith can be pulled apart by a first-year student, the attitude is that “market forces” are sovereign, bad outcomes for some or many are just the luck of the draw, the future is irrelevant, debt is irrelevant as well, integrity matters little, inequality is “natural” rather than contrived, and profitability is the sole arbiter of effectiveness.

From this nonsense, almost everything else follows. There is no contradiction between promoting consumption and undermining wages, because debt can fill the gap so long as deregulation keeps the taps open. Buying $1 of “growth” with $2.50 (or much more) of new debt is fine, because debt isn’t very important anyway. Ethics become optional, and corporate misbehaviour, where it cannot be ignored, can be explained away as “miss-selling” (which sounds no more serious than misplacing an umbrella) whilst, if penalties really must be meted out, the hapless shareholders can always be punished. The bosses are almost untouchable.

One of the most tragic consequences of “neoliberalism” has been the relentless degradation of business ethics. Increasingly, only “the eleventh commandment” (“don’t get caught”) is observed, and even this hardly matters if your control of the state renders you but all immune to sanction. Anyone who has read Adam Smith knows that honesty and transparency are indispensable characteristics of a properly functioning market.

A predictable consequence of “free-for-all” economics is that it has fostered market concentration, particularly in sectors like water, gas, electricity, cell-phones, the internet, retail banking and, in America at least, air travel. Anyone truly convinced by Adam Smith’s interpretation of the market would long since have demanded break-ups, so that no business in these sectors should enjoy more than, say, 10% or 15% of the market.

This, of course, is one of the bits of Smith that his falsifiers conveniently forget. Many big corporates have more than enough political clout to ensure that the very idea of “trust-busting” is out of the question, the preference being for “regulators” whose powers are necessarily very limited in comparison with competitive pressures. Wherever we look in some of the most important sectors of the economy, we see a market concentration that impairs drastically the free choice of customers, and delivers profitability far in excess of competitive market norms. The acceptance of this concentration by government has been a huge betrayal of the principles of the competitive market.

The case must be made

The public need to be told that those who claim to speak loudest for “the market” have in fact been its biggest betrayers. The case needs to be made for competition as the servant of the many, not the hollow slogan of a manipulative minority. This requires making the case, too, for regulation and for the primacy of ethical behaviour, and emphasising that the system at fault is not “capitalism”, but corporatism.

If this case is not made, we face two distinct risks. The first, less likely danger is that the current elites survive, perhaps by using ever greater coercion to maintain their power and wealth. The greater danger is that an infuriated public turns instead to the same collectivist philosophy which failed so spectacularly in the Soviet Union and its satellites.

Believers in the principles of the free market should feel angry, not apologetic, about the debasement of their beliefs by a self-serving elite. They should side with the public, and explain that the competitive market offers a future far better than the siren call of collectivism, or the tawdry manipulation of corporatism.

It is to be hoped that what emerges from the popular backlash is reform that does three main things.

First, it must insist on competition, breaking up companies whose market shares inhibit competition.

Second, it must demand the highest standards of honesty, transparency and accountability in business, reinforcing this with appropriate sanctions.

Third, it must block the “revolving doors” between government and corporate wealth.

If these reforms are made, the competitive market can restore prosperity.

If they are not, a populist-collectivist future looms.

#82. Backlash, part 1


Following “Brexit” (the British referendum decision to leave the European Union), the election of Donald Trump as President of the United States is another severe blow to the self-styled “liberal elites” that have governed the West since the early 1980s.

In both instances, voters defied the wishes of the vast majority of the political, corporate and financial elite, and made decisions that “experts”, and much of the mainstream media, regarded as dangerously misguided.

These outcomes can be baffling, until one point is noted – each establishment endorsement of Hillary Clinton delivered more votes for Mr Trump, just as each political, corporate or “expert” speech supporting “remain” won more votes for “leave”.

What is happening is a revolution, in the sense that society is engaged in the rolling repudiation of established elites. The significance of this is obvious, even though interpretation is made more difficult by an establishment mind-set of denial that is reflected, too, in much of the mainstream media.

Understanding the popular rejection of the elites is complicated, and this article has been through far more “rough drafts” than most. The best course of action is to set out a central point of view, and then discuss the reasoning behind that view. The focus here is on political change – part 2 will explore the economic implications.

The tide of events

We need to start by being clear that “Brexit”, and the election of Mr Trump, are not freak events, and that they were completely predictable. To those of us who have expected a popular backlash against the elite, the only real surprise is how long it has taken.

Just as these choices are not aberrational, neither are they reversible. Much of the British establishment hopes that someone – Parliament, the courts, the Scots, but even Batman and Robin would do – can either stop “Brexit” altogether, or water it down into meaninglessness. If this did happen, public anger would be likely to explode. Likewise, many in the United States hope that office will moderate Mr Trump. But, if the new president does not do most of what he has said he will do, voters will elect somebody else who will.

With hindsight, the 2008 global financial crisis (GFC) was the high-water-mark of the “liberal elites”. Incumbent governments succeeded in preventing the collapse of the banking system, but, in the process, surrendered so much of their political capital – in other words, their credibility with the public – that their demise became inevitable.

Historical inevitability?

Are the “liberal elites” due for repudiation by the public? History suggests that three conditions are required for “regime change” of this nature.

First, an incumbent regime has to be seen as self-serving and exploitative.

Second, it needs to be regarded as arrogant, complacent and out of touch with the general population.

Third, it needs to be seen as having failed.

The public will tolerate self-enrichment, arrogance and incompetence, or even two of these in combination – but will not tolerate all three.

As a rider to this, regimes due for the chop are usually the last to know, and react to a popular challenge by retreating into denial. In deriding the population as misguided dupes, blaming “populist” agitators, and dismissing defeats as just “a little local difficulty”, today’s establishments are doing nothing that wasn’t done by Communist apparatchiks in 1989, Tsar Nicholas II in 1917 or the court of King Louis XVI in 1789. For this reason, we need to ignore the protestations of the elites, and disregard much of what is said in the mainstream media.

Two valid indictments

On two of the three “criteria of unfitness” listed above, incumbent regimes have already been convicted in the court of public opinion. The case against the elites on these issues does seem so self-evident as to need little comment.

Where being “self-serving” is concerned, the evidence is surely overwhelming. In terms both of income and of wealth, the gap between the rich and everyone else has widened dramatically. There is scant evidence that this is linked to merit, because “the system” has played far too big a role in the enrichment of a minority for this defence to be valid.

Big corporations are perceived by the public to have become too powerful, in that they stifle competition, interpret the tax regulations to suit themselves, treat both customers and employees with disdain, and exert undue influence over the political process.

The “revolving doors” between government and business have not been blocked, and the public is entitled to be more than suspicious of the generous remuneration of former politicians and administrators through consultancies and the “lecture circuit”. It defies popular credibility that the burblings of politicians in their dotage, or even their consultancy services, are remotely worth the huge sums paid to many of them. This being so, the suspicion is fostered that the enrichment of retired government figures is linked to influence. This inference may be unfair, of course – but appearances are often decisive.

The second pre-condition for repudiation, too – which is that the elite has become arrogant – also seems beyond dispute. This has been evident, first, in their imposition of their own values on the public through increasingly coercive enforcement of what is known as “political correctness”. Governments are entitled to take a moral lead on issues, but go too far when they start denying the right of free expression to those who disagree.

Second, there have been all too many instances of what looks like systemic unfairness. Bankers are rescued, but steelworkers, shop employees and pension savers are not. The vigour with which benefits cheats are pursued contrasts with very few prosecutions of wealthy tax-evaders. Behaviour treated as “fraud” when engaged in by individuals or small businesses seems to become “miss-selling” when practised by big companies. When corporations break the rules, it is always the shareholders, and seldom, if ever, the responsible executives, who are held to blame.

Policy has favoured the wealthy, both in inflating asset values and in failing to tax “unearned” capital gains more demandingly. Little is seen to be done to close tax loopholes from which only the wealthy benefit, whilst governments seem loathe to tackle “offshore financial centres” which are widely regarded as tax-havens. The latter would, in fact, be pretty easy to implement.

On the charges of being self-serving and arrogant, then, the case seems to be unarguable. What about the third, decisive charge – that of failure?

An exercise in failure?

Regimes which are both self-serving and arrogant can remain in power if they deliver economic success – the public may be prepared to accept a great deal of downside if this is seen as the price of growing prosperity. The public mood today, however, seems unconvinced by the elites’ claim that they are good at managing the economy to the collective benefit.

There are really two dimensions to this issue. First, has the validity of the economic principles and policies of the elites been proven by experience? Second, have ends justified means? In the current instance, this question re-frames as “has improvement in the general economic conditions vindicated the management of the incumbent regime?” The distinction here is that the public may be prepared to tolerate current hardship if they believe that this will result in longer-term improvement (an obvious example being public support for austerity during war). What they will not tolerate is unfairness that does not also serve the general well-being.

And this, essentially, brings us to one core issue – “globalisation”.

Globalisation – vision, or scam?

If “globalisation” simply meant spreading the benefits of development to emerging market economies (EMEs), few would have much reason to complain. The popular criticism of “globalisation” as it has been practised is that, far from seeking global development, it has been nothing more than a grubby exercise in profiteering through the reduction of wages.

Globalisation, its critics say, depresses wages at home, both by exporting well-paid jobs and by allowing immigrants to compete for less-skilled work. This accusation might not have been true had the aim of globalisation been to spread the benefits of development by boosting both production and consumption in the EMEs.

In fact, this was never the objective – the aim of globalisation, as it has been practised, was simply to reduce the cost of production, widening margins on goods and services still sold to Western consumers.

This has had two detrimental effects on the global economy. First, it has failed to grow demand in the EMEs, something which is necessary for balanced development. Second, it has driven debt levels sharply higher, initially in the West, but latterly in the rest of the world as well.

The linkage between globalisation and the escalation of debt is quite simple – with wages under downwards pressure, consumption could only be sustained by encouraging Western consumers to borrow the difference. A cynic would argue that this is why, over a period of decades, banking regulation has been relaxed, whilst credit has become ever cheaper.

On the facts

It would be hard to deny that the combined effect of regulatory and monetary policy has been to supply the debt needed to sustain consumption in the face of stagnant or declining wages.

This process of using borrowing to support consumption is evident in the data. Between 2000 and 2007, global debt (excluding the inter-bank or “financial” sector) rose by $38 trillion, or $2.20 for each $1 of nominal growth in GDP. Between 2007 and 2014, debt increased even more rapidly, growing by $49 trillion, or $2.90 for each growth dollar.

Even the “growth” denominator is suspect, of course, amounting to nothing more than the spending of borrowed money.

Closer analysis shows that the escalation in debt has taken place in distinct stages. Between 2001 and 2008, the brunt of new borrowing was borne by Western households, whose indebtedness increased from $16 trillion to $34 trillion. These households’ ability to borrow was maxed-out by 2008, despite the use of ever-riskier lending techniques (such as sub-prime, and the on-sale of packaged securities), which involved separating risk from return in ways that previous regulatory norms would not have facilitated.

Since 2008, the further increase in global debt has come from Western governments, and from the EMEs. The retreat from the borrowing-based “boom” of 2001-08 impaired tax revenues whilst increasing welfare demands. This, and the need to rescue an over-extended banking sector, forced Western governments to increase their debt from $26 trillion in 2007 to $46 trillion in 2014. Meanwhile, EME borrowing has surged, with China alone seeing its debt total rise from $7 trillion in 2007 (and just $2 trillion in 2000) to well over $30 trillion today.

Because, by 2008, servicing this global debt mountain – let alone ever repaying it – had become all but impossible, the authorities responded with ultra-low interest rates, pursuing ZIRP (zero interest rate policies), flirting with NIRP (negative rates), and even contemplating outlandish ideas such as “helicopter money” and the banning of cash.

All along, ordinary people have suffered, with wages falling behind even official inflation, let alone the cost of essentials. Though net household borrowing in the West effectively ceased in 2007, debt levels still remain far higher than in 2001. Some of the adverse side-effects of ultra-low rates are now becoming apparent, most conspicuously in the emergence of dangerous deficits in pension provision. The wealthy alone have prospered, most conspicuously from the inflation of asset values, and from generous tax treatment of capital gains created by monetary policy. Young people have particular reasons for feeling aggrieved at a system that has increased costs (such as housing) whilst exporting well-paid jobs.

Justified responses?

If it is obvious – to everyone except the elites themselves, of course – that what is happening is a global repudiation, not a series of isolated events, it is equally obvious that solid logic informs the popular backlash. Self-serving, arrogance and a failure to promote the general good are valid accusations against the “liberal elites”.

For those elites, denial is as pointless as it is predictable. What is needed now is thorough-going, self-denying reform, whilst the scope for implementing reform still exists.

This does not, of course, mean that the “populist” agenda is the right one. In particular, protectionism is the wrong answer to the right question. A switch from monetary to fiscal stimulus does make sense, but isn’t as easy as it may sound, whilst the likelihood of higher taxes on the wealthy is, in itself, nothing more than the swinging-back of a political pendulum that had gone a very long way in the opposite direction.

In part 2, we’ll look at how the populist revolution could improve the economy – but only if its leaders and supporters are clear about what works……..and what doesn’t.