#231. Short and sharp


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

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

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

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

That’s understandable – these are deeply worrying times.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Inferences, of course, are a very different matter.

The outlook in brief

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

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

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

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

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

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

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

These forecasts are summarised in fig. 1.

Fig. 1

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

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

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

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

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

The basis of projection

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

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

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

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

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

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

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

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

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

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

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

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

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

Three main conclusions emerge from this analytical approach.

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

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

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

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

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

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

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

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

Fig. 2

#230. The rule of three


In the autumn of 2008, as the full seriousness of the global financial crisis (GFC) became apparent to investors, markets fell with dizzying speed.

Something very similar happened in the first quarter of 2020, when it became clear that the coronavirus pandemic had severe implications for the economy.

Perhaps the single most striking aspect of the current situation is that markets haven’t – yet, anyway – gone into a tail-spin.

This might seem surprising, given the take-off in inflation, pressures on the supply of energy and other commodities, and a pretty general recognition that the interest rate cycle has turned.

There are, to be sure, what we might call ‘pockets of concern’, of which the obvious examples are the “tech” sector in America, and the value of GBP. These exceptions aside, though, market responses to the current crisis have been restrained, whilst property price bubbles haven’t burst.

As you may know, this site does not provide investment advice, and must not be used for this purpose.

But we’re entitled to look at the general behaviour of markets as a barometer of sentiment ‘at the sharp-end’ of opinion. Thus far, it’s fair to say that markets have behaved like the dog that didn’t bark “in the night-time” in the famous Sherlock Holmes story about stolen racehorse Silver Blaze.

As you may also know, the view here is that surging inflation signifies a fundamental tipping-point, a moment at which the reversal of prior growth in material prosperity moves from unconventional theory to inescapable fact.

If that is indeed the case, the outlook for the financial system is grim, because the entirety of the system is predicated on the presumption of ‘perpetual growth’.

“Won’t get fooled again”?

Why, then, are markets exhibiting comparative insouciance in the face of seemingly-grave economic trends?

There are, in essence, two main explanations for this relative calm. One of these can be labelled “won’t get fooled again”. The other is a belief that all of the bad news is already priced in to the markets.

The “won’t get fooled again” explanation is that investors lost huge amounts of money in the third quarter of 2008, and again in the first quarter of 2020, only to find out that the World hadn’t, after all, come to an end.

Investors seem determined not to fall for this ‘end of the World’ stuff for a third time.

Given that we should never underestimate the role of psychology in the markets, this is a persuasive argument.

The “already priced-in” explanation is slightly more complicated. For starters, falls in the NASDAQ and in GBP can be portrayed as isolated cases.

The prices of American “tech” stocks had, the argument runs, been inflated to absurd extremes, so what we’re seeing now is nothing more than a long overdue correction towards reality. There’s a precedent here, of course, making a ‘dotcom2’ bust a plausible thesis.  

An equally persuasive case can be made that Sterling, like “tech”, is a special case. It’s hard to deny that the British economy has very glaring weaknesses, and the market judgement seems to be that these weaknesses are not replicated, to anything like the same extent, in other Western countries.

This isn’t the place for an assessment of the British economy, but the broad view taken here is that, whilst the UK situation, as measured by SEEDS, is indeed pretty dire, other economies have broadly equivalent problems of their own.

The real question-mark is whether the UK has what it takes to navigate the coming storm.

More generally, the market view seems to be that inflation, whilst clearly not the “transitory” phenomenon claimed until recently by the Fed, can nevertheless be prevented from running wild.

With the coronavirus crisis behind us, it is argued, ruptured supply-chains can now return to normality, and the monetary largesse poured into the economy to counteract “lock-downs” is draining from the system.

Where the war in Ukraine is concerned, there are two ways in which a calm market response can be explained. The first is that, after a period of adjustment, energy and other commodities previously sourced from Russia and Ukraine can be obtained from elsewhere.

A second, more cynical view is that we can already see the outline shape of a conclusion to the conflict. As war cools towards stalemate and settlement – and as the approach of winter demand peaks starts to concentrate minds – the trade freeze might begin to thaw, with Western policy turning out to be no more resolute over Russia than it was in Afghanistan.

Arguing along these lines, whilst rates might indeed rise to perhaps 3% or even 4%, we’re not heading into a re-run of the double-digit rates experienced in the late 1970s and the early 1980s.               

A darker perspective

If you’ve been visiting this site for any length of time, you’ll know that the interpretation of the economy set out here differs starkly from the orthodox view which continues to inform decision-making in government, business and finance. The surplus energy interpretation is summarised briefly here, and in greater detail here.

Once we understand that the economy is an energy system, and not a financial one, it readily becomes apparent that material prosperity is a function of the supply, value and cost of energy.

Within this matrix, the most important determinant is cost, referenced here as the Energy Cost of Energy.

ECoE refers to that proportion of accessed energy which is consumed in the access process, and is not, therefore, available for any other economic purpose.

Largely because of depletion, the ECoEs of oil, natural gas and coal have been rising relentlessly, pushing overall trend ECoE to ever higher levels.

This has pushed prior growth in prosperity into reverse, because prosperity is a function of the surplus (ex-ECoE) energy available to the economy.

As ECoEs rise, surplus energy shrinks, and prosperity contracts.

Important though they undoubtedly are, renewable energy sources (REs), such as wind and solar power, can’t push overall ECoEs back down to levels at which growth is possible. The average person in the West has been getting less prosperous over an extended period and, latterly, the same thing has started to happen in EM economies which, by virtue of their lesser complexity, have higher thresholds of ECoE-tolerance.

Energy transition, though undoubtedly imperative on economic as well as on environmental grounds, cannot stem – still less reverse – this prosperity-sapping trend.

The connections between ECoE and prosperity per capita in America, Britain and China are illustrated in fig. 1. Prosperity per capita turned down in the United States from 2000 and in Britain from 2004, and China is now decelerating rapidly towards its own inflexion-point.

Fig. 1

Meanwhile, the real costs of essentials are rising, primarily because the supply of so many necessities is highly energy-intensive. Examples include food, water, housing, infrastructure, the transport of people and products and, of course, energy used in businesses and in the home.

Accordingly, the scope for the consumption of discretionary (non-essential) goods and services is being squeezed. The SEEDS metric PXE – prosperity excluding essentials – is in decline even in countries (such as China) where top-line prosperity has yet to inflect (fig. 2).

Fig. 2

Depending on how we define “essential”, upwards of 50% of Western economies ranks as discretionary, a proportion reflected in activity, employment and profitability.

One implication of falling PXE is a decline in the value of those discretionary sectors which account for more than half of all the businesses whose shares are traded on the markets.

Another implication is that, as the gap between prosperity and essentials narrows, the affordability of mortgages (and of rents) declines, with adverse implications for property.

These negative tendencies in stocks and property can only be exacerbated by rises in nominal interest rates, even if real rates remain negative because inflation is rising more rapidly than nominal rates.

Denial nears denouement    

None of this is accepted by an orthodox school of thought which depicts the economy entirely in monetary terms, thereby dismissing the possibility of material constraints, and assuring us of the possibility of ‘infinite growth on a finite planet’.

Accordingly, policymakers have tried to counter energy downside with financial stimulus.

As you can see in fig. 3, this has seen liabilities – such as debts and other financial commitments – rise much more rapidly than prosperity. (It should be noted that the financial “assets” shown in fig. 3 are the systemic counterparts of the liabilities of the government, household and corporate sectors).

Fig. 3

Meanwhile, this process has created cosmetic “growth” in metrics such as GDP, because these metrics measure monetary activity rather than material prosperity.

With this understood, it becomes apparent that there has been a relentless widening in the gap between the ‘financial’ or proxy economy of money and credit and the ‘real’ or material economy of goods and services.

This creates an ultimately irresistible force tending towards the restoration of equilibrium between the two economies of money and energy.

Inflation is a logical concomitant of this process, because prices are the point of intersection between the monetary (financial demand) and the material (physical supply). This relationship is illustrated in fig. 4.

Fig. 4

The necessary conclusion of this dynamic is that a large proportion of the monetary claims embedded in the financial system cannot possibly be honoured ‘for value’ by a faltering underlying economy of material prosperity.

The process of excess claims destruction can take place either (a) through an inflationary degradation in the purchasing power of money, or (b) through a process of failure and default driven by a determination to use rate rises to prevent ever-worsening rates of inflation.

In practical terms, what this means is that we face a choice between untamed inflation or a ‘hard default’ slump, both in forward commitments and in asset prices, which are the corollary of the liabilities side of the value equation.

Perhaps the single most disturbing aspect of the present situation is rigid adherence to the fallacy that fiscal and monetary policy can deliver ‘growth in perpetuity’ despite worsening resource (and environmental) limits to expansion.

When governments (and others) assure us that we can “grow out of” current pressures on living standards, and that we can promote policies of “sustainable growth”, they are – perhaps in all good faith – making promises that the material economy simply cannot honour.

#229. In the Eye of the Perfect Storm – 2

The previous article set out what was intended to be a short but comprehensive guide to the economy understood as a surplus energy system. It’s been pointed out that, however comprehensive that report may be, it’s far from being “short”.

Here, then, is “the short version”. The intention is to make both versions available as downloads.


With economies stumbling, the cost of living rising at rates not seen in forty years, and world markets gripped by nervousness, there are two ways in which we can try to make sense of current economic turbulence.

We can, if we wish, see all of this as temporary – caused by the lasting effects of the pandemic, latterly compounded by the war in Ukraine – and assure ourselves that the ‘normality’ of continuous economic “growth” will return once these crises are behind us.

The alternative is to face facts.

Ultimately, the economy is an energy system, not a financial one, because literally nothing that has any economic value whatsoever can be supplied without the use of energy.

The vast and complex economy as we know it today was built on energy from coal, oil and natural gas, in a process whose origins can be traced to 1776, when James Watt completed the first really efficient engine for the conversion of heat into work.

Whenever energy is accessed for our use, some of that energy is always consumed in the access process. For much of the time since 1776, this Energy Cost of Energy (ECoE) declined, driven downwards by economies of scale, technological progress and a worldwide search for lowest-cost energy resources.

Latterly, though, the positive impetus of scale and geographic reach has faded out, leaving depletion – the process of using lowest-cost resources first, and leaving costlier alternatives for later – to push fossil fuel ECoEs back upwards.

Technical innovation continues, but it should never be forgotten, even in an age obsessed with technology, that the scope for technological progress is limited by the laws of physics.

This is particularly pertinent to the assumed “transition” to renewable energy sources (REs). Instead of unthinking extrapolation from past reductions in their costs, we need to note that renewables, too, have their technical limitations.

One of these is the Shockley-Queisser limit which determines the maximum potential efficiency of solar panels. Another is Betz’s Law, which does the same for wind turbines. Best practice is already close to these theoretical limits.

Moreover, dramatic expansion in RE capacity will make huge demands on material resources, including steel, concrete, copper, cobalt and lithium. For the foreseeable future, these resources, even if they exist at all in the quantities required, can only be made available through the use of legacy energy from oil, gas and coal.

To be clear about this, we most emphatically should make every effort to transition to renewables, not just on environmental grounds, but for economic reasons as well.

But we cannot assume that the ECoEs of REs will ever fall to levels low enough to replicate the economic value of fossil fuels.

Environmental “sustainability” is a practical, no-brainer objective. But “sustainable growth” is no more than wishful thinking, and the probabilities are heavily stacked against it.

I drew attention to the implications of the energy economy when I was head of research at Tullett Prebon, publishing the Perfect Storm report back in 2013. Since then, I’ve carried on exploring this concept at Surplus Energy Economics, as well as building SEEDS, an economic model which runs on energy rather than financial principles.

What has emerged is that, as trend ECoEs have risen relentlessly, prior economic growth has petered out before going into reverse.

Throughout a quarter-century precursor zone that has preceded the onset of economic contraction, we’ve become adept at deluding ourselves that we can continue to rely on ‘infinite growth on a finite planet’.

Because GDP measures financial activity rather than material prosperity, we’ve been able to create an artificial simulacrum of “growth” by pouring vast quantities of cheap credit – and, latterly, cheap money as well – into the system.

Ultimately, of course, money has no intrinsic worth, but commands value only as a ‘claim’ on the goods and services produced by the energy economy. Prolonged financial gimmickry – sorry, “innovation” – has had the effect of driving a wedge between the ‘real’ or material economy of energy and the ‘financial’, ‘claim’ or proxy economy of money and credit.

Because prices are the point at which these two economies intersect, inflation is a logical outcome of this divergence between the material and the monetary.

Whether we carry on letting inflation run hot, or raise interest rates in an effort to tame it, the end result is that we get poorer, either through an economic slump, or through the inflationary destruction of the purchasing power of money.

And there’s a sting in this tail (or tale), too. Most of those products and services that we deem “essential” – including water, food, housing, infrastructure and the transport of people and products – are energy-intensive, meaning that the real costs of necessities will continue to rise, even as overall prosperity erodes.

This means that the affordability of discretionary (non-essential) goods and services – those things that consumers might want, but do not need – will contract, with obvious implications for large swathes of the economy.

Orthodox economics continues to deny all of this, asking us to believe that there is no material shortage that cannot be overcome by using financial “demand” to push prices upwards.

The reality, though, is that no amount of demand, and no increase in price, can produce anything that does not exist in nature. Neither can any amount of technological genius overcome the laws of physics in general, or the laws of thermodynamics in particular.

Recent trends, albeit overshadowed by concerns over covid and Ukraine, are confirming that the “precursor zone” has ended; that economic contraction has begun; and that even the myth of perpetual “growth” can no longer be sustained.

Beyond high inflation, deteriorating prosperity and the erosion of discretionary consumption, this also means that the financial system faces a process of drastic downsizing, a process that can be expected to be disorderly.  

The debate – between orthodox ‘perpetual growth’ and material (and environmental) physical constraint – may run for some time yet, but the outcome is now beyond dispute.

The question now devolves into one of preparation and adaptation, which can only start once the reality of economic limits is grasped.      

#228. In the eye of the Perfect Storm



The title of this report makes intentional reference to the Perfect Storm paper published by Tullett Prebon back in 2013, when I was head of research at that organization.

Since then, my efforts have been concentrated on (a) promoting discussion (at Surplus Energy Economics) about the energy basis of the economy, and on (b) building an economic model (SEEDS) founded on these principles.

Whilst theoretical debate will continue, and models can always be further refined, time has run out for the purely intellectual contest between conventional and energy-based interpretations of the economy.

Accordingly – and with due apology to those to whom much of this is already familiar – what follows is a comprehensive summary of what we know about the economy as an energy system, and what we can reasonably infer about the future based on this understanding.


Faced with rising inflation, worsening pressure on living standards and significant nervousness in the markets, we’re at liberty – if we so choose – to ascribe all of these problems to the combined effects of the coronavirus crisis and the war in Eastern Europe, and to assure ourselves that the ‘normality’ of never-ending economic growth will return once these temporary vicissitudes are behind us.

The alternative is to face facts.

These are that prior growth in material prosperity has gone into reverse, and that a financial system erected on the mistaken presumption of ‘infinite growth on a finite planet’ faces challenges of a magnitude which eclipse all past experience.  

Understood as a system supplying the goods and services which constitute material prosperity, the economy is a dynamic propelled by the supply, value and cost of energy.

The critical element in this equation is the Energy Cost of Energy, which determines how much surplus (ex-cost) energy is available to the system. The ECoEs of oil, natural gas and coal have been rising relentlessly, undermining the fossil fuel foundations of the modern economy.

Protracted efforts to overcome energy deterioration with financial innovation have failed, simultaneously driving a wedge of instability between the ‘real’ or material economy of resources, goods and services and the ‘financial’ or proxy economy of money and credit.

Since prices are the point of intersection between these two economies, surging inflation is a logical signifier of the moment at which divergence becomes unsustainable, and the system becomes subject to forces tending towards a restoration of equilibrium between the energy economy and its financial counterpart.

Financially, and as fig. 1 illustrates, the extent of the imbalance between the material and the monetary economies reveals the downside risk in a system of forward commitments which has grown exponentially as monetary expansionism has fought a losing battle against material deterioration.

Meanwhile, whilst top-line prosperity erodes, the scope for discretionary (non-essential) consumption is being compressed by relentless rises in the real costs of essentials, many of which are highly energy-intensive.

Fig. 1

The inability of financial stimulus to reinvigorate the energy economy is the first of at least three popular myths which are poised to fail in the face of reality.

A second is the supposed ability of renewable energy sources (REs) to replace fossil fuel energy without undermining economic prosperity – whilst a “sustainable economy” may indeed be feasible, “sustainable growth” is a pipe-dream.

Neither can we expect the alchemy of technology to triumph over the laws of physics.

From here, and as the financial system draws ever nearer to the trauma of disorderly downsizing, the economy enters an era in which, whilst “collapse” might be avoided, involuntary contraction has become inescapable.


One of the most profound shortcomings in orthodox economics is the mistaken assumption that “prosperity” is coterminous with “money”.

If this were true, it would enable us, through our control of money, to promote perpetual economic expansion, unfettered by any material constraints imposed by the finite nature of the planet in its physical and environmental characteristics.  

We have spent twenty-five years discovering, at enormous cost, that such assumptions are fallacious. Conventional economics, once dubbed “the dismal science”, might or might not be “dismal”, but cannot in any way be considered a science.

Those conclusions which orthodox economists are pleased to call “laws” are, in fact, no more than behavioural observations about the human artefact of money, and are not remotely analogous to the laws of science.

If there is ever to be a science of economics, it will be founded, not in finance, but in thermodynamics.  

Critically, we should dismiss the orthodox insistence that financial demand always creates material supply, in part by promoting substitution. No amount of financial stimulus, and no rise in price, can produce resources which do not exist in nature. We can lend and print money into existence, but we cannot similarly create the low-cost energy without which the economy cannot function.    

The reality is that prosperity is a material concept, understandable only in terms of resources in general, and of the “master resource” of energy in particular.

As a recent reappraisal by Gaya Herrington confirms, the authors of The Limits to Growth (LtG) were right when, back in 1972, they modelled the Earth as an inter-connected system, and found definite material limitations to expansion.

In the narrower fields of economics and finance, it’s becoming ever clearer that we have been living through a quarter-century precursor zone during which the potential for further growth has been exhausted.

What we are experiencing now is the disruption which attends the ending of this transitional phase, and the onset of involuntary economic contraction.

The aim in Part One is to uncover the operative principles of the economy understood in material terms, and to look at how these define the nature and progression of prosperity.

In Part Two, we look at what the application of these principles tells us about the future of the economy and the financial system.


The Surplus Energy Economics interpretation is based on three principles, each of which is fully in accordance both with logic and with observation.

First, the economy is an energy system, because nothing which has any economic utility at all can be produced without the use of energy. This applies, not just to services and manufactured products, but to other natural resources as well, because the supply of these materials is a function of the energy required to make them available.

The second principle is that, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This ‘consumed in access’ component is known here as the Energy Cost of Energy, giving us the principle of ECoE.

Because no unit of energy can be used twice, rises in ECoEs reduce the economic value of any given quantity of energy available to the system. Rising ECoEs also undermine the economics of energy supply, and thus act as a constraint on the quantity, as well as the economic value, of energy available to the economy.

This means that material prosperity is a function of the surplus (ex-ECoE) energy available to the system. Prosperity can be – and, through the SEEDS system, is – quantified and modelled on this basis.  

The third principle is that, lacking any intrinsic worth, money commands value only as a ‘claim’ on the products of the material economy of energy.

Money is thus ‘a human artefact, validated by exchange’. It is not a ‘store of value’, but at best ‘a store of claims to value’. Since money is a claim on energy, debt, as a ‘claim on future money’, is in reality ‘a claim on future energy’.  

We are at liberty to create as many monetary claims as we see fit, but we cannot create the material prosperity required to honour these claims ‘for value’.

Money and money-equivalents created in excess of the deliverability capabilities of the ‘real’ economy of energy are known in SEE as excess claims. Since, by definition, these excess claims cannot be honoured, they must be eliminated, either through repudiation (‘hard’ default) or through an inflationary degradation of the purchasing power of money (‘soft’ default).

To the extent that these claims are regarded by their owners as ‘value’, divergence between aggregate claims and the material economy must result in ‘value destruction’.

What emerges from these principles is the critically important concept of two economies.

One of these is the ‘financial economy’ of monetary claims, and the other is the ‘real economy’ of energy. This conceptual understanding is vital to a meaningful interpretation of economic and financial conditions, trends and prospects.   

For so long as we persist with the time-honoured but fallacious notion of a material economy governed entirely by the immaterial artefact of money, we will continue to make costly mistakes, to cherish expectations which the economy cannot deliver, and to build dangerous risk into a financial system which is wholly predicated on the false assumption of ‘growth in perpetuity’.

ECoE and prosperity

As we have seen, ECoEs are the decisive arbiter of the material prosperity made available by the economy understood as an energy system.

For most of the time from its inception in the symbolic year of 1776, the industrial economy benefited from steady falls in ECoEs. These falls reflected the operation of three positive factors.

The first of these was an expansion in geographic reach, as pioneers scoured the world in search of lower-cost energy resources. The second was economies of scale, a product of the rapid expansion of the energy industries. The third was a steady improvement in the technology of energy extraction, processing and delivery.

The sparsity of data for earlier periods is such that we cannot know what ECoEs were in 1776, when James Watt completed the first truly efficient steam engine, starting the industrial era by enabling us to convert heat into work.

But we do know that ECoEs at that time were very high indeed. Energy operations were small in scale and limited in geographical range, whilst energy accessing technologies were in their infancy.

A long downwards trend then reduced ECoEs to a nadir at or below 1% during a post-1945 quarter-century remarkable for its rate of expansion in economic prosperity.

Latterly, though, ECoEs have turned upwards, largely because, with the benefits of reach and scale maximised, depletion has taken over as the primary driver of the ECoEs of fossil fuels. Depletion describes the way in which lowest-cost resources are used first, leaving costlier alternatives for a ‘later’ which has now arrived.

The overall development of trend ECoEs can be pictured as a stylised parabola, as illustrated in fig. 10 at the end of this report.

The contemporary situation, as shown in fig. 2, is that relentless rises in trend ECoEs are undermining prosperity through a dynamic that cannot be managed in any way by financial policies. Unlike money, low-cost energy can’t be loaned or printed into existence.

SEEDS analysis reveals that the prosperity of the average American has been declining since 2000, and has since (as of 2021) deteriorated by 8%. The ECoE of the United States at the prosperity inflexion-point in 2000 was 5.1% and, as a general observation, this is the approximate level of ECoEs at which prior growth in the prosperity of the Advanced Economies (AEs) of the West goes into reverse.

Emerging Market (EM) economies – by virtue of their lesser complexity, and their consequently lower maintenance demands – enjoy greater ECoE resilience, and prosperity per capita in China might not turn downwards until about 2027, by which time China’s trend ECoE is projected to have reached 13%.

This said, the rate of improvement in Chinese prosperity per capita has decelerated dramatically, and the anticipated increase between 2021 and 2027 is very small indeed (1.6%). The inflexion point calculated for China by SEEDS has moved successively nearer with each iteration of the model.

In some EM countries – including Mexico, South Africa, Argentina, Brazil, Chile and Indonesia – prosperity per person has already started to decrease.

Fig. 2

Globally, and over an extended period, deterioration in Western prosperity has largely been offset by continuing (though decelerating) progress in EM countries. Now, though, this ‘long plateau’ has ended, such that the prosperity of the world’s average person is heading downwards.   

This is an accelerating trend, and the ‘average’ person worldwide is likely to be 7% poorer by 2030, and fully 21% less prosperous in 2040, than he or she was in 2019.

With the economy understood as an energy system, we can recognise that the growth momentum injected into the system by the harnessing of energy from fossil fuels has now faded to a point at which prior growth in material prosperity has gone into reverse.

An almost universal failure (and refusal) to recognise this process poses the greatest single threat to global prosperity, material security and stability, a threat comparable with – and directly linked to – energy-induced deterioration in the environmental and ecological well-being of the planet.

This can NOT be “fixed”

Thus far, very limited (and generally mistaken) acknowledgement of the economy’s energy challenge has met responses founded in wishful thinking and, to be frank about it, outright ignorance.

Current problems have been compared with the energy crises of the 1970s, when sharp rises in the price of oil triggered severe disruption, soaring inflation and a sharp slump in the economy.

In fact, any such comparisons are completely inappropriate. There was no material shortage of petroleum in the 1970s, and price rises were caused entirely by political developments – the Oil Embargo of 1973-74, and the Iranian Revolution of 1978-79 – which fractured the relationship between the major consumers and the major exporters of oil.  

The reality is that, back in the 1970s, global all-sources ECoEs were between 1.3% and 1.8%, at which further growth remained eminently feasible, even in the highly complex Advanced Economies of the West.     

Now, though, trend ECoEs are close to 10%, a level at which prior growth in prosperity must go into reverse, even in less complex, more ECoE-resilient EM countries.  

Of the proposed solutions to energy and associated environmental issues, by far the most absurd is the idea that we can somehow “de-couple” economic prosperity from the use of energy. The case that has been made for “de-coupling” has rightly, and authoritatively, been described as “a haystack without a needle”.

Alternative energy sources offer a more realistic set of solutions, with most hope vested in the development of renewable energy sources (REs) such as wind and solar power. As the ECoEs of fossil fuels continue to rise, there is a compelling economic as well as environmental case for maximising the use of REs.

There is something close to an orthodox “narrative” which depicts REs as the assured driver of a new age of growth. This orthodoxy contends that indefinite continuation of past reductions in the costs of REs will provide a smooth transition to a new era in which ever-cheaper electricity will unite with new technologies to combine environmental sustainability with unlimited economic expansion.

Unfortunately, such expectations are informed by a fundamental fallacy, which is the mistaken assumption that REs can provide a complete quantitative and qualitative replacement for the economic value provided historically by fossil fuels.

This isn’t the case, not least because the material resources required for the expansion and maintenance of REs can only be supplied using the legacy energy from oil, gas and coal.

We do not have, and are most unlikely ever to have, a truly renewable system which obtains its necessary inputs (including steel, concrete, copper, cobalt and lithium) without recourse to fossil fuel energy.

It’s not even clear if these raw materials actually exist in the quantities needed for complete transition. Even if they do exist, the energy required to deploy them does not.

This resource connection necessarily ties the ECoEs of REs to those of fossil fuels. The ECoEs of renewables have fallen, from a high base, but we cannot use the ‘fool’s guideline’ of infinite extrapolation to conclude that energy from REs will become cheaper indefinitely.

Moreover, the technical efficiencies of these energy sources are already close to their theoretical maxima, as set for solar power by the Shockley-Queisser limit, and for wind turbines by Betz’s Law. Even the “green” credentials of renewables are subject to severe qualification.

Over-optimistic expectations for renewables are informed by a contemporary fascination with technology, an attitude which forgets that the potential of technology is bounded by the laws of physics.

In short, the only way in which involuntary contraction in material prosperity could be reversed would be by the discovery (and the rapid deployment) of sources of primary energy whose ECoEs are at or below 5%.

Those of renewables are unlikely ever to be lower than about 12%, and are likely to trend back upwards over time. Conventional nuclear power has an important role to play, as do hydroelectricity and, perhaps, geothermal energy. But none of these is remotely scalable to a point sufficient to replace the low-cost energy hitherto sourced from coal, oil and natural gas.

Even new discoveries (such as practicable nuclear fusion) may not be sufficiently scalable within the necessary time period to prevent a continuing deterioration in prosperity.

To be clear about this, it IS imperative that we maximise the development of renewables – to continue to tie the fortunes of the economy to the deteriorating dynamic of fossil fuels would be to invite, not just irreversible environmental deterioration, but economic ruin.

The mistake all too often made is the fallacious assumption that an RE-based economy somehow “must” be as big as, or bigger than, the fossil-based economy of today.

An understanding of the fallacy of this assumption reveals the distinction between a “sustainable economy”, which may and should be feasible, and the mantra of “sustainable growth”, which is impossible.

The mechanics of self-deception

As we have seen, the mistaken interpretation of the economy as entirely a financial system has fostered the delusion that economic growth can continue in perpetuity, and that “growth” is, in some mystical way, not just an inevitability, but an entitlement.

In reality, rising ECoEs started to undercut the scope for further growth during the 1990s, with trend ECoEs rising from 2.9% in 1990 to 4.2% in 2000. Though economic deceleration was noted – and labelled “secular stagnation” – it was not traced to its cause.

Rather, it was assumed that it must be possible to restore the supposed ‘normality’ of brisk growth by the use of financial policies.

The first of these innovations, known in SEE terminology as “credit adventurism”, was invoked from the mid-1990s, when credit was made easier to access than it had ever been before.

Between 1995 and 2007, whilst reported GDP expanded by 63%, global debt doubled, with each incremental dollar of GDP accompanied by $2.30 of net new debt.

Worse still, almost half of all the recorded “growth” of that period was the purely cosmetic effect of pouring additional liquidity into the system, and then counting the transactional use of that added liquidity as ‘activity’ for the purposes of measuring GDP.

It must be stressed that GDP is a measure, not of material prosperity, but of activity – a very important distinction that is seldom, if ever, made in conventional economic presentation. The ability to create activity without adding value has injected unproductive complexity at every level of the economy.

Divergence between debt and economic output, exacerbated both by asset price inflation and by failures of regulatory oversight, led directly to the crisis of 2008-09.

With grim predictability, the authorities then decided to compound prior mistakes with “monetary adventurism”, undertaken using supposedly “temporary” expedients such as QE and ZIRP.

These had the effect of boosting the expansion of financial claims which included, not just debt, but broader financial system “assets” (which are the liabilities of the government, business and household sectors), and the underfunding of pension commitments.

These responses to the GFC bought some time for the perpetuation of the status quo, but did so at enormous cost. The dangers of ‘moral hazard’ were disregarded, and the necessary linkage between risk and return was broken, whilst the essential process of creative destruction was stymied.

Perhaps worst of all, avowedly “emergency” innovations – which have since become permanent – invited us to operate a ‘capitalist’ economy without the essential pre-requisite of positive real (above inflation) returns on capital.

Quantifying self-delusion

The SEEDS model enables us to put these various processes into a value-referenced framework. Let’s start by analysing what happened between 1999 and 2019, the latter year chosen because it excludes the subsequent distortions created by the coronavirus crisis.

Unless otherwise noted, all global data produced by SEEDS and used here is expressed in international dollars, converted from other currencies using the more meaningful PPP (purchasing power parity) convention, and stated at constant 2021 values.

Between 1999 and 2019, recorded global GDP slightly more than doubled (+110%), increasing by $74 trillion. But debt increased by 180%, rising by $204tn, or $2.75 for each dollar of reported “growth”.

Moreover, we can estimate that this $204tn increase in debt was accompanied by a $275tn rise in other financial liabilities, and a worsening, probably of the order of $150tn, in the shortfall or “gap” in the adequacy of provision for future pensions.

Concentrating on debt alone, SEEDS calculates that “growth” in GDP, mathematically averaging 3.7% between 1999 and 2019, was made possible by borrowing that averaged 10.2% of GDP during that period (see fig. 3).

SEEDS calculates that, stripped of this ‘credit effect’, underlying or ‘clean’ economic output (C-GDP) increased by only $28tn, or 41%, over a period in which reported GDP increased by $74tn, or 110%.

This in turn means that fully 63% of all “growth” recorded between 1999 and 2019 was the cosmetic effect of pushing gargantuan quantities of credit into the system, thereby creating enormous forward excess claims whose elimination, through a process of ‘value destruction’, has now become inescapable.

If we were to include 2020 and 2021 in the calculation – and, as well as debt, to incorporate increases in other financial liabilities (such as those of the shadow banking system), plus worsening shortfalls in pension provision – we would find that each $1 of “growth” since 1999 has been fabricated using close to $10 of incremental forward commitments.

Fig. 3

Measuring prosperity

Underlying economic output, calibrated here as C-GDP, is not the same thing as prosperity, the difference between the two being the first call made on output by the Energy Cost of Energy.

Between 1999 and 2019, trend ECoEs rose from 4.1% to 8.7%. This means that a 41% rise in global aggregate output (C-GDP) translates into an increase of only 34% in aggregate prosperity.

Since world population numbers rose by more than 25% between those years, average prosperity per capita increased by only 6.6%, a far cry from the claimed improvement of 67% in GDP per capita. As of 2021, prosperity per capita was only 5.2% higher than it was back in 1999.

These global numbers disguise extremely divergent geographical experiences. In 2021, prosperity per capita in China was more than double (+276%) what it had been in 1999. But per capita prosperity has declined by 8% in the United States since 2000, and by 10% in Britain since 2004.

The typical pattern revealed by SEEDS modelling of 29 national economies shows that, after prosperity per capita has reached its inflexion-point, initial declines are gradual, but rates of deterioration accelerate thereafter. This worsening in the rate of deterioration reflects compounding processes that will be discussed later.

Prosperity inflexion-points occur later in EM countries than in Advanced Economies, but subsequent declines are more rapid in EM economies.

Essentials and the loss of discretion

To concentrate on top-line prosperity – whether per capita or in aggregate – would be to miss much of the point, because what really matters, where the economy and the circumstances of the individual are concerned, is the relationship between total prosperity and the cost of essentials. Many of these essentials are energy-intensive, meaning that their costs will carry on rising, even as prosperity itself erodes.

The difference between prosperity and the cost of essentials is known in SEE terminology as PXE (prosperity excluding essentials), and this is one of the most important calculations produced by the SEEDS economic model.

PXE is now in decline almost everywhere, even in countries where top-line prosperity has yet to reach its point of inflexion.   

The SEEDS model defines “essentials” as the sum of two components. One of these is household necessities, and the other is public services provided by the government.

These services count as “essential” because the citizen has no day-to-day discretion (choice) about paying for them.

It should be noted that government spending falls into two broad categories. One of these is transfers, involving redistributive payments such as welfare benefits and pensions. These are not included in the SEEDS definition of essentials, because they net out to zero at the aggregate and at the average per capita levels.

The other category of government spending, which is incorporated in the “essentials” definition, is the direct provision of services, such as education, health care and defence.

The definition of a “necessity” varies both geographically and over time. Something which was regarded as a luxury in 1962 or 1992 may be regarded as a necessity in 2022. A product or service considered optional in a poor country may be seen as essential in a wealthier one.

The SEEDS calculation of essentials is thus, necessarily, an estimate, and it’s unlikely that a universal definition of “essential”, applicable irrespective of place and time, could ever be agreed (though the importance of the topic merits intensive examination).

What really matters, though, isn’t the precise definition of a necessity, but the trend in the real cost of the broad category of “essentials”. Many necessities – including water, food, shelter and the transport of people and products – are highly energy-intensive. Accordingly, the costs of essentials have carried on rising even as prosperity itself has gone into decline.

With prosperity eroding and the real costs of essentials rising, SEEDS analysis shows a process of rapid convergence, shown in per capita terms in fig. 4.

Fig. 4

As fig. 4 makes clear, SEEDS projections show an impending point of crossover at which the prosperity of the ‘average’ person falls below his or her cost of essentials.

Two important points should be noted about these projected intersections.

First, we can anticipate re-definition of the term “essential”, with some products and services, now deemed necessities, coming to be seen as discretionary.

This will apply, not just to household necessities, but to public services as well. An example of the former might (and probably will) be a decline in car ownership, and an increased reliance on public transport, within a general reduction in travel. Governments will face the unenviable task of deciding which public services can no longer be afforded.

Second, the projections shown in fig. 4 relate to the ‘average’ person. In practice, some people will retain the scope for discretionary consumption whilst an increasing number of the less fortunate will become unable to afford essentials, at least as these are currently defined.


In Part One of this report, we have looked at how the economy functions as an energy system, at the meaning and quantification of material prosperity, and at the shortcomings of an economic orthodoxy predicated on the false premise that the economy can be explained, managed – and propelled to infinite expansion – on the basis of money alone.

Turning to projections, there are two issues on which energy-based modelling can provide forward visibility in a way consistent with these fundamentals.

One of these is calibration of the relationship between the financial economy of money and credit and the real economy of goods, services, labour and energy.

This reveals a process trending towards a restoration of equilibrium between the two economies of money and energy. This points towards an inevitable, and very probably a disorderly, contraction, of the order of 40%, in the financial system understood, as it must be, as an aggregation of monetary claims on the material prosperity of today and tomorrow.

First, though, we look at trends in overall economic prosperity and its components.

In preference to a conventional approach which defines the economy as the government, business and household sectors, the SEE interpretation concentrates on three functional segments, which are the provision of necessities, capital investment in new and replacement productive capacity, and the consumption of discretionary (non-essential) goods and services.

As we shall see, general expectations of continuing expansion are based, not just on the false assumption of infinite growth, but also on extrapolation of a recent past mispresented by distorted presentation of historic trends.

In other words, consensus projections are based on the indefinite continuity of a past that simply didn’t happen in the way that convention says that it did.

We conclude that, just as material prosperity is trending downwards, the cost of essentials will continue to rise. This is creating compression effects to which businesses will respond along lines described in SEE as the taxonomy of de-growth.

A primary challenge for governments, meanwhile, will be management of the deteriorating affordability of public services, many of which form part of the essentials which the economy provides to its citizens.  

Clarifying underlying trends

If you want to work out where you’re going, it’s rather important to have reliable information about where you’re starting from, and of how you got there.

In economic terms, this is information that orthodox methods cannot provide.

In search of underlying reality, we’ll look at developments between 1999 and 2021, a period which loosely coincides with the prolonged precursor zone preceding the onset of involuntary economic contraction.

Official data says that global real (constant value) economic output, measured as GDP, increased by 116% between 1999 ($68 trillion PPP) and 2021 ($146tn). If these numbers were accurate, they would mean that the world’s average person was 69% better off in 2021 than he or she had been back in 1999.

On this basis, we’re asked to accept that, since the economy expanded at a compound annual rate of around 3.5% (real) between 1999 and 2021, something similar can be relied upon in the future, once the pandemic, and the crisis in Ukraine, are behind us.

It should come as no surprise at all, then, that the long-range consensus is based on rates of growth of between 3.3% and 3.5%, which confirms the prevalence of extrapolation from misunderstood recent history.

As we’ve seen, this interpretation of past trends ignores the fact that GDP, as a measure of activity rather than value, has been inflated, artificially and dramatically, by rapid expansions in debt and other financial commitments. The average person’s share of GDP may have increased by 69% between 1999 and 2021, but his or her share of total debt far more than doubled – rising by 148% – over that period.

The conventional calculation also takes no account of a dramatic rise in trend ECoEs, from 4.1% in 1999 to a growth-crushing 9.4% in 2021.

On an underlying basis which incorporates these critical issues, the SEEDS model shows that global aggregate prosperity increased by only 35% (rather than 116%) between 1999 and 2021. This means that the world’s average person became better off by just 5.2% (rather than the claimed 69%) between those years.

SEEDS analysis informs us that annual growth in prosperity averaged only 1.3% (rather than 3.5%) during that period.

From a forecasting perspective, this enables us to produce two sets of calculations.

One of these, as mentioned earlier, is a calibration of the relationship between the real economy and the financial system.

The other is the ability to revise past trends onto a basis which provides a realistic rather than an optimistically-distorted historic foundation for forward projection.

RRCI – re-basing to prosperity

It should be understood that revising historic numbers is a routine process in economics.

For instance, global GDP rose from a reported $47tn (PPP) in 1999 to $146tn in 2021.

Everyone knows that this nominal increase (of 210%) is misleading, because it ignores inflation. Accordingly, the GDP deflator is applied, revising the 1999 number to $68tn, enabling ‘real’ growth since then to be calculated at 116%.  

Since GDP and its component parts are the generally-accepted basis for forecasts, projections produced by SEEDS need to start with the most recent GDP number, however misleading we know it to be.

This does not, though, mean that we need swallow the mythical growth figures – such as the supposed more-than-doubling of the real size of the world economy between 1999 and 2021 – when we know that the increase in underlying prosperity was only 35%.

Accordingly, we need to restate past nominal numbers on the basis of a more realistic assessment of systemic inflation, replacing the GDP deflator with a more meaningful measure of price changes over time.

This alternative measure is known in SEEDS terminology as the Realised Rate of Comprehensive Inflation (RRCI).  

Global systemic inflation between 1999 and 2021, measured as the annual GDP deflator, is reported at 1.7%. Applied to an annual rate of increase of 5.3% in nominal GDP, this produces a reported rate of real “growth” of just under 3.6%, compounding to 116% over the period as a whole.

As we’ve seen, though, we know that the expansion in prosperity between those years was only 35%, an annual compound rate of increase of less than 1.4%.   

If we accept – for forecasting purposes – the reported rate of growth in nominal (“money of the day”) activity of 5.3%, recognition that prosperity increased at a compound rate of only 1.36% (rather than 3.6%) reveals that the required compound deflator isn’t 1.7%, but 3.87%.

Globally, these RRCI calculations reveal that the purchasing power of money declined, not by the reported 30%, but by 57%, between 1999 and 2021.     

This restatement is consistent, not just with what we might call ‘everyday experience’, but also with the known shortcomings of orthodox inflation calculations.

For a start, we know that the preferred measure of headline inflation – the Consumer Prices Index – has, since the 1990s, been affected (and reduced) by innovations such as substitution, hedonic adjustment and geometric weighting. Studies based on the application of earlier techniques consistently reveal sizeable understatements in the contemporary presentation of consumer inflation.

Moreover, and as its name indicates, CPI measures only inflation as it is experienced by the consumer, thus excluding many other important metrics, one of which is the inflation in the prices of assets, including stocks, bonds and property.

Asset price inflation most emphatically IS relevant to the overall situation, and not just because of its importance to the relationship between a (generally older) demographic which already owns assets, and a (generally younger) group which aspires to acquire them.

A gamut of transactions in the financial system is linked directly to the prices of assets.

The GDP deflator is supposed to overcome some of these shortcomings through the use of chain-linked measures of volume.

But a large part of the economy – most obviously, financial activities such as banking and insurance – simply cannot be measured volumetrically. We can’t, for practical purposes, meaningfully measure activity in financial services in volume terms, simply by counting the numbers of bank statements provided and insurance certificates issued.

Trend reality

The application of RRCI re-basing to economic data is illustrated in fig. 5.

As mentioned earlier, instead of the usual practice of dividing the economy into sectors (government, businesses and households), these charts depict the world economy in the form of segments, which are essentials, discretionary (non-essential) consumption, and investment in new and replacement productive capacity.

In fig. 5, world economic output for 2021 is stated in all three charts at $146tn (PPP), the reported number for that year. In nominal terms, this reflected an increase of 210% since 1999, when current (“money of the day”) GDP was $47tn.

Application of the GDP deflator raises the 1999 number to $68tn at 2021 values, implying subsequent real “growth” of 116%.

On an RRCI, prosperity-referenced basis, however, the 1999 figure rises, not to $68tn, but to $109tn, reducing subsequent expansion to 35%.

The left-hand and central charts project the situation out to 2027 when, according to the consensus, real GDP is expected to have increased by about 22%. This – as we have noted, and as the middle chart reveals – amounts to extrapolation along the lines of the supposed “trend” rate of growth in recent times.

In the right-hand chart, SEEDS data is used to extend the forecasting period out to 2040, by which time economic output is projected to be lower (by 9%) than it was in 2021.

These, of course, are aggregate numbers, which take no account of increases in population numbers. These rose from 6.0 billion in 1999 to 7.7bn in 2021, and may reach a figure just short of 8.9bn by 2040. On this basis, prosperity per capita is projected by SEEDS to be 21% lower in 2040 than it was in 2021.

Fig. 5

Scoping the future

In fig. 6, SEEDS analysis is used to compare two versions of economic output for the global, American and British economies. In each case, reported 2021 GDP is accepted as a common start-point, even though we know that this is a ‘financial economy’ data-point which is at variance with the underlying ‘real economy’.

In each case¸ the RRCI-based SEEDS trend-line, shown in blue, starts from higher historical levels than those shown in the official ‘real’ equivalent shown in black. It readily becomes apparent that the consensus¸ framed as a continuation of the supposed past, extrapolates from a history that didn’t actually happen.     

If you believe, for example, that the American economy had, prior to 2020, been expanding at an annual trend real rate of 2.1%, there’s a superficial basis for believing that it will carry on growing at much the same supposed rate, such that GDP will be 13% higher in 2027 than it was in 2021.

The underlying situation, though, is that American prosperity actually expanded at only 0.5% annually between 1999 and 2019, and that even this slow rate of increase has been decelerating.   

The British situation is even less robust, with reported trend growth (of 1.8%) between 1999 and 2021 falling to just 0.3% on an underlying basis.

In both countries, underlying rates of growth in prosperity have, over a lengthy period, been lower than the trend increase in population, which expanded by 0.8% annually in the United States, and by 0.7% annually in the United Kingdom, between 1999 and 2021.

This leads us to an observational conclusion, which is that, if the average or ‘ordinary’ person in most Western countries thinks that he or she has been getting poorer (as well as more indebted) in recent times – rather than more prosperous, as asserted by the official view – the strong probability is that his or her perception is correct.

Fig. 6

It would be hard to over-state the significance of this interpretation, but it becomes of even greater importance when we recognise two other underlying realities.

The first is that divergence between the ‘real’ and the ‘financial’ economies has now reached a point at which even the myth of continuing growth has become untenable.

Mistaken presentation of past trends contributes to an unjustified confidence in the ability of the economy to carry – and, in due course, to honour – its gargantuan financial commitments.

The taxonomy of contraction

The second is that, whilst trends in prosperity per capita have adopted (or, in some economies, are soon to adopt) a trajectory of decline, the real cost of essentials is continuing to rise.

Using methodologies described earlier, fig. 7 sets out economic projections for America, Britain and South Korea, subdivided into essentials, investment in new and replacement productive capacity, and the affordability of discretionary consumption.

It should be stressed that each chart presents aggregates, and that adverse trends are more pronounced at the per capita level. It should also be emphasised that the projections for other countries follow broadly similar patterns.

In each instance¸ prosperity is trending downwards. Even aggregate prosperity is now at the point of inflexion in the United States, whilst the rate of decline in Britain has become relentless.

Likewise, the real costs of essentials are trending upwards.

Together, these processes are compressing both investment capability and discretionary affordability, which are the residuals in the equation.     

Stated at constant 2021 values, PXE – the residual difference between prosperity and essentials – is, by 2030, projected to be 14% lower in South Korea, 22% lower in America and 28% lower in Britain than it was in 2021.

Fig. 7

PXE is an indicator of the scope that exists for discretionary consumption and capital investment over time, and it should be said at once that neither of these segments can continue to be propped artificially by credit and monetary subsidy, as has been the case in the past.

This in turn means that, although the entire economy is exposed to the consequences of involuntary contraction, sectors supplying non-essential goods and services will be in the eye of the storm.

It would not be appropriate to specify activities or sectors here. The operative principle, though, can be likened to a household in which decreasing resources, and the rising costs of essentials, compel a reduction in discretionary purchasing.

Of course, no enterprise – whether it supplies discretionaries or essentials – can be expected simply to sit back and let this happen. Beyond general considerations of rising costs and decreasing revenues, there are two particular issues with which businesses will have to grapple.

One of these is a decline in utilization rates – as sales volumes decrease, fixed costs need to be spread across a diminishing number of customers. Passing on these rises in unit costs is likely to result in price increases which exacerbate the rate at which customers and revenues are lost.

The second is a loss of critical mass. As suppliers fail, or reduce the range of goods and services which they offer, a widening range of necessary inputs will either rise in price, or cease to be available at all.

Together, these two processes can be expected to worsen the rate at which economic prosperity declines. These compounding factors help explain why deterioration in prosperity is an accelerating process.

For businesses, the obvious response is simplification, both of product ranges and of supply processes. This will lead to de-layering, as some stages in the production process are eliminated altogether, or are reduced in scale to the point at which they are rendered uneconomic.

What we’re describing here is a process of de-complexification. As the industrial economy expanded, it also became progressively more complex, introducing wholly new activities, many of them very large, which did not exist in the earlier, smaller and less complex economy.

Together, decreasing utilization rates, loss of critical mass, simplification, de-layering and de-complexification form what is known in SEE terminology as the taxonomy of de-growth, though ‘contraction’ might be a more appropriate term than ‘de-growth’ for the description of trends which are part of an involuntary reduction in the scale and complexity of economic activity.

Financial contraction

With two vital concepts understood – the two economies, and the role of money as claim – it becomes apparent that rapid (and very probably disorderly) contraction is to be anticipated in the financial system.

There are many sectors in which the confidence of investors and lenders could very rapidly ebb away.

Calibration of these trends relies on two calculations. One of these is percentage exposure, meaning the gap that divides the ‘financial economy’ of money from the ‘real’ economy of energy, goods and services.

The widening of this gap has already progressed far enough to trigger a sharp and systemic upturn in inflation, a process which largely precludes any continuation of that reliance on “stimulus” which has characterised economic crisis-management over a remarkably prolonged period.

Whilst raising rates might not tame inflation – and perhaps nothing can – central bank inaction, allowing real rates to go ever deeper into negative territory, might not be tenable either.

It is not the purpose of this report to draw detailed comparisons between economies, but fig. 8 illustrates that percentage exposure is frighteningly larger in China (-54%), and markedly smaller in Italy (-10%), than in the United States (-32%), or in the world economy as a whole (-40%).    

Fig. 8

In any case, percentage downside is really meaningful only when applied to the proportionate size of the financial system which – within the principle of ‘money as claim’ – needs to be understood in terms of liabilities.

Globally, and stated at constant 2021 values, debt has soared from $113tn (PPP) in 1999 to a provisional $360tn at the end of 2021. Though the ratio of debt-to-GDP has risen to ‘only’ 240% now (from 166% in 1999), the way in which increases in debt inflate activity reported as GDP means that a linkage between numerator and denominator results in a progressive understatement of this oft-cited ratio.

Referenced to prosperity rather than GDP, the debt ratio today rises to over 400%, compared with a similarly-calibrated 175% back in 1999.

Much the same applies to financial assets, which are the counterpart of liabilities in the government, corporate and household sectors of the economy. On the basis of data available for countries accounting for about three-quarters of the world economy, we can estimate that these liabilities, which include those of the shadow banking system, may now equate to at least 930% of prosperity (and about 550% of GDP), compared with 440% of prosperity in 2002.

Inadequacies (“gaps”) in pension provision are harder to calculate, but available data suggests that these might now have risen to about 3x global prosperity, a sharp increase powered, at least in part, by policy-induced crushing of returns on invested capital.

Within the charts shown in fig. 9, it must be understood that we have only limited data on financial assets globally, and still less on the inadequacy of pension provision. The latter, in any case, tends to be referenced, not to firm commitments, but to general expectations, with global pension provision tending to be financed from government revenues rather than from funded provision.

Even so, we can conclude that, following a prolonged period in which forward claims have been increased exponentially in order to sustain a cosmetic simulacrum of “growth”, systemic risk has become enormous within an economy increasingly dependent on, and addicted to, a continuity of breakneck expansion of financial commitments, commitments which might have become impossible to honour ‘for value’ even if the material prosperity of the global economy hadn’t ceased growing, and started to contract.     

Fig. 9


It’s been well said that people have a strong inclination towards believing what they want to believe.

Even so, the extent of contemporary misunderstanding about our true economic and financial predicament can only be described as staggering.

The consensus view remains that current problems combine the lasting effects of the coronavirus crisis with the more recent stresses created by the war in Ukraine. The assumption, seemingly shared at all levels of opinion, is that, as and when these disruptions recede into history, “growth” will return, inflation will fall back to pre-crisis levels, and there need be no re-run of the financial crisis of 2008-09.

This consensus “narrative” is based on at least three critical misconceptions.

The first of these misconceptions is that “growth” can be maintained indefinitely in the future, as it supposedly has been in the past, through the operation of financial policies.

This view not only exemplifies the fallacious orthodoxy that the economy is entirely a financial system, but further ignores the reality of a recent past in which the simulacrum of “growth” has been manufactured by the relentless creation of forward commitments which cannot possibly be honoured ‘for value’.

The second misconception is that we can make a seamless transition from fossil fuels to renewable sources of energy without impairing the performance of the economy. Whilst imperative in environmental terms, this transition cannot replace the economic value hitherto provided by oil, gas and coal. The material resources to accomplish this transition, where they exist at all, can only be provided courtesy of legacy energy from fossil fuels.

Informing both of these is a third misconception which rests on remarkably over-sanguine expectations for technology. Ultimately, the scope of technology is bounded by the limits of physics in general, and thermodynamics in particular.

When we see past these misconceptions, what emerges is an economy poised for severe contraction because of (a) the depletion of the low-cost fossil fuel energy which has powered the industrial sage, (b) the absence of any plausible replacement for this low-ECoE energy, and (c) the sheer idiocy of the idea that we can somehow “de-couple” economic prosperity from the supply, value and cost of energy.

This gap between reality and misconception poses enormous risks for a financial system which has created gargantuan ‘forward claims’ that cannot possibly be delivered. These excess claims will have to be repudiated, through default, through runaway inflation, or a combination of both. This inevitable process of disorderly downside on the claims side of the equation has obvious implications for asset prices which have been inflated, often to the point of absurdity, through a period of ultimately-futile policy gimmickry.

Based on the same misconceptions which distort collective understanding of the economy and the financial system, it is widely assumed that existing political and social arrangements, and the intellectual dogmas that support them, will evolve only very gradually from where they are today.

We have reasonable grounds for concluding that this consensus view is shared by leadership cadres in government, business and finance. Whilst it is fashionable to question the candour of politicians, we can state with confidence that, if business bosses and investors really did have serious doubts about the validity of the consensus “narrative”, these doubts would already have become apparent, not least in corporate strategies and, most obviously, in the markets.

What we cannot calculate is the moment at which reality displaces all of these fondly-cherished delusions, economic, financial and political. A purely personal view – and an admittedly somewhat subjective one – is that we are now very close indeed to the moment at which the myth of perpetual growth succumbs to the hard facts of an economy heading into contraction; a financial system, built on false predicates, trips into a crisis of disorderly downsizing; and the public demands pragmatic responses to challenges which its leaders, perhaps in all good faith, have hitherto refused even to acknowledge.    

Fig. 10

#227. Pictures of imperfection


Jane Austen once wrote in a letter of how much she disliked “pictures of perfection” which, she said, “make me sick and wicked”.

Perfect pictures are, of course, the preserve of the artist, but the latest version of the energy-based SEEDS system does an improved job of picturing the imperfections that are driving us towards both a rapid deterioration in the economy and a severe financial crisis.

Under normal conditions, we might spend at least a little time discussing the improvements and refinements incorporated into the SEEDS 23 iteration of the model.

The harsh reality is that current conditions are very far from normal, so the priority now has to be to concentrate on what the model is telling us rather than at the way in which this is told.

Anyone new to Surplus Energy Economics and the SEEDS project can find a summary of energy economy principles here, whilst this article discusses the way in which the model generates forecasts.

Before looking at the annotated picture gallery which follows, it must first be warned that that a certain stoicism is required. If you’d prefer a happy ending, where prosperity doesn’t fall, asset prices don’t slump, liabilities aren’t repudiated through force majeure and the ‘liberal consensus’ that has ruled the roost for forty years remains intact, this isn’t the place for you.

The reality is that 2022 is the year where old illusions go to die.

Neither the long-established notion of TINA (There Is No Alternative) nor the newly-minted concept of TINAR (There Is No Acceptable Reality) can serve under conditions of rapid and adverse change.

To be clear about this, the energy dynamic which determines material prosperity is deteriorating, as indeed it has been over an extended period. Relentless rises in the ECoEs – the Energy Costs of Energy – of fossil fuels have put Western prosperity onto a declining trajectory since the early 2000s.

The average American, for instance, is now 11% poorer than he or she was back in 2000. Prosperity per capita has fallen by 13% in Britain since 2004, and by 7% in Japan since 1997.

These trends are now being replicated in less complex, more-ECoE resilient EM (emerging market) economies such as China and India. This means that global prosperity has now turned down after a long plateau in which continued (though decelerating) progress in the EM countries offset continuing deterioration in the West.

Fig. A

There can be no ‘fix’ – financial or technological – for these problems. Monetary manipulation has done no more than buy some time (at huge expense) for a failing system.

The capabilities of technology – whisper it who dares – are bounded by the laws of physics. Transition to renewable energy sources (REs), though imperative, cannot replicate the economic characteristics of fossil fuels.   

That worsening economic trends have not been evident in conventional data reflects the way in which various forms of adventurism have been used to create a simulacrum of “growth”. Pouring cheap credit and cheaper money into the system has had the effect of creating activity (as measured by GDP) even though the value of economic output has been deteriorating.

Between 1999 and pre-covid 2019, each $1 of reported “growth” was accompanied by increases of $2.70 in new debt plus an estimated $3.75 in broader financial liabilities. Were unfunded pension promises included in this calculation, it would emerge that close to $10 of forward commitments have been adopted for each “growth” dollar.

All of these numbers precede coronavirus crisis interventions, which have made all of these ratios far worse. Historians of the future are likely to characterise these gargantuan interventions as the ‘last hurrah’ of the money-for-nothing form of denial.

In practical terms, what this long era of self-delusion has accomplished is the driving of an ever-widening wedge between the ‘real’ economy of goods and services and the ‘financial’ economy of money and credit.

The operative process now is one that will forcibly restore equilibrium between the two economies of money and energy. Globally, the gap between them can be calculated at 40%, giving an approximate measure of the extent to which the financial system will be forced to contract.

Fig. B

Since money functions as an aggregate of claims on the real economy, this indicative calculation references the liabilities side of the financial equation. Asset markets will fall by more than this, reflecting the extent of leverage in the dynamic which links the pricing of assets to the underlying structure of liabilities.

This is where the need for stoicism comes in. The stark reality of the situation is that the prices of stocks, bonds and property are poised for extremely sharp falls.

The bond market situation is that the permanence of the inescapable rise in interest rates will, once recognized, drive yields sharply higher. Corporate bonds will be undermined further by a relentless deterioration in the financial conditions of the business sector.  

Just as prosperity is eroding, the real costs of essentials – many of which are energy-intensive – are rising rapidly. The SEEDS indicator termed PXE – prosperity excluding essentials – is on a sharp downwards trajectory.

Fig. C

As well as impairing the scope for investment in new and replacement productive capacity, this PXE compression will exert relentless downwards pressure on the affordability of discretionary (non-essential) goods and services.

Though there are ameliorating measures – known here collectively as the taxonomy of de-growth – which businesses can and will adopt to manage deterioration, it is clear that discretionary sectors will bear the brunt of a process by which equity markets start to price the future as it is, rather than as we would like it to be. A series of growth-predicated business models will fail, including the popular “streams of income” model which prioritises the signing up of customers over current revenues.

For property, meanwhile, the combination of deteriorating affordability and rising interest rates creates a dynamic which requires no amplification here.

Fig. D

As asset prices tumble and defaults cascade through the system, the last delusion will fail.

This delusion is that, if we engage in enough tantrums, the adults in the room – meaning central bankers – will step in to ‘kiss it better’.

The take-off in inflation – which has long been under-reported when compared with the SEEDS measure of RRCI (the Realised Rate of Comprehensive Inflation) – makes such intervention impossible.

The game-changer of systemic inflation means that the authorities can no longer, as they did in 2008-09, step in to rescue the reckless whilst penalising the prudent.

It would take a very special form of madness to invoke the supposedly “temporary” gimmicks (sorry, the “unconventional innovations”) of the GFC under conditions of rapidly accelerating inflation.

Barring surrender to a hyperinflationary destruction of the purchasing power of money, neither ZIRP nor QE can be re-invoked. The extinguishers used to fight (or at least to damp down) the fires of the global financial crisis now contain, not foam or water, but gasoline.  

“Nobody ever feels or acts, suffers or enjoys, as one expects”, wrote Jane Austen in another letter. Put another way, the era of self-delusion is over, and the stoicism involved in facing reality will now be the characteristic most required to adapt to a new era.                            

#226. The siblings of misunderstanding


Though they would be the last to admit it, governments no longer have economic strategies worthy of the name.

On the single most serious economic challenge of the day – which is the escalation in “the cost of living” – the cupboard of answers is bare. What remains is a vague, fingers-crossed faith in continuity, reinforced by pious hopes that energy transition and technology will somehow reverse the palpable decline in public prosperity.

Ultimately, the only thing that now props up the orthodoxy – and similarly both supports artificially-inflated markets and stands in for the lack of a persuasive sense of direction – is TINA, the acronym for There Is No Alternative.

TINA may not seem particularly rational – until, that is, you meet TINAR.

Passing the buck

In economic terms, there’s nothing altogether new in this situation, since governments largely abdicated from economic policy back in 2008-09 when, during the GFC (global financial crisis), responsibility for the parlous state of economic affairs was dropped into the laps of central bankers.

Given what faces them now, these worthies might well wish that they could hand this burden back to the politicians. If central bankers don’t raise interest rates sufficiently, the inflationary spiral could very well get out of control. If, on the other hand, rates are hiked significantly, impairing the affordability of debt and stemming the flow of new credit, the consequences will include a major recession and a slump in asset markets.

Either way, the implications are so stark that not even the most Pollyanna-accredited optimist could spin them as ‘just a temporary problem’. 

Monetarily, by far the likeliest outcome is an unsatisfactory compromise. Western central banks’ policy rates might rise to, say, 3% or a bit more by the end of this year, by which time inflation could easily be into double digits.

Nominal interest rates (which determine how much borrowers actually have to pay) are thus set to rise, whilst real (ex-inflation) rates may simultaneously plumb new depths of negativity, worsening the economic distortion that this long-established anomalous condition has already created.  

The predicament of the ‘average person’ should be front and centre of any assessment of the economic situation. His or her discretionary prosperity is being compressed by the way in which the cost of essentials is rising much more rapidly than incomes. He or she is already heavily in debt – particularly so when per capita shares of government and corporate indebtedness are added to direct household debts – and faces the consequences of sharp increases in the nominal cost of credit.

One should not pick out any single government in this generalized crisis, but British policy does typify the bafflement of the authorities. The partial solution to painfully dramatic rises in energy bills is seen as a system of loans. The longer-term fix is presented as an expansion of renewable energy sources (REs), such as wind and solar power, with the possible inclusion of ‘fracking’, and of a renewed commitment to nuclear.

Neither solution can be expected to work.

Reliance on loans must reflect an implausible assumption that the cost of domestic gas and electricity will, somehow, and of its own accord, fall back to some kind of “normal”. Not even its most optimistic advocates, in Britain or anywhere else, claim that energy transition can reduce the burden on households in other than the long term.  

In these circumstances, it’s not unreasonable to assume that public dissatisfaction is likely to worsen, fostering increasing suspicion that the system is somehow loaded against the “ordinary” person.

This suspicion might or might not be well-founded, but it should not induce us to believe that governments have answers which only malign intent prevents them from enacting.

The fact of the matter is that governments have no solutions, palatable or otherwise, to a generalised deterioration in prosperity.  Still less have they solutions to the broader implications of prior economic growth going into reverse.

Explanations are not solutions

Since its inception, this site has had two objectives. The first has been to explore and refine the principles of the economy understood as an energy dynamic rather than a financial system.

The second has been to find out whether these principles could be incorporated into an economic model providing an improved interpretation of the present and the recent past, and an enhanced ability to forecast the future.

The basis of principle has been set out in one recent article, whilst projections produced by the SEEDS economic model have been outlined in another. April is a month particularly replete with new data, but it’s highly unlikely that the next iteration of the model (SEEDS 23) will reveal any significant shift in future trends that can now be predicted with a pretty high degree of confidence.   

At no point has it been anticipated here that the energy basis of the economy would prompt a serious re-think of the money-based economic orthodoxy, still less that decision-makers, in government or beyond, would accept a reality based on the emerging evidence that the economy is an eroding energy system, subject to material constraints, rather than an entirely financial one, capable of delivering ‘infinite growth on a finite planet’.

Even the acceptance of environmental constraint has been gradual and reluctant, leading largely to policy prescriptions chosen far more for their acceptability than for their practicality. Acceptance of economic limits would be a bridge too far, not just for decision-makers but for the general public as well.

The best that can be hoped for – at least until conditions become far worse – is shadow appraisal of the implications of the orthodoxy turning out to be mistaken. Scenario planning is helpful, in that it can build preparedness for the worst without requiring the adoption of that worst as a declared basis of policy.

Trust TINA

With the logical and empirical foundations of the continuity presumption falling apart, the best things that the orthodoxy has going for it now are two versions of TINA.         

In its economic dimension, TINA applies to a long-established penchant for buying time in the hope that ‘something will turn up’. Faced with the demonstrable failure that was the real lesson of the GFC, the decision was taken to compound credit with monetary “adventurism”.

Nobody seemed unduly troubled, either by the moral hazard thus unleashed or by the contradiction involved in trying to run a capitalist system without the essential pre-requisite of positive real returns on capital.

Hopes now are pinned on the proposition that rates can be raised by enough to tame inflation without either crashing asset prices or triggering a severe recession.

This situation confronts investors with a TINA of their own – the prices of equities, bonds and property may look extremely over-inflated, but, with rates deeply negative and likely to become more so, the only alternative, which is to be cash-long, is the sole sure way of losing money,

Put another way, deeply negative real returns on cash are now the only prop standing in the way of a market slump.

A cupboard empty of answers

The political version of TINA is the absence of a persuasive alternative to the ‘liberal consensus’ that has been in place since the start of the 1980s.

Even where they are in opposition rather than in government, centre-Left parties propose no systemic alternative to the precepts of economic policy that have been accepted since the interventionist, mixed-economy model seemed to fail in the 1970s, and the Soviet version of collectivism actually did fail at the end of the 1980s. 

Cassandra-style prophecies of collapse have zero appeal to the public, whilst conspiracy theories deter far more voters than they can ever persuade.  

This situation is, of course, inherently unstable.

Where markets are concerned, there are limits to how long the downside in discretionary sectors can be ignored by equity investors, and to how long the bond markets can dismiss rate pressures as nothing more than a short-term irritant. The relentless compression of affordability, and the inevitability of a rise at least in nominal rates, have unmistakable implications for property.

Politically, too, there are limits to quite how much hardship voters will accept without putting some tough questions to TINA. The tax base is being squeezed, because the only part of the economy that can really be taxed in a net-positive way is the margin that exists between top-line prosperity and the cost of necessities. There really is no practical mileage in taxing people to the point where hardship requires the hand-back of taxes through welfare.

Given the absence of alternatives, governments cannot really be criticised for a Micawberism which promises, and simultaneously hopes, that “something will turn up”, even if that “something” gets ever less realistic as time goes by.

The magic of monetary manipulation, and the alchemy of technology founded in denial of the laws of physics, may look implausible even to those most minded to put faith in them, but – yet again – the ‘rule of TINA’ applies.

It’s all very well to understand that the accessibility and affordability of essentials are the political battlegrounds of the future, but there are serious obstacles to an early recognition of this reality.   

As the soldier is supposed to have said in the First World War, “if you know a better fox-hole, go to it!”

The evil twin

In this situation, prognosis can become more than just unpopular, if prognosis lacks an effective prescription.

As just one example, the lack of practical alternatives means that, whilst the political Left might advocate imposing ever greater taxation on ‘the rich’, such proposals ignore the fact that much of the supposed wealth of the wealthiest is a notional product of market distortion, and cannot be monetized into taxable cash. 

We can reasonably infer that there can be no soft landing from a choice between market collapse and soaring inflation, and that the public cannot be expected to go on buying implausible long-term answers to worsening short-term economic hardship.

We are, likewise, at liberty to produce reality-based assessments of the present, and to set out probable trends in the future. We can demonstrate, for instance, that most of the “growth” of the past twenty years has been cosmetic, that prosperity is already in relentless decline, and that rises in the real costs of energy-intensive necessities are strangling the scope for discretionary consumption. We can point out that monetary policy has been driven into a cul-de-sac, and that there is no policy ‘fix’ that avoids both the Scylla of inflation and the Charybdis of recession.

How, though, does any of this help those burdened with responsibility for decisions?

We can go on to draw reasonable inferences, which include the probability that asset price delusions will fade away, and that popular patience may not much longer survive the solvent of worsening hardship.

None of this, though, offers a palatable alternative to TINA.

It might seem almost heartening that, in the absence of logic and evidence, TINA has become the sole prop retained by the consensus “narrative”.

We need to beware, though, that TINA may have a far less forgiving sibling, with the confusingly-similar acronym TINAR – There Is No Acceptable Reality.               

In other words, popular expectations may become ever more entrenched, and public demands ever more strident, even as the wherewithal for satisfying them ebbs away.           

#225. Gravitational pull


A new ‘heavenly body’ has entered the cosmology of political and corporate decision. This new influence is the emerging reality that the economy is turning out, after all, to be an energy system, and that long-accepted ideas to the contrary are fallacious.

The concept of limits is replacing the paradigm of ‘infinite growth’.

Where decision-making is concerned, this emerging reality isn’t likely to have an immediately transformational effect. Established nostrums can have a tenacity that long out-lasts the demonstration of their falsity.

We’re not, then, about to see sudden, open and actioned acceptance of the fact that the economy is an energy rather than a monetary system.

Rather, we can expect to see energy reality exert an increasing gravitational pull on the tide of decisions and planning, most obviously in government and business. Policy statements may not change, but the thinking that informs planning and strategy undoubtedly will.

This gravitational effect is starting, as of now, to re-shape perceptions of the present, change ensuing “narratives” of the future, and trigger a process of realignment towards the implications of a world with meaningful constraints.        

The aim here is to examine the practical consequences of a contest of interpretations which, whilst it has already been decided at the theoretical level, leaves ‘everything to play for’ in political and commercial practice.

And then there was one

There are, essentially, two ways in which we can seek to explain the working of the economy.

One of these is the conventional or orthodox school of thought, which presents economics as a process determined by the behaviour of money, and acknowledges no limits to the potential for growth.

For the best part of nine years, this site has endeavoured to encourage, explore, model and quantify the alternative interpretation, which states that prosperity is a product of the use of energy, and that there are very real resource and environmental limits to economic expansion.

There are two ‘adjudicators’ of this debate. One of these is logic, and the other is experience.

Logic has always favoured the energy interpretation. The concept of material constraints is not remotely a new one. A notable milestone in the exploration of this thesis was The Limits To Growth, which was published back in 1972, and is now looking remarkably prescient. Hitherto, though, LtG and similar theses could be, and have been, dismissed as theoretical rather than practical challenges to the orthodoxy. 

What’s different now is that experience is in the process of confirming the verdict of logic.

In fact, the only thing that the orthodox explanation still has going for it is ‘custom and practice’.

Readers will not misunderstand me if I state that, at the purely intellectual level, this contest is ‘all over bar the shouting’ (though there will be plenty of that).

What lies ahead is a process of adjustment – we might call it realignment – to the new reality of an economy in which the scope for expansion is constrained by limits, both to energy value and to environmental tolerance.

Policy-makers and business leaders may have grasped the latter constraint, but have still to discover the reality of the energy limits to prosperity.

So here’s the question. If you were a decision-maker – in government, say, or in business – what would you do if you knew that the consensus “narrative” of our ever-expanding economic and broader future was heading into the blender?

Theory and narrative, #1 – money and myth

In essence, orthodox theory states that the economy can be explained entirely in terms of money.

The “laws” of economics are not, in fact, analogous to the laws of science. Rather, they are observations about the behaviour of money.

The central conclusion of this orthodoxy is that there need be no limits to economic growth, because the driver of expansion is under our control as the creators and managers of money.

Monetary causation enables us to use pricing, incentives and demand to circumvent all material limitations.

A more recent refinement of this theme combines technical innovation with monetary management to assure us that all material limits can be circumvented, through technology and monetary management, such that ‘growth in perpetuity’ is perfectly feasible, and can be used as a reliable forward presumption.

To use the contemporary idiom, what follows from this is a “narrative” of a perpetually-expanding economy.

Where planning and projections are concerned, this narrative is emphatically directional, flowing from assumed growth to everything else that we want to anticipate.  

Here’s what this means in forecasting terms.

Planners and forecasters start with – and tend seldom to question – assumptions about the future size of the economy. If, for instance, we accept a trend real annual rate of growth of 3.5%, simple mathematics tells us that the economy will be twice as big in, say, 2040, as it was in 2020. If we assume trend growth of only 3.0%, growth over that period is 80%. At 4.0%, it will be 120%. 

With this presupposition in place, only then do they calculate what this is going to mean in practical terms. If we know that the economy will be, say, X% larger in 2040 than it is now, it can be calculated that the need for energy, for instance, will have expanded by Y%.

If it is further assumed that we need to reduce our use of fossil fuels by Z% over that same period, what remains is a non-fossil market of predictable size, requiring to be filled, in varying possible proportions, by nuclear power, hydroelectricity and renewable energy sources (REs).

This ‘start with growth’ process of calculation delivers the narrative of seamless energy transformation, ever-expanding prosperity, and a billion vehicles powered by batteries or hydrogen.

Theory and narrative, #2 – resources and reality

The alternative thesis reasons from entirely different predicates. Instead of assuming that future energy requirements are a function of assumed economic expansion, our understanding is that prosperity is a function of the availability of energy value.

If we happen to agree that the availability of energy value might indeed conform to the Y% number calculated by growth-predicated forecasts, we might also agree that the economy will be X% bigger by the target date.

The sequence of reasoning, though, is entirely different. It operates in the opposite direction.  

In the simplest of terms, conventional forecasting assumes that Y (energy demand) is a function of X (economic growth). The alternative is to restate this as X (economic growth) is a function of Y (energy availability).

The energy approach to economics starts with recognition that the economy is an energy system, because nothing that has any economic utility at all can be provided without the use of energy.

Pausing only to dismiss the quaint notion (the “haystack without a needle”) that the economy can somehow be “de-coupled” from the use of energy, we move on to introduce a second predicate, which is ‘the principle of ECoE’.

This recognizes that, whenever energy is accessed for our use, some of this energy is always consumed in the access process. In Surplus Energy Economics (SEE), this ‘consumed in access’ component is known as the Energy Cost of Energy (ECoE), and is expressed as a percentage.

Importantly, energy cannot be used twice. This means that the proportion of total energy supply absorbed as ECoE cannot also be used for any other economic purpose.

This in turn means that material economic prosperity is a function of the availability of surplus (ex-ECoE) energy

This makes it vital that any process of interpretation and projection starts with an examination of the trend in ECoEs from the various sources which constitute energy supply.

We know that ECoEs are shaped by geographic reach, economies of scale and the process of depletion. With the potential of reach and scale now exhausted, depletion has become the factor driving the ECoEs of oil, gas and coal.

To be sure, technology acts favourably, accelerating falls in ECoEs when these are declining, and mitigating rises when trend ECoEs are increasing.

Critically, though, it is self-evident that the potential of technology is circumscribed by the limitations of physics, which in this case means the material characteristics of energy resources. 

This understanding is critical, because it takes the potential of REs out of the realm of wishful thinking, and requires us to accept two limitations to the potential economic value of renewables.

First, we know that the resources required for the creation and maintenance of RE capacity are products of the legacy energy provided by oil, gas and coal. This means that the trajectory of the ECoEs of renewables is linked to that of fossil fuels.

Second, we also know that REs have their own constraints, most obviously the Shockley-Queisser limit to the theoretical maximum efficiency of solar power generation, and the Betz’ law equivalent for wind power.        

We further recognize that ECoEs affect both the delivery costs and the affordability of energy. This means that ECoE trends determine, not just the qualitative nature of available energy, but the quantitative issue of supply.

The last of our three principles – otherwise known as “the trilogy of the blindingly obvious” – is that money has no intrinsic worth, but commands value only as a ‘claim’ on the goods and services made available by the material economy of energy.

Money can be defined as “a human artefact, validated by exchange”.

On this basis, we arrive at the transformative conception that there are two economies. One of these is the proxy or financial economy of money, credit and assets. The other is the material or real economy of goods, services, labour and energy.

With this understood, our ‘control’ over the creation and use of money ceases to endow us with the ability to drive infinite economic growth. It becomes, instead, nothing more than an ability to manage one side (the financial part) of a ‘two economies’ equation determining the relationship between money and material prosperity.

On this basis, the creation of money in its various forms can outgrow the underlying economy, but this process simply creates what are known in SEEDS terminology as “excess claims”.

Much of our recent economic and financial experience can be explained as the creation of ever more abundant excess claims which, by definition, cannot be honoured ‘for value’ by a smaller underlying or ‘real’ economy.

The contemporary financial system is at severe and worsening risk because of the gargantuan scale of the ‘excess claims overhang’ that has been created on the false assumption that the creation of money and credit in their various forms (known to conventional economics as “demand”) can somehow expand the real economy of goods and services.                            

A future redefined

Applied using the SEEDS economic model, these principles point to a very different future, and, for that matter, present a very different past and present, from those described by orthodox economics.

This, of necessity, results in a very different forward “narrative”.

The following charts provide a snapshot of the interpretation provided by SEEDS (the Surplus Energy Economics Data System).

The left-hand chart shows how, as trend ECoEs have risen relentlessly, average world prosperity per person has plateaued, and has now turned downwards.

At the regional level, prior growth in prosperity has long since inflected in the advanced economies of the West, whilst less complex, less ECoE-sensitive EM (emerging market) countries have continued to enjoy improving prosperity, albeit at a steadily decelerating pace.

Meanwhile, and as the middle chart shows, the real cost of essentials has continued to rise, in large part because so many necessities are energy-intensive.

This process has initiated severe compression of the SEEDS metric of prosperity excluding essentials. PXE is a measure of the affordability, in aggregate, of (a) discretionary (ex-essential) consumption, and (b) capital investment in new and replacement productive capacity.    

Finally, where these overview indicators are concerned, an enormous gap has emerged between the financial and the real economies, such that the economy of goods, services and energy is now about 40% smaller than its financial proxy of money, credit and assets.

You will appreciate that, because prices are the interface between the real and the financial economies, inflation is a natural consequence of this divergence or, rather, of the pressures that operate towards the restoration of equilibrium between the two economies.

You might, indeed, wonder why – more than thirteen years on from the adoption of supposedly “temporary” expedients such as QE and ZIRP – inflation hasn’t accelerated before now.

Part of the answer lies in the systemic understatement of inflation by conventions which, amongst other quirks, exclude asset price rises from a definition of inflation which concentrates on – and, even then, understates – changes in consumer prices.

The SEEDS calculation of the Realised Rate of Comprehensive Inflation (RRCI) indicates that, over the two decades between 2000 and 2020, systemic inflation averaged 3.5% annually, far higher than the official rate of 1.5% over that period.   

Fig. A

“The future’s not what it used to be”

What we have been describing is a process of divergence which has driven a wedge between a ‘real’ economy (shaped by the energy dynamic) and a ‘financial’ economy (whose size is determined by monetary policy).

This explains a great deal that, from an orthodox perspective, seems baffling. It warns us that a major correction looms between the ‘two economies’, a correction that must involve financial ‘value destruction’ as a consequence of the elimination of ‘excess claims’.  

As we have seen, the contemporary consensus narrative rests on the false premise that we can start with assumptions about future growth and then predict what can be expected to happen in numerous categories of forward outcomes.

Uncovering the false premise – and the ensuing fallacious direction of reasoning – of the consensus narrative acts in a way that might be likened to taking out the bottom brick of a speculative wall.

For example, once we know that future prosperity is a function of energy trends rather than the other way around, we know that we cannot assume that the supply of renewable energy somehow ‘must’ expand in conformity with what growth assumptions supposedly tell us about the scale of energy supply in the future.

Reasoning in this opposite direction has a liberating effect on thought processes. This realization enables us to place into the equation factors which conventional thinking has been forced to ignore, or to treat as anomalous and inconvenient.

We are now at liberty to recognise that each rise in the price of fossil fuels, whilst it increases the cost of using conventional cars and commercial vehicles, also raises the price of all of those materials (including steel, concrete, copper, lithium and cobalt) that are required for energy transition.

We can place the undoubted environmental downsides of this transition into a broader context. We can take cognisance of the fact that the ECoEs of renewables are linked to those of fossil fuels through renewables’ reliance on resources which can only be made available by the legacy energy provided by oil, gas and coal.

What had previously been nagging reservations – such as the resource and investment demands of renewables, the Shockley-Queisser limit, Betz’ law, doubts about how “green” renewables really are, and so on – can now find their appropriate places in a broader understanding of energy, the economy and the environment.

Accommodating gravitational effect

What we’ve been doing here is following a logical process to a point at which a raft of consensus assumptions about the future turn out to have been the products of mistaken assumptions.

Though the theoretical approach is essential, what matters in practical terms is that this interpretation is being borne out by the trend of events. Its consequence is an invalidation of all of the preconceptions which inform the “consensus narrative” of our economic, financial, political and broader future.

If you’re in government, it tells you that future resources are going to be far less than you might hitherto have assumed, and that the provision of essentials is set to become the critical battleground between competing priorities.

If you’re in business, it tells you that we cannot rely on growth, least of all in discretionary sectors, and that the scope for capital investment is poised to decrease rather than to expand.

It anticipates the wholesale failure of business models based on false predicates, and suggests that the taxonomy of de-growth – with its emphasis on product and process simplification, on delayering, and on managing utilization and critical mass risks – is the appropriate template for decisions.

This discussion is not, in any sense, intended as any kind of primer for the conduct of business or government in a future that’s not going to conform to a mistaken consensus.

But one issue is of immediate relevance to the theme that interests us here – are governments, businesses and other organizations going to start a process of fundamental re-appraisal?

The view taken here is that these institutions are not about to reveal a Damascene conversion to the realities of a material (and constrained) rather than a monetary (and unlimited) conception of the economy.

Nobody is likely to start telling shareholders, voters, workers, consumers, the markets or anybody else that the consensus narrative is mistaken, and that, in the words of Mickey Newbury, “the future’s not what it used to be”.

Rather, “gravitational effect” is the appropriate analogy here. Any large organization is entitled to operate research units looking into “what if?” scenarios, and is under no obligation to share the results of such evaluation with others.

This is likely to be the way in which new thinking about the economy crosses the boundary from theory into practice.

It seems most unlikely that institutions will ignore the various factors, some of them described here, which put ‘the currently-assumed’ into the category of ‘the speculative and the potentially mistaken’.

Research processes are likely to act on planning in much the same way that a piece of iron, placed on the rim of a binnacle, acts on a magnetic compass.

New economic thinking can be expected to work its way into decision-making processes in a way more akin to gradual absorption than to a flood.

For practical purposes, the revolution in economic thinking “will not be televised”, but neither can it continue to be dismissed as nothing more than ‘inconvenient theory’.   

#224. Unaffordable, stranded, at risk


One of the more striking trends in a shifting consensus appreciation of economic issues has been an increasing focus on what’s being called a “cost of living crisis”.

There’s no doubt that this is serious – but is it, as the public is assured, only temporary? And, if it’s not, what are its implications?  

Though the seriousness of this situation is gaining recognition, its implications – not least for asset markets – remain generally unappreciated.  

Properly understood, what we’re witnessing is part of a broader dynamic, long discussed and calibrated here as the erosion of discretionary prosperity. As prior growth in prosperity goes into reverse, and the cost of necessities rises, consumers are losing the ability to afford non-essential (discretionary) purchases.  

Governments, businesses and the markets are profoundly mistaken if they assume that this is some kind of passing phase, caused by nothing more than the temporary consequences of ‘unexpected events’, such as coronavirus disruption, and war in Eastern Europe.  

Will the consensus of opinion – only now, and belatedly, catching-on to the pressures on discretionary consumption – also recognize what’s happening to affordability? And will it then move on to re-define the concept of “stranded assets”, realizing that this term applies, not to hydrocarbon projects after all, but to a far broader range of investments?

Moreover, will asset markets start to recognize the broader implications of deteriorating affordability, particularly where property is concerned?

Hidden in plain sight 

As regular readers will know, downwards pressure on the affordability of discretionary goods and services is one of the two most critical issues identifiable through interpretation of the economy as an energy rather than a financial system.

The other is the unbridgeable gap that now divides the ‘financial economy’ of money, credit and asset values from the ‘real economy’ of material output, labour and energy.

Current events may be leading towards a moment at which issues of affordability collide with an over-inflated financial system to trigger far-reaching negative reactions. 

The much-discussed “cost of living crisis” means, not just that households are struggling to cope with the rising cost of necessities, but also that their disposable incomes are under severe, indeed unprecedented, downwards pressure.

In short, if people have to pay more for necessities – such as food, heat, power and essential travel – they are left with less to spend on all of those many things that they may want, but do not need.

This extends far beyond non-essential purchases, having equally serious implications for the affordability of credit.

If you’ve been visiting this site for any length of time, you’ll know that these trends have long been anticipated here. SEEDS-based analysis has been warning, over an extended period and with increasing urgency, of a worsening squeeze on discretionary (non-essential) prosperity.

This expectation has been based on recognition of two critical trends, neither of which is accepted by conventional economic interpretation, and both of which are related to the way in which prosperity is defined by the availability, value and cost of energy.

First, relentless increases in ECoEs – the Energy Costs of Energy – have been undermining the prosperity-determining availability of surplus (ex-ECoE) energy. 

Second, and just as top-line prosperity has been trending downwards, the real costs of energy-intensive essentials have been rising remorselessly.

What this means is that the indicator known in SEEDS terminology as “PXE”prosperity excluding essentialsis on a pronounced downwards trajectory. This trend is illustrated in the following charts, which compare prosperity per capita with the estimated cost of essentials in America, Britain and China.

You’ll note that, as in Britain and China, it’s perfectly possible for PXE to turn down well before the zenith of top-line prosperity has been reached. 

This trend is, in fact, by no means new, but has hitherto been disguised, where consumption is concerned, by the availability of ultra-cheap credit.

This ability to use credit to provide artificial support for discretionary consumption is now being eliminated by an acceleration in inflation, driven by the rising cost of necessities and, again, long predictable through energy-based analysis of the economy.

“Stranded”, but not as we know it

Even as the energy basis of prosperity has been deteriorating, techno-utopians have taken to describing big investments in fossil fuel projects as “stranded assets”.

The argument has been that, as renewable energy sources (REs) displace fossil fuels, demand for oil, natural gas and coal will slump, causing energy companies to lose money on investments “stranded” – cut off from consumers – by this supposedly-inevitable revolution in energy markets.

In reality, this has always been unlikely, not least because we cannot expand and maintain RE capacity without recourse to legacy energy inputs from oil, gas and coal. This means that the ECoEs of REs are linked to those of fossil fuels.

As energy costs rise, so, too, does the cost of everything – including steel, copper, cobalt, lithium and plastics – required, not just to expand RE generating capacity itself, but also to advance the use of technologies powered by electricity rather than by oil and gas.

A simple example is that, just as rising fossil fuel prices make conventional vehicles more expensive to run, so battery and hydrogen alternatives become costlier to produce, as does the RE infrastructure by which they are supposed to be powered.   

A proper appreciation of actual rather than hypothecated trends reveals that we need to re-define “stranded assets”.

Instead of oil and gas projects, the investments cast adrift by decreasing demand are likely to be aircraft, hotels, leisure complexes, broadcasting rights contracts, and anything else predicated on the false assumption that consumer discretionary spending will increase indefinitely.

The circumstances of the ‘average’ household or individual illustrate this unfolding process. As increases in the costs of necessities outpace incomes, people have less to spend on everything from holidays or a new car to subscriptions for television and internet services.

At the same time – with rates rising, and levels of debt already highly elevated – they can no longer resort to cheap credit to finance non-essential purchases.

Just as customer affordability is falling, businesses providing discretionary goods and services are subject to relentless increases in their own costs of operations.

These trends are likely to have adverse implications for a string of business models, including the ‘high-volume, low-margin’ template used in some sectors, the ‘streams of income’ model popular in many others, and the widespread dependency on revenues from advertising.

Unfortunately for businesses supplying discretionary products and services, the conventional over-statement of past trends has provided misplaced comfort, often to the point of inducing complacency.

As we have seen in a recent assessment, the same fallacious methodologies which overstate real economic growth have created the misleading impression that nominal increases in activity in discretionary sectors translate into robust trend growth which can be relied upon to continue into the future. 

This is illustrated in the following charts, in which conventionally-calibrated trends, shown in black, are compared with SEEDS analyses shown in blue.

What SEEDS interpretation reveals is that discretionary affordability, having already decelerated, has now entered a pronounced down-trend, completely contrary to the expectations on which so much investment and planning in discretionary sectors is based.

It’s always possible, at least to some extent, to reallocate assets, and to modify or replace business models – but not if you don’t know what to expect.

Financial implications

As a rule-of-thumb, discretionary goods and services account for roughly 60% of Western consumer spending, a proportion that includes swathes of durables including, most obviously, domestic appliances and vehicles.

The ‘average’ consumer is now finding that his or her ‘disposable income’ – the mainstream term for what SEEDS calls discretionary prosperity – is subject to severe downwards pressures.

The essentials still have to be purchased, and are now costing more. This means, first, that unpalatable choices have to be made.

The consumer may need to spend less on leisure activities, take fewer holidays, and cut back on outgoings such as subscriptions. He or she may also need to put off making ‘big ticket’ (consumer durables) purchases, such as a new washing machine or a replacement car.

A second implication is that the affordability of all forms of credit (and continuing payment commitments) is being undermined. The more that people have to spend on essentials, the less remains for the servicing of debt and the upkeep of obligations.

The compounding factor here, of course, is the rise in the cost of borrowing.

False confidence might be drawn from the fact that, in overall terms, rates are rising less rapidly than inflation, reducing the ‘real’ (ex-inflation) cost of debt.

But nominal rates matter, too. If the rate of interest on a mortgage increases from, say, 3% to 6%, the resulting increase in outgoings is very ‘real’, albeit in a different sense, to the borrower.

It’s of little or no comfort to the borrower to be told that the rise in rates is less than the increase in inflation, particularly where the inflationary effect on incomes lags, or is less than, the rate at which the cost of necessities is increasing.

This raises two questions about the affordability of credit. First, can the borrower carry on servicing existing debts at higher nominal rates of interest?

Second, can he or she really be expected to carry on financing otherwise-unaffordable non-essential spending by going still further into debt?

The far greater likelihood is that we’ve reached that point of “credit exhaustion” after which consumer purchasing and debt servicing capabilities can no longer be inflated to ever-higher levels on a tide of cheap credit.

Although rates are clearly heading upwards, property prices have enjoyed a boost provided by borrowers rushing to lock-in rates in anticipation of rising mortgage costs. It may seem illogical to pay over-inflated prices in order to keep borrowing costs low, but this is exactly the behaviour that has helped drive house prices upwards.

In the aftermath of this ‘anticipatory blip’, questions of affordability may now put enormous downwards pressures on real estate markets, defying the extrapolatory assumption that ‘prices can only rise over time’.

If investors – and lenders too – start to recalibrate affordability calculations, and accordingly to view property markets with more caution, there’s every reason why they might look at a broad swathe of discretionary-dependent businesses in a very similar way.

What, after all, are the prospects for companies supplying non-essential goods and services to increasingly hard-pressed consumers?        

Systemic exposure 

This takes us to an observation, set out in #222: The Forecast Project, that the ‘financial’ economy now stands at an unsustainable premium to a faltering underlying ‘real’ economy. This excess varies between countries, with China particularly exposed to a process of forced restoration of equilibrium between the financial and the material economies.

What this analysis indicates is that apparent economic “growth” has been inflated artificially by the injection of credit which, whilst boosting recorded activity, actually adds very little incremental value. In the business sector, this has created a trend towards unproductive complexity.

The SEEDS taxonomy of de-growth identifies many steps – including de-layering, and product and process simplification – which companies are likely to take in order to bolster profitability, and protect themselves against utilization risk and loss of critical mass.

But we need to be clear that there are limits to how far any business can counter a relentless erosion of demand for its product or service.

The onset of deterioration in discretionary sectors creates a serious risk that investor and lender confidence might erode when forward expectations are revised from growth to contraction. The pivotal issue is likely to be the extent to which forward commitments cease to be regarded as viable.     

In short, the financial system could be driven into disorderly contraction by a dawning recognition that both affordability, and the viability of discretionary sectors, are being undermined by trends which cannot be explained away by short-term setbacks.

#223. Trading with the (common) enemy


The tragedy unfolding in Ukraine, as well as being horrific in itself, has brought us face-to-face with a brutal fact whose reality we’ve always, hitherto, managed to ignore.

This fact is that the world has become accustomed to a standard of living that its energy resources can no longer support.

This is as true of, for example, China as it is, more obviously, of Western Europe. Indeed, once forward trajectories – and the all-important matter of ECoE – are taken into account, the United States has the self-same problem.

Neither can we assume that countries favoured with extensive indigenous energy resources are insulated from this problem. It simply isn’t possible for Russia – or, for that matter, for the oil-rich states of the Middle East – to pull up the drawbridge and let the rest of the world ‘freeze in the dark’.

The people of Ukraine are the obvious victims of this crisis, but the hardship being inflicted by the underlying issue stretches, in varying degrees, into most corners of the world.

Westerners – hit by rising living costs, and fearing that their trinket-laden lifestyles and their penchant for foreign holidays may be receding into the past – might spare a thought for citizens of the world’s poor and poorest nations, where the harsh realities of energy constraint are already showing up in the worsening unaffordability of food and other necessities.   

The current crisis is bringing us ‘up close and personal’ with a string of fundamental issues.

First, the emergence of energy constraints is destroying the long-favoured illusion that we can enjoy ‘growth in perpetuity’.

To paraphrase Kenneth Boulding, idiots and orthodox economists might continue to believe in the tarradiddle of infinite growth on a finite planet, but the rest of us have to face facts.  

Second, our efforts to pretend otherwise have inflated the global financial system to a point of extreme vulnerability.

Third, we can’t use the magic of money, or the alchemy of technology, to resolve the twin challenges of resource scarcity and environmental degradation. 

This time IS different

Many might be tempted to think that ‘we’ve been here before’.

Back in the 1970s, the Oil Embargo and the Iranian Revolution starved much of the world of petroleum, setting off sympathetic rises in the prices of other fuels, and triggering a severe combination of economic stagnation and soaring inflation.

Some observers now seem to think that, just as the Western world survived the oil crises, we can similarly brush off the effects of this latest threat to the reliability of affordable energy supplies.

The fundamental difference is that global ECoEs – the Energy Costs of Energy – are drastically higher now than they were back in the 1970s.

Superficially, at least, the effects of the oil-induced stagflationary crisis of the 70s are reasonably well-understood.   

First, it put an end to the super-rapid rates of oil consumption growth that had characterised the post-1945 world. Remarkable though this may now seem, there were times in that post-war period in which consumption of petroleum grew at annual rates as high as 8%. 

Second, the crises created the incentives for the development of new sources of oil in non-OPEC regions, most importantly in Alaska and the North Sea.

By the early 1980s, a new generation of far more fuel-efficient cars had reached global markets. Oil had become recognised as a premium fuel, and was ceasing to be used for substitutable activities such as the generation of electricity.

The oil market was subject to transitional (though lasting) over-supply from new sources. Arguably, OPEC over-played its hand by propping up prices in the first half of the 1980s.

Oil markets crashed at the end of 1985.

This, coincidentally or not, was also a period of significant political change. The doctrines variously described as “Thatcherism” and “Reaganomics” claimed, and for the most part were given, credit for an economic revival which, in reality, was the product, not of market ‘liberalization’, but of the downwards leg of an artificially-distorted long-cycle in energy supply.

The critical point, though, was that the ECoEs, both of oil and of energy generally, remained at levels low enough to facilitate continued economic expansion. The resource backdrop to the oil crises of the 1970s was that ECoEs remained at or below 2%.

The new reality

Today, global all-sources ECoEs are over 9%, far beyond levels at which further growth in aggregate material prosperity remains possible.

In the West, rising ECoEs have already put prior growth into reverse, a trend temporarily disguised (though not, of course, overcome) by successive exercises in financial legerdemain.

As ECoEs have continued to rise, much the same combination of deteriorating prosperity, financial gimmickry and worsening self-delusion has started to emerge in less complex, more ECoE-tolerant EM (emerging market) economies.    

Faced with the stark reality of what the Ukraine crisis has crystalized in global energy markets, it’s natural for us to hope that we can side-step the implications of resource scarcity.

Some think that a switch to EVs can replicate the increased fuel efficiency of the 1970s, and that wind and solar power can act as latter-day successors to the supply-side solution provided back then by the North Sea and Alaska.  

All of these hopes miss the fundamental point, which is that ECoEs are very much higher now (above 9%) than they were in the 1970s (at or below 2%).

Between these data-points lies a climacteric which, once crossed, sees the assumed continuity of growth replaced by an inevitability of contraction.

Moreover, ECoEs are continuing to rise, and this trend cannot be countered, either by technology or by financial innovation.

In this situation, prosperity deterioration is inescapable, though the chaos of a disorderly economic ‘collapse’ remains avoidable, at least in theory, if the right choices are made.

Creative involvement

For those of us who understand the economy as an energy system, the most useful thing that any of us can do is to describe, model and project the situation as accurately as possible, and to delineate the choices that others, on our behalf, will have to make.   

Given our inability to influence tragic events in Ukraine, the most constructive action that we can take here is to intensify and develop our interpretation of the economy as an energy system,

This urgency – the need to ‘up our game’ – existed before Russian tanks moved into Ukraine. This is why the previous article broke new ground for this site by publishing specific forecasts informed by the SEEDS economic model.

Essentially, at least three dynamics are now in operation.

First, trend ECoEs are continuing to rise, pushing prior growth in economic prosperity into reverse. This trend cannot be stemmed (though it might to a limited extent be moderated) by an enhanced recourse to alternatives, including both REs (renewable energy sources) and nuclear.

Second, increases in the real costs of essentials are combining with deteriorating top-line prosperity to undercut the affordability of discretionary (non-essential) goods and services.

Much the same is happening to the scope for capital investment in new and replacement productive capacity.

To a certain extent, the definition of “essential” is imprecise, and certainly varies both geographically and over time. If we had a hard-and-fast definition of essentials – and therefore of discretionaries – planning, both for government policy and for investment, would be a great deal easier.

Efficiency could thereby be enhanced, because governments could set an agenda for debate around the prioritizing of services, whilst markets could start to redirect capital from discretionary into essential activities.

As it is, the fluid character of ‘necessities’ means that we need to use more nuanced appraisal, both of those services that governments must prioritize and of those sectors in which investment should be concentrated.

Third, so accustomed has the world become, both to growth itself and to its benefits, that there are major intellectual and psychological obstacles to reasoned acceptance and effective management of post-growth societies.

De-growth, in turn, creates the probability of increasing political and geopolitical instability, and this instability is likely to prompt, not just increasing conflict, but worsening hardship and consequent migration flows.  

It seems reasonable to assume that most of us lament the hardship being suffered within and beyond Ukraine, and are hoping against hope that wiser counsels will prevail.

Likewise, we must hope that decision-makers, and the public generally, can respond realistically and effectively to the challenges of a post-growth economy. 

To go beyond hoping for the best, we need to explore, discuss and quantify a world in which the assumption of ‘growth in perpetuity’ looks ever more likely to go the way of the Dodo.  

#222. The Forecast Project


In the Western world, at least, there’s an almost palpable sense of public uncertainty, anxiety and discontent which might be attributed to a variety of causes.

Some ascribe it to specific issues, some to the over-reach and incompetence (or worse) of governments, and others to widening inequality between “the elites” and everyone else.

The view taken here is that the deteriorating public mood has a more straightforward explanation, which is that prior growth in economic prosperity has gone into reverse.

The cessation of growth and the onset of involuntary economic contraction are, of course, denied by governments, but this makes popular dissatisfaction worse.

If the economy as a whole is supposed to be growing, but the individual finds that his or her economic circumstances are deteriorating, it’s easy to assume that there must be some kind of bias in the system.

In fact, we don’t need to posit conspiracy theories, or look to ‘the machinations of the mighty’, to explain worsening hardship.

The simpler reality, hidden in plain sight, is that the prosperity of the average person is eroding and so, at the same time, is his or her sense of economic security. Efforts to use financial innovation at the macroeconomic level to stave off this trend have failed, driving people ever deeper into the coils of debt and other financial commitments. 

In short, the average person is getting poorer, and feeling less secure. He or she doesn’t like it, and is baffled and suspicious over official assurances that it isn’t happening at all.

Projection – the land of hazard

Forecasting involves entering territory ‘where angels fear to tread’. But the publication of projections has now become imperative, made so (a) by the rapid worsening in the public mood, and (b) by the incomprehension that continues to inform policy decisions.

The projections that interest us come in two main forms. The first category, covering the economic and the financial, is addressed here. The plan is that broader forecasts, which necessarily include the political, will be tackled in a subsequent article.

To ‘cut to the chase’, analysis undertaken using the energy-based SEEDS economic model reaches two principle conclusions.

The first is that the ‘financial economy’ – the monetary counterpart of the ‘real economy’ of material goods and services – will contract by between 35% and 40%, in real terms, and on a global basis.

This is a process to which asset-prices are over-leveraged, so overall falls in the equity, bond and property markets are likely to be a great deal more severe. In parallel with tumbling asset prices, downsizing of financial commitments can be expected to involve both the ‘soft default’ of inflation and the ‘hard default’ of failure.

Second, economic prosperity will continue to deteriorate, whilst the real cost of essentials will carry on rising.

Reflecting this, the scope for the consumption of discretionary (non-essential) goods and services will shrink rapidly, as will the capability for investment in new and replacement productive capacity.  

Country-specific analysis suggests that, in comparison with pre-pandemic 2019, discretionary consumption in the United States will have declined by 14% by 2030, and by a further 41% by 2040. In Britain, discretionary consumption is projected to be 57% lower in 2040 than it was in 2019.  

Projected trends in discretionary consumption in America, Britain and France are illustrated in the first set of charts, which compare conventional measurement (in black) with SEEDS analyses of underlying trends (blue).

As we shall see, conventional interpretation of past trends has been extremely misleading, conveying the idea that discretionary consumption has continued to grow, from which the inference is that further expansion in discretionary consumption can be expected.

SEEDS modelling shows that the affordability of non-essential goods and services has (at best) plateaued in the United States, and has been trending downwards, over a lengthy period, in most other Western economies.    

Two observations are pertinent here.

First, and obviously, the scope for the discretionary consumption of goods and services that people might want, but don’t need, is poised to fall rapidly.

Less obviously, this deterioration is sharply at odds with what might be expected, based on the misleading prior trajectories shown in black.

A critical point to emerge from SEEDS-based analysis is that these prior trajectories have been distorted, such that false interpretations of the past and present have created gravely mistaken expectations for the future.   

Fig. A

Principles of analysis

The basis on which prior trends are analysed here, and forward projections are made, has conceptual complications.

In principle, the process of interpretation has to move forwards from the past to evaluate financial risk, but backwards from the present to create the preconditions for effective forecasting.

It’s hoped that this apparent contradiction will be clarified by the description that follows.

Let’s start with GDP. This measure, central to conventional economics, is generally assumed to quantify material prosperity but, in reality, it does no such thing.

Rather, GDP is a measure of activity, which is by no means coterminous with prosperity. If liquidity is injected into the system, the resulting use of that liquidity can create activity that has very little material value.

This is exactly what’s been happening over a period stretching back to the 1990s, when governments and their advisers first noticed the phenomenon of “secular stagnation”, wholly failed to understand its causes, and sought in vain to ‘fix’ it with various forms of financial gimmickry.

This started with ‘credit adventurism’ before, in response to the 2008-09 GFC (global financial crisis), ‘monetary adventurism’ was added to the mix.

As well as over-inflating asset prices, this process has created activity without adding value, and has injected unproductive complexity into the economy. It has also led to chronic and cumulative understatement of inflation, properly understood as the rate at which money loses purchasing power.

On this basis, GDP has become increasingly misleading, a confection inflated by the injection of low- or even nil-value activity into the system.

By analysing trends forwards from the past, we can plot the divergence between activity (measured as GDP) and prosperity (calculated using the energy-based SEEDS economic model).

Conversely, though, current GDP is where everyone thinks we’re starting from.

This sets contemporary GDP as the logical point from which forecasts need to begin. This is where analysis needs to reason backwards from the present to reveal the prior trends that will shape future developments.

In other words, we need to think of current GDP both as a polite fiction and as a baseline for forecasts.

Benchmarking the economy

Putting this into practice requires a benchmark, and the reference-point used here is prosperity.

This is calculated, using SEEDS, on the basis of principles familiar to regular readers. The first of these principles is that material prosperity is a function of the use of energy. This is an obvious truism, given that literally nothing that has any economic utility at all can be provided without the use of energy.

The second principle is that, whenever energy is accessed for our use, some of that energy is always consumed in the access process, meaning that it is not available for any other economic purpose. With the ‘consumed in access’ component known here as the Energy Cost of Energy, this is ‘the principle of ECoE’.

In short, prosperity can be calibrated as a function of the supply, value and cost of energy.

On this basis, SEEDS calculates that global prosperity increased by 31% between 2000 and 2020. Allowing for a 25% rise in population numbers between those years, the world’s average person was just 4.8% more prosperous in 2020 than he or she had been back in 2000.

The third principle of surplus energy interpretation is that money has no intrinsic worth, but commands value only as a ‘claim’ on the goods and services provided by the energy economy.

Taken together, these principles point towards the need to draw a conceptual distinction between a ‘real’ economy of goods and services (though ultimately of energy) and a ‘financial’ economy of money and credit.

These ‘two economies’ are perfectly capable of diverging from each other, if we create financial ‘claims’ in excess of the material output of the ‘real’ economy.

This, since the 1990s, is exactly what’s been happening.

Since prices are the point of intersection between the financial and the real economies, inflation ought to reconcile any divergence between the real and the financial economies.

It can only do this, though, if inflation is measured accurately, which hasn’t been the case.       

Forward from the past

The official line, of course, is that material hardship cannot explain popular discontent because, with the exception of the coronavirus crisis of 2020, economic output (measured as GDP) has, with remarkable consistency, grown much more rapidly than population numbers, making people successively better off.

Stated at constant 2020 values, and calculated in international dollars converted from other currencies using the PPP (purchasing power parity) convention, world GDP grew by 94% between 2000 ($68 trillion) and 2020 ($132tn). The global population increased by 25% over that same period, so the world’s average person became 55% more prosperous between those years. 

Bearing in mind that GDP measures activity – and the use of money – rather than prosperity, this claim of rapid improvement in material well-being is easily demolished.

For a start, reported “growth” of +94% ($64tn) between 2000 and 2020 was accompanied by an increase of +190% ($216tn) in debt, meaning that each dollar of “growth” came at a cost of $3.40 in net new borrowing.

Using estimates for broader financial exposure (including the shadow banking system), this ratio rises to $7.20 of incremental commitments for each “growth” dollar. If we further include escalation in the shortfalls (“gaps”) in pension provision, we can arrive at incremental ‘hostages to the future’ of close to $10 for each dollar of reported economic expansion.

In short, since the 1990s, we’ve been inflating GDP artificially by injecting liquidity into the system, and counting the use of that liquidity as ‘activity’ for the purposes of measuring GDP.

The alternative calculation of prosperity is undertaken in two stages. First, the model normalises reported output for the effects of credit expansion.

Second, trend ECoE is deducted from the resulting underlying or ‘clean’ output number (C-GDP), because ECoE, as the first and inescapable call on resources, is the difference between output and prosperity.

The next charts show, for the United States and the global economy, the widening divergence between GDP and prosperity.

It’s worth reminding ourselves that, in a twenty-year period in which GDP reportedly rose by 94% worldwide, prosperity increased by only 31% whilst, for context, debt escalated by 190%, and estimated broader commitments (excluding pension provision shortfalls) rose by close to 250%. 

These broader global trends are illustrated in the right-hand chart. The gap between GDP as reported, and prosperity as calculated by SEEDS, is shown in solid red, and is far smaller than the enormous ‘wedge’ (shown in outline) that has been inserted between debt, broader liabilities, and either calibration of economic output.         

Fig. B

Backwards – and forwards – from the present

As we’ve seen, then, recorded GDP has been inflated artificially by massive credit and liquidity injection. By examining trends over a period going back to the 1990s, we can calculate that 2020 GDP of $132tn drastically overstates underlying prosperity of only $87tn.

The ratio between these numbers provides a measure of the extent to which the financial system, including asset prices and liabilities, will need to contract to restore equilibrium between the financial and the real economies.

Where forecasting forward trends is concerned, however, we are faced with a conundrum. Current GDP may be an extremely misleading number but, for most observers, it’s the point from which forward projections need to commence.

The solution is to use today’s GDP as the basis for forecasts, but to apply our knowledge of underlying dynamics to re-state the way in which that number arrived at where it is.

We can – and, for forecasting purposes, we must – use a base-year (2020) world GDP number of $132tn, but we don’t for one moment have to swallow the fiction that this figure has grown by 94%, in real terms, since, 2000.

In other words, we must use our knowledge to recalibrate the past – not just in total, but in component form as well.

In fact, conventional economics routinely re-states the past for purposes of comparison. When calculating “growth”, economists compare current year GDP, not with its nominal (‘money-of-the-day’) equivalent in previous years, but with those prior numbers restated to a constant, inflation-adjusted basis.

For example, a direct comparison between American GDP in 2020 ($20.9tn) and 2000 ($10.3tn) might suggest growth of 104%, but everyone knows that this number has been distorted by inflation between those years.

The application of the GDP deflator raises the 2000 number to $14.9tn at 2020 values, from which growth over that period is then calculated at a ‘real’ (ex-inflation) 40%.

This is where the SEEDS concept of the Realised Rate of Comprehensive Inflation comes into the equation. What RRCI says is that, whilst the nominal GDP figures for each year might be accepted as an accurate measurement of activity, calculation of ‘real’ change over time has been distorted by a severe underestimation of intervening inflation.

Put another way, the purchasing power of money has declined far more rapidly than official data suggests.

It should, of course, come as no surprise to anyone that inflation has, routinely and to a large extent, been under-reported over time. The conventional measurement of inflation uses a number of questionable assumptions, and very largely excludes changes in the prices of assets.  

Globally, and on the PPP currency convention, nominal GDP was $50.3tn in 2000, and $132tn in 2020. Official data converts the earlier number to $68tn at 2020 values, resulting in the assertion that the world economy has grown by 94%. The official rebasing calculation infers that broad inflation averaged 1.5% between 2000 and 2020.

RRCI analysis indicates that systemic inflation actually averaged 3.5% annually, not 1.5%, over that period. Accordingly, GDP in 2000 is restated to 2020 values, not at $68tn, but at $100tn. This in turn indicates that ‘real’ growth between 2000 and 2020 was 31%, not 94%.

This is very far from being a purely theoretical point, because working out how far GDP has really travelled over the past twenty years also reveals trends in its components.

It’s almost inevitable that past trends act as the basis of forward expectations.

Accordingly, misunderstanding of the past leads naturally to mistaken expectations for the future.   

These components can be stated as “sectors”, which are government, households, financial businesses (such as banks and insurers), and PNFCs (private non-financial corporations). 

For our purposes, though, a more useful analysis is one which divides the economy into three segments, which are capital investment (in new and replacement productive capacity), the provision of essentials, and the supply of discretionary (non-essential) goods and services to the consumer.

Interpretation and projection

Again using the United States as an example, the next charts show three alternative interpretations of the evolution of essentials, capital investment and discretionary consumption, within overall economic output, over time.

The first chart shows nominal GDP, not adjusted for inflation, whilst the second translates everything to 2020 values based on official inflation data.

As you can see in the second chart, economic output, and each of the three segments within it, is supposed to have carried on increasing, even in the recent period in which debt and other financial commitments have been accelerating unsustainably.

On this basis, it might seem reasonable to infer, not just that aggregate economic output will continue to expand, but also that the future expansion of capital investment and discretionary consumption is assured.

The right-hand chart, whilst accepting 2020 GDP as a point-of-arrival for analysis and a point-of-departure for forecasting, uses RRCI analysis to recast the way in which that point has been reached.

The clear message to be taken from this analysis is that both capital investment and discretionary consumption have flat-lined, with the latter already starting to turn downwards.      

Fig. C

The next charts use SEEDS economic projections to carry the RRCI-referenced interpretation of the American situation forwards, and to do the same for the British and the global economies.

For Britain and America, the implications are that, whilst further rises in ECoEs and deterioration in broader resource supply are going to drive economic output downwards, the real costs of energy-intensive essentials will continue to rise.

This means that, looking ahead, both capital investment and discretionary consumption are set to be compressed in ways that interpretations based on mistaken analysis of past trends are incapable of anticipating.

Where global projections are concerned, we’re still in the process of learning the severity of the effect that Western deterioration is going to have on economic performance in EM (emerging market) economies such as China and India. Current indications are that projections for EM prosperity may need to be revised downwards, showing earlier and more pronounced contraction.        

Fig. D 

This dynamic can be expressed using the SEEDS metric of prosperity excluding essentials (PXE).

The next charts illustrate this metric, showing top-line prosperity as a thin blue line, and PXE as a thicker one. The gap between these lines represents the real cost of essentials, but it should be remembered that PXE states the scope, not just for discretionary consumption, but for capital investment as well.

What is revealed here, where America and Britain are concerned, is pre-existing stagnation, followed by impending rapid deterioration, in PXE.

Global calibration seems to show that PXE might not – quite – have peaked yet, but this projection is subject to the previously-mentioned variable about Western effects on the performance of the EM economies.  

Fig. E

Finally, where charts are concerned, the experience and prospects of the average person can be set out by illustrating prosperity and the cost of essentials on a per capita basis. Because population numbers have continued to increase, the per-capita equivalents of the compression of PXE aggregates are more pronounced than the same metrics expressed as aggregates.

In America and Britain, whilst top-line prosperity per person has been trending downwards over an extended period, the real cost of essentials has been rising inexorably.

You’ll notice that, in each of these charts, projection of the per capita cost of essentials ceases in 2030, before the future point at which the lines cross over, and essentials cease to be affordable at all for the average person.

The reason for this is that, long before 2040 – and probably much sooner than that – we’re going to have to re-define what we mean by “essential”.     

Fig. F


Lengthy though this discussion has been, the focus has necessarily been confined to an overview of trends, with selected economies used as illustrative examples.

Our first conclusion, which ought to come as no real surprise at all, is that the ‘financial’ economy of assets and liabilities has become grotesquely over-inflated. This informs us that – because of the dynamic that links the financial and the material – it’s only a matter of time before an inescapable process trending towards equilibrium triggers a correction.

SEEDS analysis cannot, of course, tell us when this will happen, but it can indicate a magnitude, varying between economies but, in overall terms, implying a contraction of 35% to 40% in the financial system as a whole.

The leverage within the equation suggests that the repudiation of liabilities at this scale will translate into markedly more severe falls in asset prices.

It should be remembered that aggregate asset pricing is no more than notional, in the sense that totals thus calculated can never be monetised. If, say, asset values fall by $50 trillion, it doesn’t make the economy “poorer” by that amount. In reality, the aggregate ‘valuation’ of asset classes amounts to nothing more than what we – collectively, and through marginal pricing – choose to tell ourselves that our assets are “worth”.

The second and third conclusions are (a) that both discretionary consumption and capital investment are poised to fall very sharply, and (b) that these contractions aren’t “priced in” to collective expectations for the future, because these expectations are based on severely misleading interpretations of recent trends.