Surplus Energy Economics

STRESS & GRIEF AT THE END OF GROWTH

Foreword

Economic growth is generally understood as a process that delivers a material betterment of living standards over time.

But growth has two other virtues, neither of which has hitherto attracted as much attention as they deserve. Both will be a sore loss now that meaningful growth has ended (and even its faked simulacrum can’t be maintained for much longer),

First, economic growth can rescue us from the consequences of our own mistakes or misfortunes.

The obvious examples are the strong recoveries staged by Germany and Japan from the ruins of 1945. The quarter-century after the Second World War was a period of global economic expansion eclipsing anything ever experienced before or since, and it’s clear that the remarkable German and Japanese reconstructions could not have happened without these favourable worldwide conditions.

These curative properties of growth also apply, though, to businesses and individuals. Governments, too, can grow their economies out of fiscal failures.

Growth, that’s to say, gives us hope. It’s associated with economic regeneration – we might even say ‘redemption’ – as well as with betterment, making it very important indeed from the point of view of collective psychology and expectation.

It was possible, over a very long period, to believe that each generation would enjoy a material improvement in living standards and opportunities in comparison with its predecessor – a belief that has only quite recently ceased to be true.

The second great virtue of growth is that it can allow some to prosper without inflicting worsening hardship on others.

In essence, ‘A can get richer without impoverishing B’ under conditions of growth. During the high-growth years between 1945 and 1970, fortunes were made by many, but the living standards of the generality continued to improve, certainly in the West, and inequalities of wealth and income actually decreased during this period.

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Now that growth has ended, then, we face two fundamental shocks. The first is that we will have to own the consequences of our mistakes, and can no longer rely on economic expansion curing our ills.

Second, minorities will only be able to maintain or expand their wealth at the expense of majorities. This in itself is a massive political shift.

As well as confronting formidable social and political challenges, we will undoubtedly grieve the loss of the curative and reconciling properties of growth.

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Colloquially, we employ the word “shock” to describe any unexpected event, a term whose use extends across the gamut from a severe loss of oil supply to a dramatic overturning of the form books in a sporting contest.

But medical professionals use the term more specifically, referencing “shock” as a condition of acute stress reaction. This is described as “a psychological response to a terrifying, traumatic, or surprising experience”. Unless treated effectively, this can develop into post-traumatic stress disorder.

In layman’s terms, shocks that change our assumptions and expectations can have very real physical and psychological consequences.

Further insights into human reactions to bad news are provided by the five stages of grief set out by Elisabeth Kübler-Ross. We handle serious setbacks by moving, via denial and anger, into bargaining and depression before we finally reach acceptance.

Those of us who aren’t medical or psychological specialists might be well advised to confine ourselves to Cyril Benstead’s observation that “[t]he weaknesses of mankind are generally accentuated under strange and unaccustomed conditions”. There’s no doubt that the ending and reversal of economic growth counts as “strange and unaccustomed conditions”.

The broad point is that an unexpected event, especially an adverse one, can shock people out of rationality.

The term “unexpected” needn’t necessarily refer to something that couldn’t have been predicted.

It might instead reference a bad outcome whose very possibility we have chosen to disregard.

Should we, then, be starting to think in terms of a post-growth derangement syndrome combining the destabilizing characteristics of grief and shock?

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If we look at the world from a perspective of determined objectivity, it’s hard to avoid the impression that collective rationality has been breaking down.

There is, for a start, abundant evidence that, at the very least, the capability for economic growth is drastically lower now than it was in not-too-distant times. Some of us have been prepared to go further, noting that economic expansion has been in the process of reversing into contraction.

Yet society seems to be in the early – the denial and anger – stages of grieving over the loss of economic growth. Perhaps, more specifically, denial has become deeply entrenched, and anger is now starting to make its presence felt.

The aim of the Surplus Energy Economics project has, from the outset, been to interpret and quantify the observation that more than two centuries of meaningful economic growth have been drawing to close.

You don’t, though, actually need C-GDP, ECoE, resource conversion ratios or RRCI disequilibrium inflation to recognise what is really going on.

Problems with “the cost of living”, for example, are visible wherever we look, yet this is still described as a “crisis”, implying some purely temporary phenomenon that wisdom or simply the passage of time will resolve.

This delusion is reinforced by an episodic narrative which blames worsening hardship and insecurity on the ‘bad luck’ of experiencing, in quick succession, a pandemic, a war in Eastern Europe and, now, a conflict in the Persian Gulf.

SEEDS analysis indicates that, far from being temporary, pressure on the costs of essentials has become a relentless and firmly-established trend.

These calculations are carried out by adding government expenditures on public services to the estimated cost of household necessities.

To be clear, any such analysis can only ever be based on estimates, not least because the definition of “essential” varies both geographically and over time. Some products and services now regarded as necessities were viewed as “luxuries” in the not-too-distant past, examples of which include colour televisions and mobile phones.

But the broad conclusion, which seems underscored by observation, appears to be valid. It is that the real costs of essentials are rising rapidly, and are out-growing any continuing expansion in economic means.

Meanwhile, the basis of economic value has been shifting, away from all forms of income and towards capital gains. The latter are, by definition, incapable of monetisation at the aggregate level. Obviously enough, the only people to whom the entirety of real estate, stocks and any other financial asset class could ever be sold are the same people to whom they already belong.

We have, then, been substituting paper gains for material-equivalent incomes.

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The denial characteristics of collective economic self-delusion are particularly visible in the increasing veneration of the two false deities of economic salvation.

One of these is the notion that a deteriorating material economy can be reinvigorated using monetary tools. The other is that we can overcome material finality using the “limitless” capability of human innovation, enacted as technology.

As you may know, both of these assertions are false.

Money, having no intrinsic worth, commands value only as an exercisable “claim” on those material products and services for which it can be exchanged. This, in Surplus Energy Economics, is known as the principle of money as claim, and its validity is surely self-evident.

No amount of money has the slightest value to anyone isolated from exchange, which is the predicament of a person stranded on a desert island, or cast adrift in a lifeboat. Air-dropping banknotes to people suffering from energy and food deprivation cannot help these people unless these commodities are available for purchase.

Meanwhile, the very idea that technology has “limitless” potential is illogical, since all technological possibility is bounded by the characteristics of materials and the laws of physics.

What’s interesting, from the perspective of a post-growth derangement syndrome, is the extent to which irrationality has been extending into the twin fields of technology and finance.

Huge hope and vast amounts of capital have been invested in artificial intelligence, which has been called “the money-losingest project the human race has ever attempted”, has no demonstrable route to profitability, and requires energy and other raw materials at scales which do not even exist.

Meanwhile, American stock markets have reached new highs, despite the fact that closure of the Straits of Hormuz has already inflicted enough material damage to ensure, at the very least, a pronounced economic hit.

Neither does anyone even seem to know what monetary responses are to be expected as this crisis unfolds – will decision-makers tighten policy, in an effort to tame inflation, or will they loosen it, to try to stimulate a sagging economy?

Nobody really knows – but equities are continuing to climb the slope towards the cliff-edge.

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Only in the oil markets has some kind of realistic thinking seemed to prevail.

The closure of the Straits is by far the worst shock ever experienced by the petroleum industry. Not only is it equivalent to the 1973-74 and the 1978-79 crises added together, but it has been greatly exacerbated by severe interruption to shipments of LNG, refined products, petrochemicals and other critical inputs such as sulphur and fertilizers.

Under these extraordinary conditions it was wholly to be expected that oil prices would spike but, thus far at least, these responses have been strikingly muted. Brent crude has occasionally tested US$120/bbl before retreating back towards US$100.

This is a far cry from mid-2008, when Brent reached US$147/bbl, equivalent to almost US$190/bbl at 2026 values. That spike was driven, not by supply shortages, but simply by robust demand.

In essence, the markets seem to have recognised that demand destruction now occurs at markedly lower price-points than in the comparatively recent past.

This doesn’t mean that consumers can shift wholesale to alternatives to oil, since no such scalable alternatives actually exist in most of the applications in which oil in general – and diesel in particular – are critically important.

Meanwhile, the crisis in the Persian Gulf has already lasted long enough to impair output from the summer planting season in the northern hemisphere, with yields set to fall by as much as 50% in some categories of food supply.

What “demand destruction” actually means is that a price is reached at which consumers opt to do without oil rather than chasing its price to ever-greater heights.

Given the profound material consequences of petroleum deprivation, a reduction in the demand-destruction price-point can only mean that consumers – and hence the economy – are poorer than was previously the case.

Fig. 1

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We are, in essence, trapped between two truisms.

One of these was stated by Kenneth Boulding, who famously explained that only “a madman or an economist” could believe in the promise of infinite, exponential economic growth on a finite planet.

But Upton Sinclair, equally famously, said that “[i]t is difficult to get a man to understand something when his salary depends upon his not understanding it”.

We seem to have been prepared to go to almost any lengths rather than admit that economic growth has long been decelerating towards contraction.

Why, though, has growth come to an end?

At the very simplest level, the explanations are that, whilst the non-energy resource base has been subject to long term degradation, the economics of energy itself have been worsening as the impetus initially imparted to the economy by the harnessing of fossil fuels fades out, with nothing available to take its place.

These processes are calibrated here using two specialised metrics. One of these measures the rate at which non-energy resources – including minerals, non-metallic mining products, biomass and water – are converted, using energy, into the top-line flow of economic value.

This, as can be seen in Fig. 2A, has been on a gradual downwards trend. What this means is that these resources have been depleting rather more rapidly than the broad swathe of conversion technologies has been able to advance.

Greater prioritization of resource use could slow this deterioration. Equally, though, the effects of environmental degradation could make things worse, by impairing the qualities of land, water and other resource systems.

Meanwhile, the Energy Cost of Energy has been rising relentlessly. ECoE is defined as “that proportion of energy which, being consumed in the energy access process, is not available for any other economic purpose”.

Rather than showing recent trends – a rise from 2.0% in 1980 to almost 12% today – Fig. 2B illustrates this as an inferred parabola extending over a much longer period.

Given the lack of really long-term historical data, this parabola is necessarily illustrational, but the point to be noted here is that ECoEs fall over an initial phase in which costs are driven downwards by extending geographical reach and rising economies of scale, together with gradual improvements in the technologies of access and use.

Once the benefits of reach and scale have been exhausted, though, the new driver becomes depletion, which describes the natural preference for using lowest-cost resources first, and leaving costlier alternatives for later.

The combined effect, as illustrated in Fig. 2C, is that surplus (ex-ECoE) energy turns down before the adverse combination of rising producer costs and declining consumer prosperity starts to impair top-line supply.

The economic corollary, shown in Fig. 2D, is moderated from the energy curves through the application of resource conversion ratios.

This shows top-line economic output (annotated C-GDP) retaining a modest amount of residual growth capability, but ex-ECoE prosperity already heading into decline.

Fig. 2

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On the basis of SEEDS projections, aggregate material economic prosperity is likely to be about 16% lower by 2050 than it is now, but a continuing (though decelerating) expansion in population numbers could see the prosperity of the average person decline by around 30% over that period.

The real costs of this person’s energy-intensive essentials could rise by more than 70% over the coming quarter-century.

In effect, discretionary (non-essential) affordability gets crushed.

None of this is all that difficult to anticipate, but even its early stages are proving remarkably hard to process collectively.

Denial, thus far, has taken the forms of runaway monetary claim expansion, and a willingness to accept all technological change as “progress”, even where, as Charles Hugh Smith has explained, it often actually constitutes anti-progress.

It’s not as though it’s even hard to predict that the undue faith invested in the false deities of limitless monetary stimulus and infinite technological possibility are likely to fail together, in an event at which the credibility both of money and of technology form a combined crisis.

In other words, we should anticipate a conjunction of technological disillusionment and a collapse of trust in money.

Will that be the point at which Boulding’s truism is accepted, and Sinclair’s axiom is somehow overcome?

REFLECTIONS ON CRISIS & THE RISE OF AMATEURISM

Foreword

One of the first things that an investment analyst learns is that professional clients need more than simply your opinions or hunches. Presentations need to be based on data, and the only way to provide worthwhile forward projections is to model the security, commodity or economic issue in question.

You (and your organisation) either have this information or you don’t.

If you don’t, you might be tempted to resort to extrapolation, which means assuming that past rates of change continue indefinitely into the future. If, say, an economy has grown at an annual average rate of 3% over the past ten years, it’s assumed that this rate of growth carries on.

This, of course, is when a pandemic breaks the sequence, or America bombs Iran.

And this is when we remember that a youngster who is five feet tall at his or her ninth birthday isn’t likely to be ten feet in height when entering college, or 36ft tall at pensionable age.

This is why extrapolation has been called “the fool’s guideline”. But it’s remarkable how often narratives are buttressed with the words “at the current rate….”.

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And then there’s artificial intelligence.

There are bluffers in any profession, of course, but the only thing that anyone trying to bluff a presentation to an expert investor using AI output is likely to achieve is to crank up the volume of laughter as he or she is ushered from the room.

This is one pertinent example of the difference between gentlemen and players, a Victorian phrase that distinguishes professionals from amateurs.

As Cory Doctorow explained last month, “If you’ve read something you disagree with but don’t understand well enough to rebut, and you ask an AI to generate a rebuttal for you, you still don’t understand it well enough to rebut it.” This is why, as Doctorow puts it, “No one wants to read your AI slop”.

Let’s take an instance of what basing analysis on artificial intelligence involves.

The user of AI poses a question about the economy, and the answer is likely to include sources of original information. If the user follows these leads, he finds himself looking at data from, for instance, the IMF, the World Bank, the BIS, the FSB or some national statistical agency. This data can be downloaded, though knowing what to download can sometimes, in itself, require professional knowledge.

So far, so good. But what do the statisticians mean by the GDP deflator, the primary fiscal balance or PPP-equivalent numbers? What are NBFIs and PNFCs? Does it matter whether we use market amounts, nominal equivalents or percentages of GDP, and how do we choose between current and real data?

Turning to GDP deflators, what is the base year used for the deflator, and what happens if the base year (or period) differs between national economies or data series? How can we even calculate the deflator, if this series is not included in the data that we have?

How, for that matter, do we handle historic dollar-equivalent numbers when we’re looking at countries with very high rates of inflation over time? Do any of the dollar exchange rates for, say, Argentina in 2005 have any contemporary relevance, or do we (and how?) have to recalculate everything for comparative rates of inflation over time?

In short, information is of little value unless the user knows how to handle it, and having AI do the organising for us does nothing to enhance our professional skills.

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April is one of those months of the year – and there are several – in which anyone analysing energy or the economy has to handle sizeable quantities of newly-released information. But the aim here isn’t to lament the hard work involved in analysis, or, for that matter, to discuss the skill-sets needed to access this data and put it to use.

Rather, what matters now is the difference between gentlemen and players – amateurs and professionals – in world events.

As you probably know, the world economy was in a pretty bad way even before hostilities broke out in the Persian Gulf. Aside from the pandemic and the war in Eastern Europe, we’ve been trying to cope with runaway debts and quasi-debts, an “everything bubble” in asset prices, structural rises in the costs of necessities, severe fiscal strains and extremely high levels of wealth and income inequalities. The IEA has warned about accelerating rates of decline in the supply of oil and natural gas, and renewables have yet to be proven as profitable technologies.

The point is that these and other challenges need to be managed professionally, when what’s actually been happening has been the relentless rise of amateurism.

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In one of his timeless sketches, Bob Newhart pondered what might happen if, instead of sending out “an expert, courageous team of men”, someone despatched “a team of non-experts” to deal with an unexploded bomb. (You can imagine the outcome, or you can enjoy it on line).

In some circumstances, amateurishness can kill. We wouldn’t ask non-experts to conduct surgery, or to repair broken powerlines or fix a ruptured gas main. The Royal Navy once built a warship designed by an amateur, and she capsized at the first real gust of wind, killing nearly 500 sailors.

Even in fiction, readers have become aware over the years that crimes are solved by policemen, not by the little old ladies and the eccentric Belgians popular in the ‘golden age’ of detective novels.

We know that, in democratic societies, senior government posts are often held by non-specialists. But we assume that these people have access to abundant counsel from career professionals. The head of an investment bank needn’t be an expert in bond mathematics, but he or she will surely employ someone who is.

And this is what makes the current amateur hour in global affairs so disconcerting. Professional advice, where it exists, seems increasingly to be disregarded – or to be outright inadequate – in decision-making circles.

Although we must start with the war in Iran, the rise of the amateur is to be seen right across the gamut of policy, commentary, business and finance.

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Whatever we think of the competence of the American armed forces, these professionals must have been able to warn their political masters in advance about the dangers of asymmetric warfare, and about the munitions depletion consequences of the adverse rate of exchange involved in using pairs of highly expensive interceptors to take out individual cheap drones and even cheaper decoys.

The administration must surely have been told, too, about the consequences of a closure of the Straits of Hormuz, and of retaliatory Iranian strikes on the energy assets of the GCC countries, both of which could surely have been anticipated.

Decision-makers might also have paused to wonder about why no previous president, however hawkish on foreign affairs more generally, has seen fit to go to war with the Islamic Republic.

This site takes no sides on this conflict, but White House leadership in this war has turned into a clown-show, with professional advice seemingly ignored, and policy made on the hoof. Mr Trump has oscillated wildly between blood-curdling (and sometimes expletive-laden) threats and subsequent climb-downs.

The United States might or might not have had clearly-stated war aims, but seems to have had no really workable strategy – no “plan B” – if initial kinetic strikes and assassinations failed to take down Iran. Since then, the government has been flip-flopping like a stranded porpoise.

It might, of course, turn out to be “all right on the night” for America in the Gulf. But evidence of professionalism and planning might, if nothing else, have given other decision-makers a great deal of reassurance.

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Not that Team Trump have been alone in their amateurism, though.

In the financial markets, oil prices have soared and equities have slumped at every bit of bad news, only for these moves to reverse dramatically at the slightest hint of conciliation. Bond markets have been conflicted about whether to expect counter-inflationary rate hikes or stimulative cuts in the aftermath of the war.

Nobody, in short, seems to have been looking through current vicissitudes to the critical underlying trends.

Many business leaders, too, seem to have wandered off into the assumption of economic conditions that do not and cannot exist. Essentially, the conflict in the Gulf has been treated as some kind of “little local difficulty” that does not require planning responses.

This is consistent with how businesses have addressed rises in the costs of living, regarding these, wholly wrongly, as some kind of temporary “crisis” that has no bearing on the future affordability of discretionary (non-essential) products and services.

In Europe, the media has continued publishing travel guides – and resorts have been preparing for an as-normal summer influx of visitors – even as consumers have been getting poorer, and supplies of jet fuel have been draining away.

In general, too many businesses around the world have assumed that consumers have bottomless pockets, and will pay up for any price hikes, irrespective of relentless rises in their living costs.

This is even before, of course, we consider the preferred business model for AI, which assumes energy and other resources that do not even exist at the requisite scale.

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But the amateur hour prize must go to anyone who asserts that economies can find energy security simply by switching from imported oil and gas to ‘home produced’ renewable energy, as though this was some quick and easy ‘fix’ for the consequences of closure of the Straits.

For one thing, the flip answer to the energy question might be “renewables”, but investors haven’t actually backed this assumption by putting serious money into these technologies. In stark contrast to the times of Henry Ford and John D. Rockefeller, there are no renewable energy giants which can power – and profit from – the contemporary industrial equivalent of the early days of the automobile industry.

Investors are, then, extraordinarily conflicted between a technology about which they enthuse and its need for energy, which they disregard.

Finally, it’s worth remembering that, whilst Iran can shut off roughly a fifth of world oil and gas supply by closing the Straits, China controls 31% of the global supply of nickel, 44% of copper, 70% of lithium, 71% of battery-grade purified phosphoric acid, 78% of cobalt, 91% of manganese, 91% of rare earth minerals and 95% of graphite. Moreover, these concentrations can be expected to increase, not decrease, for at least the next ten years.

Two conclusions can be reached from this data. The first is a reminder that freedom of trade is, second only to abundant low-cost energy, the critical precondition for the industrial economy.

Patriotism might or might not be “the last refuge of the scoundrel”, but protectionism is the first and instinctive resort of the idiot.

The second conclusion is that, whilst the real fundamentals of economics should be clear and straightforward, their application is complex. We really don’t need amateur nostrums about finding national energy security through the simple expedient of replacing oil and gas with ‘home produced’ renewables.

It’s just a little bit more complicated than that………

TRYING TO DODGE AN ENERGY BULLET

Foreword

For perfectly understandable reasons, many comparisons have been drawn between contemporary events in the Persian Gulf and the oil crises of the 1970s. This can only be useful, though, if we have an accurate perception of what really happened during that traumatic decade.

That was a time when long years of supply complacency were suddenly replaced with a new energy consciousness. One consequence was the rapid abandonment of whole swathes of energy-profligate technologies.

If, after an even longer period of complacency, a new sense of energy consciousness results from unfolding events in the Gulf, energy-intensive business models for artificial intelligence could, amongst many others, follow the ‘gas-guzzling’ cars of the early seventies to the scrap-heap of bad ideas. ‘Working smarter’ will involve achieving the same objectives with less use of energy.

Second, it was hard enough for individuals – and, indeed, for decision-makers – to ensure the continued availability of necessities, let alone to spend money or energy on anything less than vital. Under these conditions, the affordability of discretionary (non-essential) products and services was dramatically reduced.

The current crisis has erupted at a time when the affordability of discretionaries is already under relentless downwards pressure, which is the chief implication of the non-temporary, non-crisis “crisis” in the “cost of living”.

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But the most profound – if the least observed – consequence of the oil crises of the 1970s was regime change, not in the Middle East, but in the West.

The decade began with the post-war Keynesian Consensus firmly in control, not least because this incumbency had presided over impressive economic growth and significant reductions in inequalities. Despite these credentials, it had, by 1980, been replaced by a Neoliberal Ascendancy whose rise was most closely associated in the public mind with Margaret Thatcher and Ronald Reagan.

In the subsequent chronology of politico-economic development, the Neoliberal Ascendancy was itself replaced, during 2008-09, by a Post-Capitalist Expediency (PCE) whose aims are the preservation and expansion of post-neoliberal structures of power and wealth inequalities by any means possible. We need not doubt that popular support for this incumbency is dramatically lower than for any previous regime.

The one comparison that should not be made with the events of the 1970s is the subsequent economic recovery. This time around, no such rebound will be possible. Back in the 1970s, the all-important Energy Cost of Energy was below 2%, and essentially stable – today, ECoEs are above 11%, and are rising relentlessly.

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There is, in war-time, no obligation to speak truthfully, if by doing so you might convey valuable intelligence to the enemy. Where the war in Iran is concerned, Mr Trump’s own quirky and self-contradictory presentational style further thickens “the fog of war”. We can’t know whether the President has a Venezuela-style coup-de-main up his sleeve, is determined to befuddle and off-balance his adversaries, or is simply as mad as a box of frogs.

This said, we do need to try to make sense of what’s happening in the Persian Gulf.

The initial plan seems to have been to destroy the leadership in Tehran quickly with a combination of massive kinetic force and top-echelon assassinations (though the idea that a repressed Iranian public might step into the vacuum thus created was always rather fanciful).

The conflict rapidly turned into a contest between firepower and staying-power. On this basis, the next logical step was for America to destroy Iran’s electricity infrastructure. The reciprocal consequence would have been an all-out Iranian assault on the energy, petrochemical and other critical assets of the GCC countries.

This, had it happened, would have transformed temporary supply interruptions into long-lasting shortages of oil, natural gas, fertilizers and chemicals. It was not (and is not) even clear whether the battered economies of the GCC countries could have afforded the massive, years-long task of reconstruction.

The drastic implications of this sequence might help to explain why Mr Trump has twice paused this next stage, first for five days, and then for ten.

Iran, obviously enough, has been playing for time, the aim being to survive with three core capabilities largely intact. These are its network of proxies in the region, its stranglehold over the Straits of Hormuz, and whatever progress it may (or may not) have made towards nuclear weapons. This is why, whilst denying that any negotiations are ongoing, Tehran has been careful not to rule out any future negotiated end to the conflict.

Taken at face value, Mr Trump’s current stance seems to be that military operations can be wound down over the coming two or three weeks, with an enormous proportion of Iran’s weaponry destroyed, most of its leadership cadre eliminated, and its nuclear ambitions set back by decades.

The President does not seem decided about whether the Straits will reopen in the natural course of events, or whether other countries – more affected by closure than the United States itself – will need to intervene. Neither has he ruled out the previous idea of devastating Iran’s electricity system.

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These are issues of only tangential relevance to our primary interests in energy and money, and who, if anyone, can claim to have “won” the war is a verdict that can safely be left to others.

What matters here must be what happens next in the interconnected realms of economics, finance and government.

Any such assessment needs to be grounded in an understanding of the sequence of political-economic eras since 1945.

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At the end of the Second World War, very few people wanted a “business as usual” return to the Crash and Depression years of the inter-war period. Keynes had given policymakers new tools for the management of what was then called “the business cycle”.

There was a widespread belief that the organizational methods which had won the war could now be used to “win the peace”. A new management architecture – Bretton Woods, the IMF and the World Bank – was put into place.

The salient features of this Keynesian Consensus were the mixed economy of private and public provision under the umbrella of demand management.

This incumbency was fortunate in that economic conditions were highly favourable for growth and for post-war reconstruction. As oil (and, latterly, natural gas) took over from coal, and as huge hydrocarbon discoveries were brought on stream, ECoEs were trending towards all-time lows. These were years of ultra-cheap energy in which various technologies (such as cars and domestic appliances), which had previously been the preserve of a minority, extended into mass markets.

There were some ways in which this era was characterised by levels of prosperity which cannot be replicated today. In Britain, for instance, it was possible for couples to buy homes and start families in their early twenties, run a car and take holidays, and to do all of this on the income of a single wage-earner, and without going deeply into debt. Local authorities provided affordable homes for those unable to buy houses or apartments of their own. Government services – including defence and health-care – were comparatively well-resourced.

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As we have seen, this Keynesian Consensus was replaced, after the hardships and insecurities of the 1970s, by a new Neoliberal Ascendancy. This group succeeded in persuading the public that the difficulties of the seventies were caused, not by the oil crisis (as was actually the case), but by “left wing” governments and “over-mighty” organised labour.

Whatever view one might take about the policies and aims of this Neoliberal Ascendancy, it did at least present a coherent economic philosophy. In essence, it contended that the economy could recover from the travails of the seventies by reducing the size of the state, breaking the power of organised labour and unleashing the driving force of personal incentive.

In its early years, fortune favoured this new incumbency. Between 1973 and 1985, whilst petroleum consumption increased by less than 6%, non-OPEC production expanded by 44%, such that the cartel’s own output halved, and its share of the market fell from 50% to less than 27%. This “oil glut” created a sharp fall in prices during the 1980s.

A second piece of good fortune occurred at the start of the 1990s, when the USSR disintegrated, a process which opened up the resources of Russia and its former COMECON allies to western “investment”.

Better still, this seemed to mark the final triumph of market capitalism over its collectivist antithesis. These were times when it seemed possible to think that history had come to an end, with neoliberal economics triumphant.

Thereafter, though, problems started to set in, with the term “secular stagnation” describing decelerating rates of economic growth in the 1990s. To the decision-makers of the times, the solution seemed to be to inject stimulus by making it easier to borrow – and in many ways cheaper – than at any previous time.

From a perspective which recognises the two economies of the physical and the financial, this couldn’t have worked. We cannot reinvigorate the material economy using monetary tools (and, for the record, Keynes had never claimed that we could). What was really happening in the 1990s was that the Energy Costs of Energy were rising markedly, from 3.0% in 1990 to 4.3% by 2000.

In consequence, the result of this “credit adventurism” was the global financial crisis of 2008-09 – the aggregate of financial claims had dramatically out-grown more pedestrian increases in material economic prosperity.

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One of the little-noticed victims of the GFC was the Neoliberal Ascendancy itself.

Its two basic precepts were (a) that markets must be left free to conduct their primary tasks of price discovery and the pricing of risk without undue outside interference, and (b) that investors must earn a positive real return on their capital. During the crisis, these precepts were abandoned in favour of massive intervention by governments and central banks.

On the basis of market principles, anyone who has taken on miscalculated risks, or who has simply been unlucky, must be wiped out by this kind of crisis. Since anyone who has been bailed out once necessarily expects to be rescued again if another crisis occurs, these interventions created the “moral hazard” which occurs when the relationship between risk and return is distorted.

Though existing only in paper form, the asset price gains driven by the deliberate under-pricing of capital are an addictive drug, which is why the supposedly “temporary” ultra-loose policies of QE, ZIRP and NIRP were kept in place long after the worst of the “emergency” had passed.

The abandonment (in all but name) of the precepts of liberal market capitalism replaced neoliberalism with a new ascendancy which is known here as the Post-Capitalist Expediency (PCE). It is characterised by an absolute determination to maintain and expand the artificially-wide wealth and income differentials created by the “monetary adventurism” of the post-GFC years.

This is an “expediency” because it has no macroeconomic principles worthy of the name, and should remind us of Robert Lowe’s description of politics as a conflict “between those who have – to keep what they have got; and those who have not – to get it”.

The PCE’s chances of maintaining its supremacy must be rated as remarkably low. The “real” economy of material products and services has stopped growing, and has started to shrink, whilst the real costs of energy-intensive necessities are rising relentlessly.

Investment in new and replacement productive capacity has become opportunity-constrained, which is why so much capital is now devoted to chasing up the prices of existing assets.

Past exercises in credit and monetary adventurism have created a financial system that is not only hugely over-sized but is also lethally over-complex. Economic prospects, looking ahead, are for ever-worsening discretionary compression, accompanied by rising levels of economic hardship and financial insecurity. Ultimately, the financial system will succumb to a crisis which will make 2008 look like a stroll in the park.

7

It’s to be hoped that the foregoing will have helped you to frame ongoing events within a politico-economic sequence and an economy that, through energy and resource depletion, is losing the ability to prop up the paper illusion of ever-greater wealth.

We cannot know whether the war in Iran will, or will not, result in a full-blown reprise of the 1970s. If it does, though, it could eliminate any possibility of a managed retreat as material economic prosperity stops growing and inflects into contraction.

SOME REALITIES BEHIND THE ONGOING CONFLICT

Foreword

We may not yet know how and when the war in Iran will end, but we can already perceive how it will be spun in retrospect.

Following the pandemic lockdowns of 2020 and the invasion of Ukraine in 2022, the conflict in the Gulf will be the third great excuse for the absence of meaningful growth in the global economy.

In the small things of life, we have a tendency to see excuses for what they are. We don’t make a habit of believing that “the dog ate my homework”, “the payment’s in the post”, or “I can’t buy a round of drinks because a spaceman from Mars stole my wallet”.

In matters of greater moment, however, excuses have a tendency to be swallowed more easily, primarily because of a collective desire to submit to “the willing suspension of disbelief”.

1

The two great realities of our predicament are that the economy is inflecting from growth into contraction, and that nobody in any position of authority or influence can afford to admit it. “Life after growth” has, as we have previously reflected, turned into life after truth.

The current conflict is a case in point. The facts of the situation are that asymmetric warfare makes it far easier to close the Straits of Hormuz than to keep this critical waterway open. Bottled up beyond the Straits are about a fifth of the world’s supply of oil and natural gas, and larger proportions still of international trade in these products.

Moreover, the Straits constitute a nitrogen trap, blocking access to sizeable proportions of fertilizer supply at a time when the planting season won’t wait while we sort out “a little local difficulty” in the region.

The global population numbered just over 3.0bn in 1960, by which point virtually all land capable of cultivation was already under the plough, and it’s a reasonable calculation that, in the absence of fertilizers, global carrying capacity might be about 4 billion, or less than half the current total.

As well as these inputs, of course, intensive agriculture also depends on the abundant availability of low-cost energy, a condition that is unlikely to prevail as fossil fuel supply declines, proportionate material costs rise, and “renewables” continue to fall far short of replacing the surplus (ex-ECoE) energy currently sourced from oil, natural gas and coal.

2

We should not, from these observations, stray into the territory of doom-mongering, but neither should we be deluded by claims based on GDP.

One of these claims is that agriculture and fisheries account for “only” about six per cent of global economic activity, implying that the remaining 94% of the economy could continue merrily on its way even if the entire ability to supply food were to be lost.

Likewise, we can calculate that energy in its entirety is an even “less important” input than food, and that the proportion of GDP which transits the Straits is, when measured by value, barely a rounding error in the overall total.

GDP is, then, an excellent measure, except when we want to calculate anything that actually matters.

3

The single biggest snag with GDP is that it measures, not the supply of material value to the economy, but the aggregate of transactional activity in the system. Accordingly, much of the “growth” reported in recent years has been nothing more than the spending of vast amounts of borrowed money.

This is why SEEDS strips out this ‘credit effect’ to calculate underlying or “clean” economic output, known here as “C-GDP”, from which the deduction of the first-call on resources made by the Energy Cost of Energy enables us to calibrate material economic prosperity.

The C-GDP metric also enables us to compare output with energy use, thus calculating the rate at which non-energy resources are converted, using energy, into the products, artefacts and infrastructures which constitute the “real” or material economy.

Whilst this conversion ratio has been trending gradually downwards in response to the depletion of minerals, non-metallic mining products, biomass and water, ECoEs have been rising relentlessly along an exponential trajectory.

Fig. 1

4

The lessons to be learned – rather, to be re-learned – from this war are the parallel vulnerabilities in our economic and financial systems.

On the one hand, the material economy depends on the flawless functioning of an interconnected series of critical supply chains. A preference for profit over prudence dictates that we rely on a JIT (‘just in time’) system which militates alike against the creation of backup capacity and the holding of sizeable inventories.

On the other, the financial system has become not only bloated but lethally cross-dependent. We can gain some insight into this from data published annually by the Financial Stability Board.

At issue here are “financial assets” which, in SEE terminology, are the aggregate of financial claims on the “real” or material economy. Put another way, the “assets” of the financial system are claims on – and liabilities of – the material or non-financial economy, since nobody else can honour them.

5

The submission of data to the FSB is voluntary, meaning that available information is neither complete nor timely.

We may know that, at the most recent reporting date, the assets of the financial system of the Cayman Islands totalled $17.5 trillion, or 295,000% of the Islands’ $5.9 billion GDP, but most other offshore financial centres (OFCs) – of which there are about forty – do not file returns with the FSB.

What this means is that, although jurisdictions equivalent to almost 80% of GDP do report to the FSB, we can’t simply gross up from their exposure (510% of GDP) to a global aggregate.

SEEDS estimates – and they can never be more than that – are that global financial assets totalled not less than $665tn at the end of 2024, equating to about 600% of reported GDP.

The latter ratio is far higher than the 475% of GDP estimated for the end of 2007, when the economy was on the brink of the global financial crisis.

Far from being learned, the lessons of 2008-09 have been disregarded in a headlong rush to ever greater risk exposure.

Adjusted for inflation since 2007, these SEEDS estimates indicate that aggregate financial assets have increased by about $315tn in a period in which reported real GDP increased by only $37tn.

The idea that we have added about $8.50 in new financial claims for each dollar of reported “growth” is by no means outlandish, given the preference for ultra-cheap capital in the intervening years.

Asset price gains might only exist on paper, but such gains are an addictive drug in the corridors and offices where decisions are taken. This is one reason why 2008-era promises that reckless monetary expansion would be “temporary”, and would last only for the duration of the “emergency”, were never likely to be honoured.

Moreover, within the estimated $315tn real-terms increase in financial assets since 2007, less than 23% has been sourced from the regulated banking sector, and almost 68% from NBFIs. These non-bank financial intermediaries are known colloquially as the “shadow banking sector”, an opaque and hyper-complex system of cross-collateralised claims.

In essence, then, the financial system has been subject to increasing risk in two distinct ways.

First, there is the scale risk associated with creating upwards of $8 in net new claims for each incremental dollar in transactional activity.

Second, there’s ever-increasing complexity risk driven by the migration of the centre of gravity of risk itself from the comparatively conservative centre of the system to its unregulated and opaque periphery.

Fig. 2

6

Thus far, at any rate, the public has not been well served by mainstream coverage of the war. We’ve been deluged with political and military ‘analysis’ which leaves us none the wiser about when and how the conflict might conclude.

But it’s in the economic field that reporting has been at its most shallow. We’re told that the costs of fuel, food and – as if it mattered, in the grand scheme of things – air fares might rise. We’ve also been informed that conflict-induced inflation might keep interest rates ‘higher for longer’.

The citizen, it seems, might have to pay more for his or her fuel, food and travel, and might find mortgages somewhat harder to find, and costlier to service.

These are, in essence, modest and manageable increments to the long-established “cost of living crisis”. Governments might, in addition, have to raise a bit more in taxes, and try to make some modest cuts in public expenditure.

This will hurt, then – and we might, as a result, not feel too happy about some of the protagonists in the conflict – but it needn’t cause us to question anything fundamental, let alone call into doubt promises of infinite economic growth made possible by monetary innovation, technological genius and the wisdom of the PCE (the post-capitalist expediency).

There’s certainly been no suggestion that the JIT-driving prioritizing of profit over prudence might have failed us; that financial claims expansion has gone far beyond crazy; that discretionary (non-essential) affordability might be on a relentlessly downwards trend; or that extreme inequalities are just ‘the price we have to pay’ for “growth”.

Neither should it even be suggested that a point might have arrived when top-heavy, over-centralised private and public institutions might, in the pursuit of resilience, need to be replaced by more localised, bottom-up alternatives.

Fig. 3

A SYNOPSIS

Foreword

For some time now I’ve been minded to post something about “the end of growth” at LinkedIn.

Obviously this had to state the issues in ways that make sense to anyone not hitherto familiar with the Surplus Energy Economics thesis.

Because of character limits, this had to be brief, and split into two posts. Perhaps because of my lack of prior experience posting there, I wasn’t able to import my formatting to those articles.

So here, as a formatted single article, is the original text. I hope it provides a usefully compact synopsis of our predicament.

Part Two of our ongoing series – The Surplus Energy Economy – will appear here in due course.

1

There are times when the most important facts, though straightforward in principle, are simply too big, or too unpalatable, for general recognition

This is one of those times. The Big Fact informing all of the sub-narratives of our age is that the global economy has stopped growing, and is starting to shrink.

We should swiftly dismiss all official or orthodox statistical claims to the contrary. GDP isn’t a measure of material value created in the economy, but of the transactional exchange of money in the system. Money routinely changes hands without value being added, and never more so than when most of the money in question has been conjured out of thin air as credit.

In reality, no form of money has any intrinsic worth. Obviously enough, we can’t eat fiat currencies, power our cars with cryptos, or sow our fields with precious metals. Rather, money is token, not substance – it commands value only as an exercisable claim on those physical products and services for which it can be exchanged.

This principle of money as claim leads directly to a conceptual necessity, which is that we need to think in terms of two economies, not one. The first is the “real” or physical economy of material products and services. The second is the parallel and proxy “financial” economy of money, transactions and credit.

Once this is understood, we are spared the futility of comparing money only with itself.

2

There are two things that we need to know about the underlying “real” economy.

The first is that it operates by using energy to convert other raw materials into products, and into those artefacts and infrastructures without which no worthwhile service can be provided. Since some of these products are consumed, whilst others wear out and need to be replaced, this is a continuous process of creation, consumption, abandonment and replacement.

Second, energy is never “free”, but can only be put to use with an energy supply infrastructure. This infrastructure, which might be wells and refineries or wind turbines and grid systems, is material, meaning that it cannot be created, operated, maintained or replaced without the use of energy.

Colloquially, then, we have to “use” energy to “get” energy. Stated more formally, “whenever energy is accessed for our use, some of that energy is always consumed in the access process, and is unavailable for any other economic purpose”.

This proportionate Energy Cost of Energy is a matter, not of money, but of physics. ECoEs from all sources of primary energy have risen from 2.0% in 1980 to more than 11% today. Accompanied by a gradual degradation of the non-energy resource base, this has impaired annual rates of material expansion to a point at which the underlying physical economy inflects from growth into contraction.

3

The authors of The Limits to Growth, published back in 1972, used the then-new technique of system dynamics to see this coming, and even gave us a pretty good steer on its probable timing.

None of this is palatable, of course, to a world so obsessed with “growth” that it disregards the obvious truth of Kenneth Boulding’s observation that only “a madman or an economist” could believe in the promise of infinite, exponential economic growth on a finite planet.

Over the past twenty years, material economic prosperity has increased by 25%, but huge rises in the stock of monetary claims have enabled statisticians to assert that the flow of economic activity measured as “real GDP” has more or less doubled (+96%, 2004-2024).

Our resistance to the very concept of an ending and reversal of growth has been vested in two false presumptions. One is that the material economy can be reinvigorated using monetary tools, which would be true only if the banking system could lend energy and raw materials into existence, or if central bankers could conjure them, ex nihilo, out of the ether.

The other is the supposedly “limitless” potential of human ingenuity, enacted as technology. In reality, the potential of technology, far from being limitless, is bounded by an envelope of possibility whose parameters are set by the characteristics of materials and the laws of thermodynamics.

4

Since the real costs of energy-intensive necessities are rising, just as top-line prosperity inflects into contraction, the supposed “cost of living crisis” isn’t a temporary “crisis” but the emergence of a wholly predictable trend. This goes a long way towards an explanation of worsening internal political and social instability.

Washington, meanwhile, has awakened, belatedly, to the reality and consequences of material resource finality, an understanding that, we can reasonably infer, has long been grasped in Beijing and Moscow.

The breakdown of international trade – and its balkanisation into trading blocs and exclusion zones – becomes readily explicable if we once recognise the ultimate finality of the material, the impotence of the monetary and the technological, and the resultant intensification of competition for scarce and dwindling resources.

LIFE AFTER TRUTH

Foreword

It might be fair to say that visitors to this site divide into two broad categories –  those who are interested in economic and financial theory itself, and those more concerned with the explanation of current events and the anticipation of outcomes.

It also needs to be borne in mind that, whilst some readers have long been familiar with surplus energy theory, there are others to whom these concepts are new.

If this first article in a planned series has one message, it is that it’s perfectly possible for us to make sense of economics and finance on our own behalf.

We’re not dependent on what anyone – the authorities, orthodox economists, propagandists, wild optimists or prophets of doom – tries to tell us.

1

It doesn’t help anyone’s search for clarity, of course, that the world of today is subject to extraordinary levels of messaging, very little of which is truly objective.

On the one hand, we are frequently informed about new technological breakthroughs, perhaps in the field of energy supply, that will liberate us from the constraints of material economic finality.

On the other, we are warned about imminent financial collapse, sometimes resulting from left-field events not recognised in the generality of analysis.

Two realisations can act as beacons to light our way through this fog of mystification.

The first is that meaningful growth has ended, and that the economy is starting to shrink. We’ll look a little later at how this conclusion can be reached.

The second is that nobody, in any position of authority or influence, can possibly afford to admit that this is happening.

This is how Life After Growth becomes Life After Truth.

Put another way, the idea that “when it gets serious, you have to lie” has graduated from the aside of a single individual to the governing leitmotif of an age.

This situation calls for heightened self-reliance, not in the sense of stockpiling canned food and bottled water, but in deciding for ourselves what we do and do not believe about current and future economic conditions.

What we’re going to do here is to start from some basic principles and then apply these to the economy of today and tomorrow.

2

The first of these fundamentals is the principle of money as claim.

This principle recognises that money has no intrinsic worth – we can’t eat fiat currencies, power our cars with cryptos, or plant our fields with precious metals.

Rather, money commands value only in terms of those physical things for which it can be exchanged. Anyone having money has, in effect, an exercisable claim on material products and services. This money may be spent in the present (flow), or set aside for use in the future (stock), but in both cases retains the essential characteristic of claim.

That’s exactly why monetary systems tend to be based on credit.

Acceptance of this principle of claim immediately distances us from an economics orthodoxy which asserts that everything can be explained in terms of money alone, and that we need not take account of the material.

On this fallacious basis have been erected the so-called “laws” of economics, but these are in no way analogous to the laws of science.

Rather, they are merely behavioural observations about the human artefact of money.

3

The principle of money as claim necessarily leads to our second fundamental, which is the principle of two economies. One of these is the material or “real” economy of physical products and services. The other is the parallel “financial” economy of money, transactions and credit.

This gives us something which orthodox economics does not have – the ability to benchmark the monetary against the material.

We are no longer trapped in the futility of comparing money only with itself.

Statistical information about the “financial” economy is available in abundance, but much less attention is devoted to the “real” economy of the material. This is where our third and fourth principles fit into the picture.

4

The third principle is the principle of conversion. The “real” economy operates by using energy to convert raw materials into products, and into the artefacts and infrastructures without which no worthwhile service can be provided.

Some of the products of this process are consumed, and others wear out and need to be replaced. So the conversion economy is a continuous process of creation, consumption, relinquishment and replacement.

This brings us to the last of our four foundation principles. Far from being “free”, energy can only be put to use using a physical supply infrastructure, stretching all the way from wells and refineries to solar panels and grid systems. This system is material, meaning that it cannot be created, operated, maintained or replaced without the use of energy.

Colloquially, then, we have to “use” energy in order to “get” energy. More formally stated, “whenever energy is accessed for our use, some of this energy is always consumed in the access process, and is not available for any other economic purpose”.

Describing this “consumed in access” component as the Energy Cost of Energy gives us our fourth principle, which is the principle of ECoE.

5

At this point we can start to anticipate some of our conclusions.

First, there has been a gradual but significant degradation of the planet’s non-energy resource base. We observe this every time ore grades decline, every time agricultural land needs more inputs to sustain yields, and every time water becomes scarce in certain localities.

Environmental deterioration fits into this broad pattern of extraction and degradation, most obviously through its adverse effects on land, crops and water supplies. The only way in which we can make sense of environmental issues is to locate them within a holistic appreciation of the economics of the material.

It will be readily apparent that we can’t resolve environmental problems by sending money to the universe. The environment, that’s to say, can’t be “bought off”. We cannot frame environmental challenges effectively without reference to the “real” economy of the material.

Second, trend ECoEs have been rising relentlessly, climbing from 2.0% in 1980 to more than 11% today. We’ll look a little later in this series at why this has been happening, and at the consequences of its continuing exponential progression.

6

Our third conclusion is that, as a society, we are wholly unwilling to accept the reality of material constraints to economic activity. Many wise and well-intentioned people have made the case for the restraint of voluntary de-growth, but their words have tended to fall on deaf ears.

This resolute denial of reality has led us into two self-deceiving fallacies.

One of these is that the material economy can be reinvigorated using monetary tools. But this isn’t how the relationship between the financial and the physical actually works. We can, indeed, create almost limitless amounts of monetary claims, but energy and other resources can’t be lent into existence by the banking system, or conjured out of the ether by central bankers.

Together the principles of two economies and of money as claim make it apparent that there needs to be a state of equilibrium between the monetary economy and its material counterpart. If we allow the monetary to out-grow the material, we set up forces tending towards the restoration of equilibrium.

What this means is that “excess claims” must, in one way or another, be eliminated. Under conditions of comparatively modest disequilibrium, the erosion of claims through inflation can suffice to meet this need for the elimination of excess claims.

Now, though, we are far beyond those limits at which inflation alone can reconcile the forces tending towards equilibrium. Accordingly, we cannot now escape an enforced elimination of claim value, meaning a crash in asset prices and a cascade of credit defaults.

7

Our second exercise in self-deception is the faith that we invest in the supposedly “limitless” potential of technology.

The reality, of course, is that the potential for technological progress, far from being limitless, is bounded by the laws of physics, and specifically by the characteristics of resources and the laws of thermodynamics.

It’s worth reflecting, at this point, that the twin delusions of monetary stimulus and limitless technological possibility share the common characteristic of collective hubris.

If our artefact of money, and our technological genius, could indeed triumph over material reality to make possible ‘infinite economic growth on a finite planet’, we would indeed be ‘Lords of Creation’.

8

It will not have escaped your notice that the hubristic fallacies of monetary mastery and limitless technological genius are combined in the contemporary craze for artificial intelligence.

AI technology does indeed offer enormous promise, though this is bounded by some significant potential drawbacks, just one of which is the risk of descending into the “slop” of AI endlessly regurgitating its own flawed output.

But the biggest snag with AI is the business model currently favoured for its development. This is the “go big” strategy of progressing AI using enormous data-centres housing huge numbers of very expensive GPUs.

This, financially speaking, is “loss-leading” on a gargantuan scale.

For American tech, “go big” worked wonderfully in the exploitation of the internet. The pre-requisite is access to huge amounts of capital. This enables firms to make large losses over protracted periods of time, thereby driving competitors out of business, and capturing disproportionate market shares, whether of subscribers, of advertisers or of customers for online retail and other services.

The capital thus lost is more than recouped once quasi-monopoly status has been secured.

But “go big” won’t work with AI. Perhaps the most important problem is that this model makes demands for energy, water and other natural resources at scales beyond the possible.

The “go big” version of AI might fail because the required resources do not exist, or because accessing them imposes too much resource deprivation upon other sectors, including households, municipalities and other non-tech businesses.

The other thing that the AI moguls seem to have overlooked is structural change in the economy. For reasons that we have already mentioned – and that will later be explored in greater depth – the downwards trajectory of material prosperity is being compounded by relentless rises in the real costs of energy-intensive necessities.

The result of these processes is the imposition of inescapable downwards pressure on the affordability of discretionary (non-essential) products and services, and AI is, almost overwhelmingly, a discretionary rather than a necessity.

A curious characteristic of Western AI is the failure to align it with the one complementary technology that could make it materially worthwhile (and no, let’s not get into guessing games about what that is).

It wouldn’t even help if – implausible though it is – the “go big” business model for AI were to succeed. The previous craze for globalisation destroyed swathes of blue-collar employment in the West. If AI were to do the same for white-collar employment, the result would be societies so dystopian that their existing social, political and economic arrangements could not survive.

9

The intention with this series is the provision of a comprehensive statement of the Surplus Energy Economics thesis, meeting – if all goes to plan – the needs both of those who are interested in economic and financial theory in its own right, and of those who want to know “what happens next, and how can I navigate it?”

In the meantime, few will have failed to notice increasing instability in domestic and international affairs. In part, this reflects belated Western recognition of something long understood in Beijing and Moscow – the unfolding reality of resource finality, and the new competitive conditions created by scarcity.

We will, of course, continue in our misplaced faith that monetary ingenuity and technological genius can combine to rescue us from the unpalatable consequences of material finality.

It takes no great intuition to recognise that the financial system is headed for a crisis that will make the events of 2008-09 look like a stroll in the park, or that the AI bubble will burst, leaving us with very little recoverable value from burned-out and time-expired GPUs, vast, single-purpose buildings “in the middle of nowhere”, and debt collateralised against assets with minimal recoverable value.

Beyond sheer scale, though, the big difference between the previous GFC and the looming “GFC II” sequel is that, this time, it’s not the banking system, but money itself, that will be in the eye of the storm.

Starting in the 1990s, we put banking at hazard in order to pursue the dream of infinite economic expansion on a finite planet. This time, we’ve gambled with the credibility, and hence the viability, of money itself.

FACT, SCARCITY & THE DE-THRONING OF MONEY

Summary

A distinctly acquisitive gleam is evident these days in the eye of American power. Other people’s presidents seem to be fair game for appropriation, as are other people’s ships, other people’s resources and – even – other people’s countries.

We can call this thievery, or we can call it realpolitik.

The label hardly matters.

What lies behind this apparent outbreak of kleptomania, however, is a shocked awakening to a reality probably long understood in Moscow and Beijing.

This reality is that, in the very different economic future now unfolding, the material will be all-important, and the monetary, by contrast, will matter very little.

1

As you may know, there is only one way in which economic processes can be interpreted effectively.

This requires that – far from ignoring the material and concentrating on the monetary – we draw a clear distinction between the “real” economy of the material and the parallel and proxy “financial” economy of the monetary.

The relationship between these two economies is that money, having no intrinsic worth, commands value only as an exercisable “claim” on the material.

To this principle of money as claim must be added two other pieces of foundational knowledge.

The first is that the “real” economy of the material functions by using energy to convert other natural resources into the products, artefacts and infrastructures which are the physical forms taken by prosperity.

The second is that, far from being “free”, energy comes at a proportional cost, manifested as the fraction of accessed energy consumed in the energy access process.

These are the principle of conversion and the principle of ECoE, the latter being an abbreviation of the Energy Cost of Energy.

The economic history of modern times can be expressed in two observations. Materially, trend ECoEs have risen relentlessly, whilst the non-energy resource base has been degraded, more gradually, by depletion.

Sociologically, we have sought to disregard material finality by developing the hubristic myth that we can manage and overturn these natural processes using two forms of magic – the human artefact of money and the human genius of technology.

This magic thinking will fail as the material asserts its primacy.

2

The underlying situation is set out in the first set of charts.

Whilst the rate at which natural resources – including minerals, chemicals, biomass and water – are converted into economic output has been on a gradually declining trajectory, the Energy Cost of Energy has been rising relentlessly, from 2.0% back in 1980 to more than 11% today (Fig. 1A).

The decline in the conversion curve might be moderated by a re-prioritizing of resource use, but there is no cure for soaring ECoEs.

As ECoEs have risen, so the gap between total and ex-ECoE surplus energy has been widening. This process not only pushes producers’ costs upwards, but simultaneously undercuts the prosperity (and hence the affordability) of the energy consumer (Fig. 1B).

Material economic prosperity is now on a declining curve determined by trends in energy supply, ECoEs and resource conversion ratios (Fig. 1C).

Meanwhile, our futile efforts to reinvigorate the material economy with monetary tools have created wholly unsustainable levels of financial commitments (Fig. 1D).

Fig. 1

3

The result has been a global economy awash with monetary “claims”, but dangerously short of material resources.

Going forward, the material becomes all-important, and the monetary becomes chaotic noise around the physical economic curve. Central bankers buying gold, and governments grabbing resources, understand this.

Anyone who clings on to the old paradigms of the monetary – or, for that matter, of the technological – has lost the plot.

Statistically, world debt has risen by 167% in real terms – and broader liabilities by not less than 210% – over a twenty-year period in which the financial equivalent of material economic prosperity has grown by only 25%.

There have been two particularly nasty stings in the tail of this progression.

First, the fading rate at which prosperity has been creeping upwards has already fallen below the pace at which population numbers have continued to increase.

Second, the real costs of energy-intensive necessities have been rising, even as top-line prosperity has been decelerating towards contraction.

4

This tale has not been a sweet one, and has intentionally been kept short. Some of its consequences are reasonably foreseeable, but others are not.

As the basis of motivation switches from the monetary to the material, global trade will contract, and the excess claims incorporated in our bloated, credit-based monetary system will be eliminated.

Together, declining prosperity and ever-more-costly essentials will put relentless downwards pressure on those discretionary products and services which consumers might want, but do not need. This discretionary compression is illustrated – for America, China, Russia and the global economy – in the second set of charts.

Governments, no less than individuals, will experience a combination of decreasing resources and rising essential costs. These fiscal situations might be examined here in the future on the basis of SEEDS analysis.

If there’s one final takeaway here, it is that decision-makers will need to stop thinking monetarily, and start thinking materially. Energy- and resource-blindness can no longer be afforded.

As we shift from the monetary mind-set to the material, incentive (understood monetarily) will lose out in importance to strategy (conducted, for want of an alternative, by the state).

This mind-set transition might be one that – in comparison with their BRICS+ rivals – western countries are extremely ill-equipped to manage.

Fig. 2

ON THE EDGE OF CHANGE

Foreword

By convention, this is the season when analysts and others make their predictions for the year ahead. The near-ubiquity of this practice is a very good reason for not following suit.

Instead, and in thanking you for your interest and your contributions to our debates during 2025, I’d like to point out that the coming twelve months will mark the 250th anniversary of the most important year in modern history.

In 1776, Adam Smith published The Wealth of Nations, the foundation treatise of classical economics, whilst the United States Declaration of Independence was promulgated. Most important of all, James Watt completed the first truly efficient steam engine.

1

People had long used coal and other fuels to warm their homes and prepare their food. What was transformative about Watt’s discovery was that it enabled us, for the first time, to convert heat into work. The entirety of the industrial age flowed from that breakthrough.

As most of us know, none of the planet’s resources are infinite, and it’s wholly natural that we deplete reserves by using lowest-cost sources first, and leaving costlier alternatives for later.

Our fundamental problem today is resource depletion, which is driving a wedge between preference and possibility. We want growth to continue; it can’t. We seem to favour wide inequalities between social groups; this is becoming unsustainable

This problem is most acute with fossil fuel energy.

In a sense, we’ve been here before, when the economics of coal deteriorated during the inter-war years. Fortunately, oil and natural gas were available to take over from coal, and their superior characteristics gave the global economy its biggest burst of growth in the quarter-century after 1945.

Our predicament now is that we have failed to find a successor to hydrocarbon energy.

Recent reports from Rystad Energy and the IEA have pointed towards a looming decline in the supply of oil and natural gas.

It’s always been true, of course, that the production of natural resources will decline in the absence of sufficient investment in new sources of supply. But two things are different now.

The first is that a large and rising proportion of oil and gas supply comes from unconventional sources, which have particularly rapid rates of natural decline.

The second is that prices are nowhere near high enough to fund investment at levels sufficient to put much of a brake on a rapid fall in production.

2

Orthodox economics would assure us that this problem will be ‘sorted out by the markets’ – supply shortages will drive up prices, deterring consumption whilst incentivising investment in new sources of supply.

This market case seemed proven by the events of the 1970s, when the price spikes triggered by the oil crises prompted exploration and development in new basins – most obviously the North Sea and Alaska – whilst depressing demand, and encouraging rapid advances in fuel efficiencies.

By the mid-1980s, OPEC’s pricing power had been broken, and the world was awash with oil.

Any such assurance, though, is dangerously misplaced, for two main reasons. First, energy is not like any other commodity. A shortage of coffee and a rise in its price do not make us poorer, but energy shortages and higher costs do make us less prosperous.

The economy works by using energy to convert other raw materials into products, artefacts and infrastructures, so a decrease in the amount of ex-cost energy available to the system makes the economy smaller.

Second, there was no material shortage of oil in the 1970s – on the contrary, petroleum was abundant, and the cost of extraction remained very low. Far from being market events, the oil crises were political, caused by a falling out between the biggest users of oil and the most important exporters.

The critical measure of the condition of energy supply is the Energy Cost of Energy, a calibration of how much energy, being consumed in the energy access process, is unavailable for any other economic purpose. Driven by the depletion of fossil fuel resources, global trend ECoEs have risen relentlessly, from 2.0% in 1980 to more than 11% today.

Fig. 1

3

It might be thought that the consequences of surging ECoEs have been modest. Using the above numbers, the proportion of produced energy available to us may have fallen from 98% in 1980 but remains at 88%, which, we might be tempted to think, is surely enough to keep the economy growing.

This, though, ignores critical leverage in the system. Most of the energy available to the economy – perhaps 95% in complex advanced economies, and 90% or so in emerging market countries – is required simply for system maintenance. It has to be devoted, not just to repairing and replacing infrastructures and productive capabilities, but also to the support of the population.

The West has long since passed the ECoE threshold beyond which growth becomes impossible, and the same is now happening in less complex, more ECoE-resilient EM economies.

Renewables cannot take ECoEs back down to growth-capable levels. In addition to their intermittencies and lesser portability, these renewables depend, for their expansion, maintenance and replacement, on legacy energy from fossil fuels.

This is a material explanation for the financial fact that renewables are reliant on subsidies. This is why no hugely-valuable, enormously profitable renewables corporations have taken over from the oil and gas majors.

Seen in material rather than monetary terms, the whole of the economy is ‘subsidised’ by the energy industries. This subsidy is gradually being withdrawn by rising ECoEs, which can usefully be thought of as the economic rent levied on us for the use of the planet’s energy resources.

4

There are plenty of reasons for not panicking about the ending and reversal of economic growth. We retain more than enough economic resources to supply household essentials and necessary services to the World’s population.

A decrease in the over-consumption of energy and other resources might be our best hope of staving off worsening environmental deterioration. Discretionary products and services are, by definition, things that we might want, but don’t actually need.

This, unfortunately, is where politics clouds the picture.

Post-war optimism combined with rapid economic expansion to support a Keynesian consensus in the quarter-century after 1945.

During the 1970s, a neoliberal ascendancy took over from the Keynesian consensus, by persuading the public that the hardship and stagflation of the times were caused, not by the oil shock, but by “over-mighty” organised labour and “left wing” governments.

At the start of the 1990s, the collapse of the collectivist USSR seemed to mark the final victory of market liberalism, not least because it opened up resources in the former Eastern Bloc to Western investment.

But this triumphalism proved misplaced, as “secular stagnation” – in essence, a trend inflexion – set in. The real cause, as we know, was rising ECoEs, for which no ‘fix’ exists.

But the response favoured at the time was “credit adventurism”.

5

We can’t reinvigorate a flagging material economy with monetary tools, any more than we can cure an ailing house-plant with a spanner. The result of super-rapid credit expansion was the global financial crisis of 2008-09, which more or less compelled decision-makers to adopt the “monetary adventurism” of QE, ZIRP and NIRP.

Nothing, however, compelled them to carry on with monetary adventurism long after the immediate “emergency” had passed. What was really happening was that the GFC marked an epic failure for the neoliberal ascendancy.

Accordingly, new forces – known here as the post-capitalist expediency (PCE) – moved into the space vacated by the failure of 1990s triumphalism.

Each new regime adapts some of the precepts of its predecessor to its own uses. The PCE can be expected to continue to favour low taxation of high incomes; a resistance to the taxation of capital gains and inheritance; a fiscal bias favouring investment returns over earned incomes; deregulation; and, where possible, a small state.

But the PCE will differ from the neoliberals in favouring tariff wars and exclusion zones over globalisation, a closer alignment between political interests and economic policy choices, and a preference for nationalism over the cosmopolitan ethos of the globalisation era.

The latter may, in large part, have been no more than a veneer, but its abandonment has changed the tenor of public debate.

6

Lest the prospect of a self-serving, all-powerful PCE should dampen your festive celebrations, let’s be clear that the PCE cannot win.

The forces of resource degradation and rising ECoEs cannot be halted by political diktat.

The use of super-rapid liquidity expansion to sustain a semblance of normality will result in a massive financial crisis, part of which will be a wholesale destruction of super-inflated paper asset wealth.

The financial recklessness required to maintain a simulacrum of ‘business as usual’ has already put wide swathes of the discretionary economy on life-support.

Our best guides to the future are ECoEs, and the resource conversion ratios which determine material prosperity; and the relationship between the “real economy” of material products and services and the parallel and proxy “financial” economy of money, transactions and credit.

There’s nothing new about self-interest and a lack of candour in politics. We can also trace, as our arc of inevitability, the mechanisms that drive economic and financial policy.

This might not be the most uplifting way to end 2025, but knowledge is always to be preferred over even the most palatable versions of ignorance.

Fig. 2

THE ESCALATING DANGERS OF ECONOMIC DENIAL

Foreword

One of the greatest mysteries of our times is why the authorities have not only permitted but actively, through their policy choices, promoted the formation of the biggest bubble in financial history, whilst knowing perfectly well, all along, how this must end.

They cannot have done this simply to further enrich the already wealthy, since they must know perfectly well that asset value aggregates can never be converted in their entirety into spendable money.

The answer is that fears of the consequences of a bursting bubble are out-matched by an even greater fear – that the ending and reversal of economic growth might move from the land of theory into the realm of established fact.

If it ever became known that the economy had stopped growing and started to shrink, no existing set of social, political or commercial arrangements could survive.

The denial of economic inflexion is the sine qua non for the defence of the status quo. Nowhere in the world is worse equipped than the West for surviving the ending and reversal of growth.

There may indeed be people in authority who sincerely believe that monetary stimulus can reinvigorate a faltering material economy.

Many might also have swallowed the parallel tarradiddle, which is that human technological ingenuity can overturn the laws of physics to make possible the alchemist’s dream of ‘infinite economic growth on a finite planet’.

What seems to have happened is that the only lever that decision-makers can pull in a slumping economy is the lever of financial stimulus, the use of which in turn triggers a runaway compounding process of escalating risk.

1

This article must begin with an apology for the hiatus since #314: How wealth dies was published on 2nd November. Whilst the ending and reversal of growth has long been predictable, the sheer pace at which decline has been accelerating has called for considerable reflection.

As you may know, the Surplus Energy Economics interpretation of economics is based on a comparison between the “real” economy of material products and services and the parallel “financial” economy of money, transactions and credit.

The productive process which drives the underlying “real” economy works by using energy to convert other raw materials into products, artefacts and infrastructures, as part of a continuous cycle of production, consumption, relinquishment and replacement.

Though depletion has subjected the non-energy resource base – including minerals, non-metallic mining products, biomass and accessible water – to gradual degradation, the primary factor driving the material economy from growth into contraction has been a relentless rise in the proportionate cost of energy.

Measured here as the Energy Cost of Energy, this cost has climbed from 2.0% in 1980, and 4.3% in 2000, to more than 11% today.

Fig. 1

2

A long-standing debate about the economy is whether material constraints will, or won’t, eventually put an end to growth.

Kenneth Boulding famously said that only “a madman or an economist” could believe that exponential economic growth could carry on forever on a finite planet.

His view was reinforced and quantified by the authors of the contemporaneous The Limits to Growth (LtG), who set out the interconnected processes which would put an end to economic expansion.

But “eventual” has always been a key word in this argument. Though no timescales were specified in LtG, the accompanying charts appeared to put this ending of growth somewhere between 2020 and 2030, which was a matter of little immediate concern when the report was published back in 1972.

LtG has been revisited on a number of occasions, and these reviews have tended to vindicate the original thesis. As this has happened, time has moved on, and the moment of inflexion from economic growth into contraction has drawn ever nearer.

SEEDS analysis concurs with the LtG projections, indicating that material economic growth might already have ended, and that the economy will have inflected into contraction by the end of this decade.

This has been a matter of modelled calculation, but there’s an abundance of external evidence to support it.

Living costs are rising in a way that cannot be explained away as some kind of temporary and self-correcting “crisis”.

In domestic affairs, economic hardship and financial insecurity are combining with elevated levels of inequality to undermine social and political cohesion.

International relations have been degenerating into bare-knuckled fights over scarce and dwindling resources.

3

But the single most compelling piece of evidence for the onset of economic contraction is the gigantic bubble that has been inflated across almost all classes of assets in modern times.

Over the past twenty years, aggregate debt has increased by 165% in inflation-adjusted terms, and broader liabilities – incompletely reported as the assets of the financial system – have expanded by not less than 210%. The real-terms value of global equities has increased by about 250% since 2004.

Against this, reported real GDP has grown by 96%, meaning that each dollar of reported growth has been accompanied by net new financial liabilities of at least $8.

Even this calculation drastically understates the severity of the situation, for two main reasons.

First, the aggregate financial liabilities referenced here do not include enormous “gaps” in the under-resourcing of forward pensions promises.

Second, and even more seriously, most of the “growth” reported in recent times has been cosmetic, amounting to nothing more than the transactional spending of vast amounts of borrowed money.

SEEDS analysis puts real growth in prosperity since 2004 at only 25%, reflecting a 37% increase in energy consumption, a dramatic rise in ECoEs, and a gradual decline in the rate at which energy use converts other resources into economic value.

The scale risk of extreme increases in liabilities has been compounded by rising complexity risk as the financial system has morphed into a bafflingly Byzantine structure of inter-dependent cross-collateralisation.

We can estimate that, over the past twenty years, the regulated banking system has accounted for barely a quarter of the increase in financial commitments, with the unregulated NBFI (“shadow banking”) sector contributing about two-thirds.

In essence, qualitative risk has increased as the centre of gravity of credit supply has migrated from the comparatively transparent and conservative centre of the financial system to its opaque and dangerous periphery.

4

Everyone knows how the reckless over-inflation of bubbles always ends, and many are familiar with the truism that “you can’t taper a ponzi”.

“Everyone” in this context necessarily includes the authorities, which raises the question of why decision-makers have acquiesced in the inflation of a bubble which far exceeds, both in scale and in qualitative risk, anything previously experienced.

In fact, the authorities haven’t just acquiesced in the inflation of the “everything bubble”, but have been conspicuously active in its creation.

Starting in the 1990s, they promoted “credit adventurism” by making debt easier to obtain than ever before. After the GFC of 2008-09, they doubled down with the “monetary adventurism” of QE, ZIRP and NIRP.

The monetary tightening introduced during the immediate period of post-pandemic inflation is already being relaxed, and there’s every reason to suppose that a reversion to QE looms in the very near future.

Meanwhile, governments have become primary drivers of credit expansion, with public debt soaring as fiscal deficits now routinely exceed – in some cases, far exceed – reported “growth”.

But why would governments and central banks knowingly court the chaos that must result from the bursting of ‘the bubble to end all bubbles’?

5

Charles Hugh Smith has given us the clue to this seemingly inexplicable behaviour in a particularly perceptive recent article in which he explained that “the entire bubble economy is a hallucination”.

A “hallucination”, of course, is ‘a perception that differs from material reality’, or, in the simplest of terms, a false narrative. The “false narrative” to which we have been subjected is that economic growth not only hasn’t stopped, but won’t.

If it ever had to be admitted that economic growth had ended, you see, all existing social, political and commercial arrangements would be invalidated. The succeeding priority would be the sustenance of the generality.

This is a change of direction that might be survived by Russia or China – albeit not without significant difficulties – but would put an end to the post-capitalist expediency (PCE) now prevalent in the West.

6

This takes us to the two arguments customarily advanced against the idea that material finality might ever put an end to growth.

The first of these is that, since the economy can be explained and managed in terms of money alone, our complete control over the human artefact of money puts our economic destiny entirely in our own hands.

The second is that the continuity of growth will ensured by human ingenuity, enacted as limitless technological advance.

The recurrence of the word “human” in both of these arguments points to their inherent super-hubris. We are, we’re told, Lords of Creation, who can financially innovate, and technologically circumvent, any obstacle to ‘infinite, exponential economic growth on a finite planet’.

7

Neither of these claims survives rational appraisal.

First, the economy is not shaped by money. Within our two economies conception, we know that money has no intrinsic worth, but commands value only in terms of those material things for which it can be exchanged. This, in Surplus Energy Economics, is the principle of money as claim.

We can indeed create money in virtually limitless amounts, but we cannot similarly create those material things without which money has no meaningful value. Unlike money, energy and raw materials can’t be loaned into existence by the banking system, or conjured out of the ether by central banks.

In essence, money is a proxy for material economic prosperity, whilst the basis of this prosperity is the use of energy to convert natural resources into material products and infrastructures.

The second claim is, if possible, even more hubristically fallacious than the first. Far from being limitless, the potential of technology is contained within an envelope of possibility whose boundaries are set by the laws of physics and the characteristics of materials.

This comes down to a vindication of what Kenneth Boulding said more than half a century ago. The claim that ‘exponential growth can go on forever in a finite world’ is made, if not exactly by ‘madmen and economists’, then on the basis of orthodox economics and cornucopian fantasy.

8

Beyond its sheer size, what’s truly fascinating about the mania for all things AI-related is the way in which it fuses together the monetary and technological delusions that support the claim of never-ending economic growth.

Critical to this fusion is a disregard for the constraints of material finality.

Whatever promise the technology itself might offer, the current Western business model for AI makes vast demands for material resources, the most significant of which are energy and water. Even if these resources actually exist at the requisite scale – which is very far from certain – they can only be channelled into AI at the direct expense of households and other businesses.

The AI bubble also differs in other significant ways from previous exercises in irrational exuberance. For a start, whereas most of the money lost in the dotcom bust was equity, most of the value at risk in AI is debt, with significant cross-financing involved.

The assets used as collateral for this debt are likely to have remarkably little residual value – it’s hard to foresee much money being recovered from fire-sales of burned out or obsolete GPUs, or much of a post-crash market for vast single-purpose buildings ‘in the middle of nowhere’.

Whilst also noting the likelihood of AI degradation through the regurgitation of its own slop, it would be unwise to dismiss the transformative potential of artificial intelligence.

Rather, it seems likely that an alternative business model for AI will emerge, one that uses less capital, requires fewer resources, and, perhaps, sets itself less ambitious objectives.

9

What we have been seeing, then, is the use of reckless financial expansion in an effort to either counter, or disguise, the ending and reversal of economic growth.

Before we leap to the conclusion that this has been a deliberately-promoted false narrative, we need to allow for the fact that fiscal and monetary stimulus is an addictive drug, and a particularly alluring one when no other course of action is available.

Either way, we have long known that a financial system entirely predicated on the false presumption of economic expansion in perpetuity couldn’t possibly survive the ending and reversal of growth.

What recent events have been telling us is that, whilst policy-makers seem to be panicking, the moment of economic inflexion is drawing very close indeed. It might, in this context, be of interest that “the astronomical level of insider selling of publicly traded stocks” has now reached levels second only to those of 2007 – and we know what happened after that.

THE NOTIONAL VALUE TRAP

Foreword

Just as growth in the “real” economy of material products and services has been decelerating towards contraction, so aggregates of financial wealth have carried on increasing relentlessly.

Since the widening disequilibrium between the monetary and the material must eventually crash the financial system, the probability is that notional wealth will reach its peak at the same moment at which the monetary system collapses.

We can see this unfolding effect in microcosm in the United Kingdom, where the most recent official calculation put national “net worth” at a near-record £12.2 trillion, or 450% of GDP. Yet you don’t need SEEDS analysis to know that the British economy itself is at an advanced stage of disintegration.

Two key factors explain the apparent paradox between soaring wealth and the onset of increasingly chaotic economic decline.

First, every failed effort made to stem material economic decline using monetary tools increases wealth, as it is measured financially.

Second, most of this wealth is purely notional, in the sense that none of its aggregates are capable of conversion into material value. Put another way, very little of the world’s supposedly enormous wealth actually exists in any meaningful sense.

A very possible final scenario is that, after an initial correction caused by a dawning realization of economic crisis, asset markets will rebound to a last peak before entering outright collapse.

To make sense of these issues, we need a clear understanding of the nature of money and wealth in relation to material economic supply.

1

As many readers will know, there’s no great mystery about the ending and reversal of material economic expansion.

Briefly stated, the “real” economy of physical goods and services is only proxied – and with ever-diminishing fidelity – in the published aggregates of financial flow.

Far from being a measure of the supply of material value to the system, gross domestic product is nothing more than a summation of transactional activity taking place in the economy. It’s perfectly possible, indeed commonplace, for money to change hands without any material economic value being added.

The way in which material value is supplied to society is, in principle, comparatively straightforward. In a continuous process of creation, consumption, disposal and replacement, energy is used to convert other natural resources (including minerals, non-metallic mining products, biomass and water) into products, and into those artefacts and infrastructures without which no worthwhile service can be supplied.

This is a dual equation in which, as energy is used for the conversion of raw materials into products, so energy itself is converted from a dense to a diffuse state. This makes energy-to-mass density, and the portability of energy, important considerations in the resource conversion process of economic supply.

Given that energy is used in the creation, operation, maintenance and replacement of energy-supplying infrastructures, we can state that “whenever energy is accessed for our use, some of this energy is always consumed in the access process, and is not available for any other economic purpose”.

This proportionate “consumed in access” component is measured in SEEDS as the Energy Cost of Energy. ECoEs have long been on an exponentially climbing trend, and have risen from 2.0% in 1980 to 11.3% today.

Renewables, and for that matter nuclear power as well, cannot materially slow, let alone reverse, the relentless rise in ECoEs caused by the depletion of oil, natural gas and coal. Neither can technology halt this trend, since the potential of technology, far from being infinite, is bounded by the limits imposed by the laws of physics.

The other determinant of the supply of physical economic value is the rate at which non-energy raw materials are converted into economic value through the use of energy. This conversion ratio is on a gradually declining trajectory, because resource depletion is occurring at a rate slightly more rapid than that at which the broad swathe of conversion methodologies can advance.

On this basis, global material prosperity has grown by 25% since 2004, which is nowhere near claimed “growth” of 96% in real GDP over that period. Moreover, the 25% rise in aggregate prosperity has been matched by the rise in population numbers over those twenty years.

The ongoing rate of deceleration is such that aggregate material prosperity is projected to be 17% lower in 2050 than it is now, which is likely to make the “average” person about 31% poorer than he or she is today.

At the same time, the costs of energy-intensive necessities – including food, water, accommodation, domestic energy, essential transport and distribution – are rising markedly. The “cost of living crisis”, far from being the temporary phenomenon that the word “crisis” is intended to imply, is a firmly established trend.

Since all of these process are both knowable and incapable of being “fixed”, why is monetary value continuing to increase?

The answer lies in the fundamental nature of money, and of how the monetary relates to the material.

2

As we know, no amount of money, irrespective of its format, would be of the slightest use to a person stranded on a desert island, or cast adrift in a lifeboat. If this castaway had an extremely large amount of money, his or her only (and very dubious) comfort would be the prospect of ‘dying rich’.

That’s an appropriate analogy for a world destined to experience financial collapse at the moment of record paper wealth. The financial system, like our castaway, is going to ‘die rich’.

There’s an instructive twist that we can add to the narrative of the castaway. At his or her greatest extreme of privation, a package is seen descending on a parachute. Opening this package with avid hopes of food or other life-saving material supply, the castaway finds only very large quantities of banknotes, gold coins and precious stones, all of which are wholly valueless in his or her predicament.

Decision-makers in society have made this exact same mistake, pouring huge amounts of money into a world whose deficiencies are material. They have done this, not out of idiocy or dishonesty, but because, whilst they cannot be seen to be ‘doing nothing’, no other possible policy response exists.

Governments and central banks can create money and wealth in almost limitless quantities, but they cannot similarly conjure energy, or any other material resource, into existence at the touch of a key-stroke.

The essential point, of course, is that, as our castaway swiftly discovers, money has no intrinsic worth. It commands value only in terms of those physical goods and services for which it can be exchanged. Money is thus an “exercisable claim” on the material.

Warren Buffett alluded to this when he said that “[t]he way I see it is that my money represents an enormous number of claim checks on society. It is like I have these little pieces of paper that I can turn into consumption”.

Various conclusions follow from this principle of money as claim. One of the most important, as regular readers will know, is the imperative need to think conceptually in terms of two economies. One of these is the “real” economy of material products and services, and the other is the parallel “financial” economy of money, transactions and credit.

Another is the absolute futility of any attempt to explain the economy by disregarding the material and concentrating entirely on money. This fallacious line of thinking leads inevitably to the deranged proposition of ‘infinite, exponential economic growth on a finite planet’.

3

None of this means, though, that money is “unimportant”, or that a collapse of the financial system would have no adverse consequences for material economic prosperity.

The most effective approach to economics doesn’t involve the disregard of the material or of money.

Rather, what we need to do is to calibrate the physical economy such that we can benchmark the monetary against the material. This enables us to avoid the futility of measuring the monetary only against itself.

It’s true that, at the moment when the monetary system collapses, we will still have the same amounts of the energy and other natural resources which are the basis of material economic prosperity.

But money is a critical enabler in the processes by which we use energy to convert raw materials into products, artefacts and infrastructures.

This is why not even the poorest person can view the impending collapse of the financial system with equanimity. Without money, how can nations trade products and resources, and how can the individual conduct his or her daily affairs?

Since money – unlike energy and raw materials – is a human construct, it’s perfectly possible, at least in theory, for us to create a new (and perhaps more intelligently-designed) form of money to replace the old.

But the chaos that monetary collapse will cause is hardly capable of over-statement.

4

Within our overall understanding of the principle of money as claim, money itself divides into two functional categories, which are the flow of money in the economy and the stock of monetary claims set aside for exercise in the future.

This “stock of claims” further subdivides into two components. One of these is immediate money, which can be spent without having to go through any preliminary enabling process. Most of this “immediate” money exists as fiat currencies, since it’s difficult to buy our groceries or pay our electricity bills using precious metals or cryptocurrencies.

But by far the largest component of the stock of claims is inferred rather than immediate. This “inferred” money exists as stocks, bonds, real estate and numerous other asset classes.

Before this claim value can be spent, it must be monetised – converted, that is, from an inferred to an immediate state. This means, simply stated, that the assets which comprise inferred value must be sold before they can be spent.

5

The aggregates of these inferred forms of wealth are enormous. Global stock markets, for instance, currently stand at about 160% of world GDP, which is far higher than this metric was in 2007, on the eve of the global financial crisis (114%). Total debt is about 240% of global GDP, and broader financial assets, in those countries which report this information, are about 470%.

If, to these, were added other asset classes, including real estate, promised pensions, precious metals, cryptos and derivatives, we could undoubtedly calculate that global wealth is at all-time record highs.

All of this is a very far cry from the oil crisis years of the 1970s. In 1975, stock markets equated to only 27% of world GDP. At its nadir, in January of that year, the S&P averaged just 72.6, from which point the index has advanced almost continuously – with few and brief interruptions – to a level today of about 6850.

Fig. 1

This has, in fact, been a near-uninterrupted, fifty-year progression. This road from “once-in-a-lifetime cheap” to the vastly higher valuations of today certainly merits some reflection.

It transpires that very little of this accession of paper wealth has happened by accident.

Starting in 1975, the initial advance in stock markets did follow processes that can be ascribed to market forces alone. In that year, the astute investor had little to lose, and much to gain, by putting his or her money, itself subject to severe inflation, into stocks.

Together, an economic rebound from the oil-crises-slump of the 1970s, the gradual taming of inflation and the euphoria created by the policies of the new “neoliberal” incumbencies combined to help to drive markets sharply higher during much of the “decade of greed” of the 1980s.

But everything changed in October 1987.

On “Black Monday”, the markets crashed, with the Dow losing 508 points, or 22.6%, in a matter of hours.

What was really significant, though, was that the authorities stepped in to shore up the markets. One of the most important players was the Federal Reserve, which had itself been created in 1913 in response to another such crash, the Knickerbocker crisis of 1907.

6

The authorities might well have been wise to have intervened as they did in 1987, but, in doing so, they conveyed the strong impression that, if ever things once more went badly enough wrong, they could again be counted upon to ride to the rescue like the fabled 7th Cavalry.

This back-stopping – variously known over the years as the “Greenspan put”, the “Bernanke put”, the “Yellen put” or, more generically, the “Fed put” – remained implicit until 2008.

Then, with the swift, no-holds-barred response to the global financial crisis, the authorities made their support for the market explicit.

Some felt at the time that these interventions were necessary and proportionate, others that they “bailed out Wall Street at the expense of Main Street”. Both points of view had their shares of validity.

But the most astute observers fretted instead about what is called moral hazard.

In the normal course of events, as envisaged by free market purists, the authorities do not intervene in the markets. If things go well, the wise (or simply fortunate) investor makes big profits but, if things go badly, the reckless (or unlucky) investor gets wiped out. Thus the antithetical forces of “fear and greed” are kept in balance.

Intervention dangerously upsets this balance. An investor rescued once naturally assumes that, if things go badly enough wrong again, another bail-out is certain to follow. This provides an enormous incentive to risk-taking, and undermines the important restraint exercised, through prudence, by fear.

7

Behind all of this, though – and seldom noticed by observers – lies the fact that all “values” routinely ascribed to wealth aggregates are fundamentally bogus.

At no point can any of the reported aggregates of wealth be monetized. The only people to whom the stock market could ever be sold in its entirety are the same people to whom it already belongs. The same applies to the global or national housing stock, and to every other asset class.

Whenever we’re told that huge amounts of value – in October 1987, for instance, $1.7 trillion – have been “wiped out” by a market fall, we’re being asked to disregard the fact that at no point, either before or after the event, could the whole market have been sold at its supposed value. The same applies to any statement of how much wealth billionaires have “gained” through rises in the market.

The £12.2tn official calculation of British aggregate “net worth” is similarly meaningless, in the absence of anyone who actually has £12.2tn to spend (and is also daft enough to invest it in Britain)

The fatal error made here is that of using marginal transaction prices to put a “value” on aggregate quantities of assets.

We might think that, were all global stock markets to fall to zero, about $180tn of wealth would have been eliminated.

In fact, that supposed “value” was only ever notional, and never existed in any meaningful form in the first place, because at no point was it ever capable of monetization.

8

This inability ever to monetize even a significant proportion of this inferred wealth enables commentators to write lurid, fact-free articles about aggregate wealth being “destroyed” or “boosted”.

But it also enables the authorities to pursue their cherished “wealth effect” without much danger of all of this largesse being converted into immediate monetary value, and then spent in ways that trigger runaway inflation in the economy.

Central banks’ use of QE is a case in point. So long as this liquidity injection was contained within the capital markets, it could not cross the boundary into spendable money and trigger severe inflation. During the pandemic of 2020, though, when QE was channelled not into the markets but directly to households, severe consumer price inflation did indeed follow.

9

What we have been exploring here is a paradox that is no paradox at all. The world will keep setting new wealth records until the financial system collapses.

Investors have lived with supportive intervention from the authorities ever since 1987, which means that very few of them have ever experienced anything else. Throughout this period – and certainly since official support became explicit in 2008 – the “momentum trade” has been the only game in town. It’s been like gambling in a casino where the house stacks the deck in favour of the punter.

So ingrained has this thinking become that there are likely to be many still determined to “buy the dip” even as the financial system goes finally into the blender. This, in short, is why wealth is destined to collapse – swiftly, not gradually – from an all-time peak.

Our necessary insight here is that, since any value contained in money exists only as a “claim” on a material economy that is now contracting, there must come a point of fatal disequilibrium between claim and substance.

The sheer scale and complexity of the aggregates of claim stock are now so extreme that the authorities will be powerless to backstop the next big crash.

It’s scant consolation to know that these enormous aggregates never, in any meaningful sense, actually existed in the first place.

Thus understood, it might not seem to matter all that much if aggregate (and individual) values collapse. Your house, for instance, will still fulfil its essential function of providing somewhere to live, even if its supposed value slumps from $1m to $200k. Even if you’d decided to sell at the highest price, buying a replacement would have been equally costly.

But this comfort only applies if you hadn’t used the property as security for a large mortgage.

And the financial system as a whole has done exactly that. The entirety of the system is enormously cross-collateralized, and this is where the destruction of “meaningless” aggregate asset values becomes enormously meaningful.

The real comfort, if any is to be found, is that anyone who can find a way of preserving value will have the opportunity of buying utility value at pennies on the dollar. The term “utility” is the watch-word here, because essentials will remain essential even as society is picking over the wreckage of discretionary sectors.

Fig. 3