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#243. The Great Inflexion

#243. The Great Inflexion



As everyone surely knows by now, the global economy has entered a recession which is likely to be both severe and protracted. For the most part, governments and central bankers are concentrating on the task of trying to tame inflation.

Their critics tend to argue for more expansionary fiscal and monetary policies, contending that stimulus could soften or shorten the recession. They claim, in defiance both of experience and of logic, that expansionary monetary policies needn’t contradict the effort to bring inflation under control.

Where almost everybody is in agreement is that, however long it takes, the recession will end. But there’s a striking absence of explanations for how or why growth is supposed to resume. The fall-back position is no more than an assumption – a recovery will arrive for no better reason than that all previous economic downturns have been followed by rebounds.

The underlying presumption here is cyclicality, a process accepted as routine, not just by policy-makers and central bankers, but by investors, business leaders and the general public alike. It is well understood that the Big Numbers – like economic output, and the aggregate value of the markets – oscillate in sine-wave patterns around central trends.

It’s further assumed that these secular trends are always positive – each recovery exceeds the preceding recession, and each market rebound more than cancels out the latest dip.

This latter assumption has reached the point of invalidation. What economies and markets are now experiencing is trend-inflexion. Cyclicality may indeed continue but, from here on, it will do so around downwards-inflected trends. This process of reversal can only be managed if it is recognized.

The consequences of trend inflexion are readily summarised. On an ex-inflation basis, economic output will deteriorate, whilst the real costs of necessities will carry on rising, even if there are some retreats from the severe spikes experienced in recent times.

…click on the above link to read the rest…

#242. The dynamics of global re-pricing

#242. The dynamics of global re-pricing



There is a growing acknowledgement that the World economy has entered a new era. We know that the cost of capital is trending upwards, with adverse consequences for asset prices. But there’s been remarkably little inclination to examine the underlying processes that are causing this to happen. Neither is there much in the way of recognition that entire sectors could be crushed, or even eliminated altogether, as re-pricing becomes more selective.

We need to dismiss any idea that this is temporary. There are some linkages connecting the resurgence of inflation with pandemic-era QE, and with the war in Ukraine, but these are little more than symptoms.

The underlying dynamic is that the economic driver of the industrial era – the supply of low-cost energy from oil, natural gas and coal – is winding down, and there is no assured replacement at hand. Transition to renewables is imperative, but there’s no guarantee that an economy based on wind-turbines, solar panels and batteries can be as large as the fossil-based economy of today. The probabilities are that it will be smaller.

Had we been prepared to do so, we could have seen this coming. The chain of causation starts in the 1990s, when the authorities responded to “secular stagnation” with deregulation programmes that made credit easier to obtain. The subsequent financial crisis forced the adoption of QE, initially to prop up the banking system, and latterly as a self-standing form of stimulus. We were assured, quite wrongly, that QE would not be inflationary, but it has created a systemically-dangerous “everything bubble” in assets.

…click on the above link to read the rest…

#238. Money and the end of abundance

#238. Money and the end of abundance


Amongst the world’s decision-makers, French president Emmanuel Macron has come closer than anyone to spelling out the reality of the current economic situation, saying that “we are in the process of living through a tipping point or great upheaval”, and referencing “the end of abundance” (my emphasis).

If his words are taken seriously – as they should be – a major crisis looms. The global financial system is entirely predicated on perpetual economic growth.

As important as what Mr Macron has said is what he didn’t say. He didn’t say that abundance is over ‘for a year or two’, or that we’ll have to live through this ‘until better times return’. He didn’t make fatuous promises of ‘sunlit uplands’ or ‘a new golden age’.

Some of us have long known that an age of abundance made possible by low-cost energy was coming to an end. Until now, though, decision-makers have fought shy of this conclusion, taking refuge in the tarradiddle of ‘infinite growth on a finite planet’ proffered by a deeply flawed economic orthodoxy.

What should concern us now isn’t when, or whether, other leaders will arrive at this same conclusion. The trend of events is going to impose that emerging reality upon them.

Rather, we need to be prepared for what happens when market participants arrive at the same conclusion as Mr. Macron.

The nature of the crisis

Preparedness requires clarity, and we need to be in no doubt that what we’re witnessing now is an unfolding affordability crisis. This means two things – and both of them point towards a major financial slump.

First, the ability of consumers to make discretionary (non-essential) purchases is in structural decline. This spells relentless contraction, not just in obvious discretionary sectors like leisure, travel and entertainment, but in ‘tech’ and consumer durables as well.

…click on the above link to read the rest of the article…

#228. In the eye of the Perfect Storm

#228. In the eye of the Perfect Storm



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

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

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

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


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

The alternative is to face facts.

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

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

…click on the above link to read the rest of the article…

#235. The affordability crisis

#235. The affordability crisis

What might be called the ‘consensus narrative of the moment’ is that our near-term economic prospects depend on the ability of central banks to tame inflation without tipping the economy into a severe recession. There are numerous complications, of course, but this is the gist of the story.

What these officials need to find, we’re told, are Goldilocks interest rates (‘not too hot, not too cold’), and all will be well if they succeed. If they err too far in one direction, inflation will run higher, and for longer, than is comfortable. If they lean too far the other way, a serious (though, by definition, a time-limited) recession will ensue.

Inflation itself, the narrative runs, has been the product of bad luck. First came the pandemic crisis, which impaired production capacity and severed supply-chains. Before we’d finished dealing with this, along came the war in Ukraine, disrupting supplies of energy, food and other commodities. There are some who add, sotto voce, that we might have overdone pandemic-era stimulus somewhat.

Our hardships, then, can be put down to a run of bad luck. Those in charge know what they’re doing.

It’s conceded, in some quarters, that we might face some sort of crisis if these challenges aren’t managed adroitly. This, though, shouldn’t be as bad as the GFC of 2008-09, and certainly won’t be existential.

We’re navigating choppy waters, then – not going over Niagara in a barrel.

The affordability reality

There is some truth in each of these propositions, but explanation in none.

What we’re really encountering now is an affordability crisis. The aim here is to explain this, without going into too much detail, and with data confined to two sets of SEEDS-derived charts at the end of this discussion.

…click on the above link to read the rest of the article…

#225. Gravitational pull

#225. Gravitational pull


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

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

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

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

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

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

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

And then there was one

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

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

…click on the above link to read the rest of the article…

#221. Strategies for a post-growth economy

#221. Strategies for a post-growth economy


Under current conditions, it’s increasingly hard to understand why the inevitability of economic contraction remains so very much a minority point of view.

None of this has to be a disaster, but the management of involuntary economic ‘de-growth’ requires innovative strategies, most obviously in business and government.

The aim here is to concentrate on the PNFC (private non-financial corporate) sector, evaluating strategies that could mitigate the worst effects of economic contraction.

Other sectors – government, households and the financial system – may be the subject of future instalments, whilst the role of technology might merit separate discussion.

Don’t over-simplify

Readers are reminded that this site does not provide investment advice, and must not be used for this purpose.

In any case, it would be an over-simplification to assume that the decline in prosperity must crush discretionary sectors whilst leaving suppliers of essentials largely unscathed.

In fact, suppliers of intermediate (and intermediary) services are at even greater risk than businesses which supply products and services that the consumer might want, but doesn’t need.

…click on the above link to read the rest of the article…

#220. The human factor

#220. The human factor


Over an extended period, but with growing intensity in recent times, there has been a discussion, here and elsewhere, about whether we can prevent economic contraction from turning into collapse.

This is part of a broader debate in which every point of view seems to begin with the letter C. The orthodox or consensus line is Continuity, meaning that the economy will continue to expand in the future as it has in the past, and is claimed still to be doing in the present. The main contrarian theme is the inevitability of Collapse. Those of us who believe even in the existence of a third possibility – Contraction – are in a tiny minority.

Of these three points of view, the only one that we can dismiss is continuity. The economic “growth” that we’re told can be extended indefinitely into the future isn’t even happening in the present.

Most – roughly two-thirds – of the reported “growth” of the past twenty years has been cosmetic. The preferred metric of gross domestic product (GDP) measures activity, not prosperity. If we inject liquidity into the system, and count the use of that liquidity as ‘activity’, we can persuade ourselves that the world economy has been growing at rates of between 3% and 3.5%.

The classic illustrative example is of a government paying one large group of workers to dig holes in the ground, and another group to fill them in again. This adds no value, of course, but it does increase activity, and therefore boosts GDP.

In this example, the obvious question is that of how the government pays for all this zero-value ‘activity’. The simple answer is to use borrowed money. Conveniently, GDP, as a measure of activity, calculates flow without reference to stock

…click on the above link to read the rest of the article…

#219. The unravelling begins

#219. The unravelling begins


In nineteenth-century England, pictures of great events and famous personages could be purchased “penny-plain or tuppence-coloured”.

Where the world economy is concerned, the price of flattering colouration has soared into the trillions, but the value of a “penny-plain” view has never been higher.

The penny-plain picture now, of course, is that a vast gap has opened up between the consensus expectation of continuity and the hard reality of a post-growth economy. This gap is the counterpart of the chasm that exists between the ‘real’ economy of goods and services and the ‘financial’ economy of money and credit.

Our understanding of these dissonances sets an outline programme for ongoing analysis. The best routes to effective interpretation are those which (a) compare reality with perception, and (b) calibrate the relationships between the ‘two economies’ of money and energy. In the coming months, the aim here will be to add interpretive and statistical detail to the picture that is emerging as the aquatint wash of delusion fades away.

The divergence between expectation and reality isn’t – in itself – a new development. Many of us have long known that, over a very extended period, most economic “growth” has been a cosmetic product of breakneck and hazardous monetary expansion, that the underlying economy has been faltering, and that the confidence placed in ‘continuity’ lacks a basis in fact.

We can go further, recognizing that even the simulacrum of “growth” can’t last much longer, that the real prices of assets are destined to fall sharply in a context of broader financial distress, and that the balance of political power might be poised to shift, perhaps in a direction that, once upon a time, used to be called “left”.

…click on the above link to read the rest of the article…

#218. The real state of the economy

#218. The real state of the economy


As this might be the last article to appear here before the festive season, I’d like to take this opportunity to wish everyone a very merry Christmas and a happy and prosperous New Year, and to thank you for your interest in, and your contributions to, our conversations about energy, the economy and directly-related subjects.

I’m particularly appreciative of the way in which our debates have remained firmly concentrated on the economy. We could all too easily have dissipated our energies on subjects which, whilst topical and important, are not those on which we can add value through specialist knowledge.

It seems to me that the economy – with its profound implications for business, finance, government, society and the environment – is of such importance that clarity of focus is invaluable.

This clarity is singularly lacking in what we might call ‘the public discourse’. The economic debate, such as it is, has become reminiscent of that old Western movie hero who “jumped on his horse and rode off in all directions at once”.

Behind all the partisan argument, the mystification and the theorizing about nefarious plots, the plain fact is that the economy faces challenges and risks without precedent in modern times.

This simple fact is all too often lost in a miasma of misconception, false nostrums and self-interest.

One economy, two systems

We can add value in this situation because we understand two central realities that are neither known to, nor accepted by, the orthodox approach to economics.

First, we are aware of the critical distinction between the ‘real’ economy of goods and services and the ‘financial’ economy of money and credit.

Second, we recognize that the real or material economy is an energy system, in which prosperity is a function of the availability, value and cost of energy.

…click on the above link to read the rest of the article…

#216. It’s now

#216. It’s now


That, in essence, is the call we need to make now. Far from being “transitory”, current conditions – including rising inflation, surging energy prices and the over-stressing of supply-chains – are indicators of a structural change.

Ultimately, what we’re witnessing is a forced restoration of equilibrium between a faltering real economy of goods and services and a drastically over-extended financial economy of money and credit.

This is where confidence in continuity crumbles, where the delusions of ‘growth in perpetuity’ succumb to the hard reality of resource constraint, and where ‘shocks that are no surprises’ shake the financial system.

If you want just two indicators to watch, one of these is the volumetric (rather than the financial) direction of the economy, and the other is the behaviour of the prices of essentials within the broader inflationary situation.

The economics of stress

In the science of materials, it’s observable that fractures happen quickly, even if the stresses that cause them have accumulated over a protracted period. We can spend hours, days, weeks or even years gradually increasing the tension applied to an iron bar, but the ensuing snap in that bar will happen almost instantaneously.

Economics isn’t a science, but there’s a direct analogy here. Anyone who understands the economy as an energy system will be well aware of a relentless, long-standing build-up of stresses.

They’ll be equally aware that this cannot continue indefinitely.

Two things matter now.

First, when will these cumulative pressures bring about the moment of fracture?

Second, what should we expect to see when this snapping-point is reached?

The answers to the second question are pretty clear.

…click on the above link to read the rest of the article…

What is Surplus Energy?

What is Surplus Energy?

I’ve been meaning to write an article featuring Dr. Tim Morgan’s blog for quite some time due to the fact that he has quite an awesome site. You can find his blog here, Surplus Energy Economics. Many people may find the word economics in the name somewhat off-putting, but these economics are more about energy rather than money and relate to the energy cost of energy rather than financial price of energy. This is a primary distinction that many people simply DO NOT UNDERSTAND, which amounts to precisely WHY there is so much misinformation constantly being spread around about all the predicaments my blog focuses on. Energy stocks are a resource that require energy in order to be extracted, shipped, refined, stored, and transported to end users all over the world. The energy stocks remaining (after the energy required to acquire said energy) are available to do actual work and this is the “surplus energy” in the title. Money is nothing more than a claim on future energy. The predicament of energy and resource decline is that due to these facts, money which has value today will continue to become increasingly worth less as time moves forward because the surplus energy it represents is in constant decline.This particular entry, A Moment of truth, is what promulgated this post. It goes into detail about the false narratives which have been attempted to “fix” the issues with energy decline (the constant borrowing from the future to pay for the issues of today) and the fact that degrowth is the only possibility from here on out…

…click on the above link to read the rest of the article…

#214. Needed – a new model tin-opener

#214. Needed – a new model tin-opener


Logically considered, 2021 ought to have been the place where old assumptions go to die.

In many ways, it is.

Specifically, orthodox, money-based economic interpretation is being debunked. Current events are demonstrating that the economy isn’t, after all, entirely or even primarily a financial system. The proposition that demand produces supply is being discredited, because no amount of stimulus can deliver low-ECoE energy where that energy does not exist. In short, we’re discovering that the economy is an energy system.

Since the start of the Industrial Age, that has meant, overwhelmingly, a fossil fuel energy system. We’re in the process of encountering two constraints to the continuity of an economy built on oil, gas and coal.

The well-known constraint is that we have reached (or passed) the limits to environmental tolerance of our use of fossil fuels.

The second, barely-recognized-at-all constraint is that fossil fuels’ ECoEs – their Energy Costs of Energy – are rising exponentially, in a process that would destroy the fossil-dependent economy even if we were so unwise as to ignore the environmental issue.

The consensus answer to this situation is that we must endeavour to transition from reliance on fossil fuels to an economy based on alternative sources of energy.

This, undoubtedly, is a realistic conclusion.

The snag, though, is that the consensus view combines the logical conclusion of transition with the unfounded assumption of an economy which, far from contracting, continues to expand.

A balanced assessment of the issues indicates, rather, that a sustainable economy will also be a smaller one.

An appraisal of outcomes

At the level of theory, there’s nothing much wrong with the idea of outdated notions undergoing a mass extinction event.

…click on the above link to read the rest of the article…

The case for contingency planning

The case for contingency planning


An intelligent investor – as distinct from a gambler – doesn’t put all his or her money on a single counter. He doesn’t stake everything on a single stock, a single sector, a single asset class, a single country or a single currency. The case for portfolio diversification rests on the existence of a multiplicity of possible outcomes, of plausible scenarios which differ from the investor’s ‘central-case’ assumption.

This isn’t a discussion of market theory, even though that’s a fascinating area, and hasn’t lost its relevance, even at a time when markets have become, to a large extent, adjuncts of monetary policy expectation. The concept of ‘value’ hasn’t been lost, merely temporarily mislaid.

Rather, it’s a reflection on the need to prepare for more than one possible outcome. Sayings to this effect run through history, attaining almost the stature of proverbs. “Hope for the best, prepare for the worst” is one example. Others include “strive for peace, but be prepared for war”, and “provide for a rainy day”. There’s a body of thought which has always favoured supplementing hope with preparation.

Dictionaries might not accept the term “mono-scenarial”, but it describes where we are, working to a single scenario, with scant preparedness for any alternative outcome. The orthodox line is that the economy will carry on growing in perpetuity. Obvious problems, such as the deteriorating economics of fossil fuels and the worsening threat to the environment, will be overcome using renewable energy and the alchemy of “technology”, with “stimulus” deployed to smooth out any economic pains of transition.

…click on the above link to read the rest of the article…

#202. The shape of things to come

#202. The shape of things to come

As, when and if the coronavirus pandemic recedes into the past, there’s a widespread assumption that we’ll see the welcome return of a ‘normality’ defined to include “growth” in the economy. The big change looking forward will, we’re assured, be the replacement of climate-harming oil, gas and coal with renewable energy sources, primarily solar- and wind-power.

This aside, almost everything else is going to be ‘more of the same’.

In reality, this consensus narrative of the future is based on the big two fallacies of our age. One of these is that the economy is a financial system, such that we’re assured of growth in perpetuity by our control of the human artefact of money.

The other is that there are no limits to the capabilities of technology, potentialities often extrapolated to and beyond the constraints of physics.

We cannot know quite how much of this is believed by governments, or whether they ‘know, but don’t say’, that most of it is implausible. Businesses and the general public seem to have bought into this narrative.

Energy reality

The facts of the situation, as we understand them here, are that the supply and the ECoE-cost of energy determine material prosperity, and that this equation has been turning against us over an extended period.

ECoEs – the Energy Costs of Energy – have been rising relentlessly, passing (during the late 1990s and early 2000s) levels at which Western prosperity ceases to grow, and then starts to contract. The EM (emerging market) economies have now reached the ECoE thresholds at which their prosperity, too, turns downwards.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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