Archive for Outubro, 2019

Actual fantasy


Everyone knows the quotation, of course, which says that “when it gets serious, you have to lie”.

Actually, when it gets even more serious, we have to face the facts.

I’m indebted to Dutch rock music genius Arjen Lucassen for the observation that the counterpart to “virtual reality” is actual fantasy – and that’s where the world economy seems to be right now.

You may think it’s imminent, or you might believe that it still lies some distance in the future, but I’m pretty sure you know that we’re heading, inescapably, for “GFC II”, the much larger (and very different) sequel to the 2008 global financial crisis (GFC).

SEEDS 20 – the latest iteration of the Surplus Energy Economics Data System – has a new module which calculates the scale of exposure to “value destruction”. This exposure now stands at $320 trillion, compared with $67tn (at 2018 values) on the eve of GFC I at the end of 2007.

How this number is reached, and what it means, can be discussed later. Additionally, potential for value destruction needn’t mean that this is the quantity of value which actually will be destroyed when a crash happens. Rather, it gives us a starting order-of-magnitude.

For now, though, we can simply note that risk exposure seems now to be at least four times what it was back in 2008. Moreover, interest rates, now at or close to zero, cannot be slashed again, as they were in 2008-09. Neither can governments again put their now-stretched balance sheets behind their banking systems, even if global interconnectedness didn’t render such actions by individual countries largely ineffective.

Finally – in this litany of risk – two further points need to be borne in mind. First, global prosperity is weakening, and has been falling in most Western economies for at least a decade, so any new crash will test an already-weakened economic resilience.

Second, and relatedly, any attempt to repeat the rescues of 2008 would be unlikely to be accepted by a general public which now – and, in general, correctly – characterises those rescues as ‘bail-outs for the wealthy, and austerity for everyone else’.

The high price of ignorance

It’s tempting – looking at a world divided between struggling, often angry majorities, and tiny minorities rich beyond the dreams of avarice – to think the surreal state of the world’s financial system reflects some grand scheme, driven by greed. Alternatively, you might feel that far too many countries are run by people who simply aren’t up to the job.

Ultimately, though – and whilst greed, arrogance, incompetence and ambition have all been present in abundance – the factor driving most of what has gone wrong in recent years has been simple ignorance. For the most part, disastrous decisions have been made in good faith, because thinking has been conditioned by the false paradigm which states that ‘economics is the study of money’, and which adds, to compound folly still further, that energy is ‘just another input’.

I don’t want to labour a point familiar to most regular readers, so let’s wrap up recent history very briefly.

From the late 1990s, as “secular stagnation” kicked in (for reasons which very few actually understood, then or now), the siren voices of conventional economics argued that this could be ‘fixed’ by making it easier for people to borrow than it had ever been before. This created, not just debt escalation, but a lethal proliferation and dispersal of risk, which led directly to 2008.

In response, the same wise people, those whose insights caused the crisis in the first place, now counselled yet more bizarre gimmicks, the worst of which was that we should pay people to borrow, whilst simultaneously destroying the ability to earn returns on capital. Nobody seems to have wondered (still less explained) how we were supposed to operate a capitalist economy without returns on capital – and that, by the way, is why what we have now isn’t remotely a capitalist system based on properly-functioning markets.

When GFC II turns up, it’s as predictable as night following day that the zealots of the ‘economics is money’ fraternity will come up with yet more hare-brained follies. We already know what some of these are likely to be. There are certain to be strident calls for yet more money creation (but this time with a label saying that “it’s not QE – honest”). Some will advocate ‘helicopter money’, perhaps calling it ‘peoples’ QE’. There will be calls for negative nominal interest rates, with the necessary concomitant of the banning of cash. Ideas even more barking mad than these are likely to turn up, too.

Ultimately, what’s likely to happen is that the authorities will respond to GFC II by pouring into the system more additional money than the credibility of fiat currencies can withstand.

We know, of course, that any new gimmicks, just like the old ones, won’t ‘fix’ anything, and can be expected to make a bad situation even worse.

So the question facing everyone now – but especially decision-makers in government, business and finance, and those who influence their decisions – is whether we abandon conventional economics before, or after, the next mad turn of the roulette wheel.

Put another way, should the creators of “deregulation”, QE and ZIRP – and the facilitators of sub-prime and “cash-back” mortgages, collateralised debt obligations and the alphabet soup of “financial weapons of mass destruction” – be allowed to introduce yet more insanity into the system?

Before making this decision, there’s one further point that everyone needs to bear in mind. In 2008, financial gimmickry nearly, but not quite, destroyed the banking system. The only reason why this didn’t happen was that fiat money retained its credibility. But, whilst the follies which preceded the GFC imperilled only the credit (banking) system, those which have followed have put the credibility of money itself at risk.

This is perhaps the most powerful reason of all for not letting the practitioners of ‘conventional’ economics have another swing at the wrecking-ball.

I hope that, reflecting on this, you’ll agree with me that we can no longer afford the folly of financial economics.

Moreover, we need to say so, making fundamental points forcefully, and resisting any temptation to wander off into esoteric by-ways.

A scientific alternative?

If there can be no doubt at all that money-based interpretation of the economy has ended in abject failure, there can be very little doubt that a workable alternative is ready and waiting. That alternative is the recognition that the economy is an energy system.


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The Consciousness of Sheep

Throughout history it has fallen to poets and artists rather than scientists and economists – still less politicians and journalists – to present the true nature of the human condition.  With this in mind, I wondered if there might have been a popular song that sums up our current human impact predicament and its environmental, resource depletion and economic collapse sub-crises.  There are, it turns out, a raft of apocalyptic songs that imagine the horrible fates that might befall humanity in the not too distant future.

David Bowie’s Five Years Left imagined some unspecified millennial catastrophe of the kind that was popular back in the 1970s.  Emerson Lake and Palmer’s 1973 Karn Evil 9 imagined the more plausible headlong rush toward nuclear annihilation at the height of the Cold War.  In 1987, REM announced the End of the World as we know it; while in 1989 Chris Rea told us that we were on The Road to Hell.  But none of these visions really gets to the malign banality of the predicament we face.

There was, however, a much earlier and far simpler song which gets to the nub of our situation.  It turns out that a sixteenth century German folk song offers a greater insight into the catastrophe that is unfolding around us than any of the apocalyptic visions offered by the music industry.  The song in question features the techno-utopian Lotte, who believes that there is a technical fix to each of the problems we face.  Lotte’s nemesis – Hans – is, however, far more aware of the complexity which renders what appears to be a series of problems into a single unresolveable predicament.

Updated for the modern world, Hans might patiently explain that the fossil fuels that we have been burning for the last 300 years have polluted and undermined the human habitat leaving us facing at best severe hardship and at worst the compete extinction of humanity.  Hans would also explain that one way or another we have to wean ourselves off these fossil fuels because we have so depleted them – and a host of other mineral resources – to the point that future production is bound to slump.

Lotte’s solution is some combination of solar panels, wind turbines, hydroelectric dams, tidal barrages, geothermal pumps and biofuels.  Hans, of course, objects that to replace the energy we currently derive from coal, gas and oil would require a massive global effort to deploy the equivalent of two nuclear power stations every three days or 1,500 wind turbines covering an area of 300 square miles every day, for the next thirty years!  This, though is only the start of our problems because, Hans explains, once we have dispensed with the fossil fuel industry together with all of the industrial processes built around it, we will not be able to maintain and eventually replace the nuclear and/or non-renewable renewable energy-harvesting infrastructure that we built in its place.

Lotte can’t see this, of course.  If the wind turbine stops working, she tells Hans, “You just have to replace it”.  But Hans objects, “Where will we get the steel and the concrete for the base?  Where will we get the plastic for the blades?”  Lotte suggests that Hans finds a steelworks, a cement works and a plastic factory.  But Hans points out that since all three were part of the oil infrastructure that we replaced; and since none of these materials can be made without the fossil fuel feedstock or the heat that only fossil fuels can generate, the only way to manufacture them is with the fossil fuels that we need to – and ultimately will have no choice but to – cease using.

The song about Lotte and Hans was anglicised in the twentieth century, and became a nursery rhyme that most English-speaking children will have sung at some point in their upbringing.  For the English version, Lotte and Hans were replaced with the American Lisa and Henry.  The song – There’s a hole in my bucket – sets out precisely why too narrow an assessment of the problem can make simple – but wrong – pseudo-solutions appear plausible.  Henry cannot fix the hole in his bucket because he has no straw; he can’t cut the straw because his knife is too blunt; he can’t sharpen the knife because the grindstone is too dry; and, of course, he cannot wet the grindstone because there’s a hole in his bucket…

As with our human impact predicament today, the problem is real enough.  But those who offer supposedly “green” solutions based around harvesting renewable energy, like so many Lisas and Lottes have simply failed to understand the whole picture.  In most cases they assume that the economists know what they are talking about when they claim that if the price is right, the necessary resources or some equally good substitute will always be available.  That is, they assume that the fossil fuel-based global industrial economy will still be able to deliver any resources we might desire long after we have replaced it with something far less material and far less energetic.

So next time someone tries to tell you that we can “save the world” with some combination of wind and solar electricity, just tell them that there’s an old German folksong they might want to listen to.

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