unmasking denial: creator and destroyer
Gail Tverberg refines her story on the relationship between energy and the economy, which is the most important issue that our leaders and media never discuss.
With each new version Gail is clearer and more comprehensive which reflects well on her effort to explain a complex and poorly understood topic.
This essay is a good place to start for someone seeking to understand what is going on in the world.
https://ourfiniteworld.com/2017/10/18/the-approaching-us-energy-economic-crisis/
Another must read by Tim Morgan…
As you will know if you are a regular visitor, surplus energy economics is an interpretation which says that the economy is, fundamentally, an energy system, not a financial one. More specifically, it is a surplus energy system, because, whenever energy is accessed, some energy is always consumed in the access process. Our prosperity is the surplus, or difference, between the amount of energy accessed and the quantity used up in getting it.
Where the surplus energy approach differs most fundamentally from ‘conventional’ economics is in its recognition that there are two economies, not one.
The first of these is the ‘real’ economy of goods and services, labour and resources, and this is an energy system.
In parallel with it is a second or ‘financial’ economy of money and credit.
Conventional economics goes wrong in thinking that this ‘financial’ economy is the entirety of our economic system. In fact, it is in a subservient relationship with the energy economy. This ought to be obvious. After all, money has no intrinsic worth. It commands value only as a “claim” on the output of the real economy.
Back in 2013, when Life After Growth was first published, I was uncomfortably aware that it would be hard to put numbers on this relationship. This is where the SEEDS project – the Surplus Energy Economics Data System – began. One of the biggest challenges has been to use monetary units to calibrate the ‘real’ economy which is the substance behind the ‘financial’ economy with which we are all familiar. This is one of the reasons why developing SEEDS has taken so long.
During this period, I have become ever more aware of a striking and dangerous reality in our situation. This is the way in which the ‘financial’ economy has become estranged from the ‘real’ economy which it is supposed to represent.
The real economy began to decelerate in or around 2000, but we have been unable or unwilling to accept this. Instead, we’ve sought to fake a “normality” of growth by ‘mortgaging the future’.
At first, we did this by creating an ever larger mountain of debt. This led to the global financial crisis (GFC) of 2008.
So large had debt become by then that the only way in which we could co-exist with it was to make it cheap to service. This is where “monetary adventurism” began.
We have toyed with some extremely silly ideas since then, such as ‘helicopter drops’ of money, negative interest rates, and the banning of cash.
The powers that be haven’t been sufficiently irresponsible to adopt some of the more extreme expedients. But what they have done has been bad enough. Ultimately, we have adopted a policy of ultra-cheap money, slashing policy interest rates to all-but-zero, and using vast amounts of newly-created money to drive asset values up, and yields down.
Only now are we becoming aware of quite how disastrous this policy of ultra-cheap money really is. Naturally, it has accelerated the pace at which we borrow – after all, why would you not borrow, when you are being paid to do so by interest rates which are negative (they are less than inflation)? And why would you save, when the real value of your savings falls year on year?
But the downsides of monetary adventurism don’t end there. I’ll pick just one of these downsides for special mention here. It is pensions. By driving returns on capital down into negative territory, we have destroyed returns on capital and, with them, our ability to provide for retirement. For all but a tiny minority of the very wealthiest, it has become impossible to save enough to give us a decent income in retirement.
The naïve answer to this is that we needn’t worry about pensions, or other future issues like paying back debts, because we have the comfort of the hugely inflated values of assets such as stocks, bonds and property.
This ‘comfort blanket’ is foolish in the extreme – because the only way we can turn these assets into money is by selling them to each other.
In politics and society, there are two things which we must hope that the general public never finds out. The first is what has happened to their ability to provide for retirement. The second is that selling houses to each other cannot get them out of this predicament.
The SEEDS system – in its SEEDS Snapshots version, freely available to the public – can now be downloaded from the resources page. The SEEDS Professional version will be announced at a later date.
We will doubtless have many discussions here about what SEEDS does, how it does it, and what it can tell us.
For now, though, such discussions can wait. Please download the very first published version – and enjoy it.
https://surplusenergyeconomics.wordpress.com/2017/10/08/108-seeds-goes-public/
Arab Spring, Greece, Brexit, Trump, Venezuela, and many more to follow.
Pay attention to what our leaders and experts say. Not one has a clue what is going on.
Hidden from view = No Clue = Denial
It is highly likely that, as events unfold, the causal criticality of energy decline will be hidden from the view of most observers, whose attention will be fixed instead on shocking but comparatively superficial and secondary political and social events. A more widespread understanding of the role of energy in society, and of the likely limits to future energy supplies, could be extremely beneficial in helping the general populace adapt to scarcity and avoid needless scapegoating and violence. Perhaps this essay can help in some small way to deepen that understanding.
One important wild card is the role of debt: it enables us to consume now while promising to pay later. Debt can therefore push consumption forward in time and (for a while, at least) make up for declining energy productivity. It would appear that the “fracking” boom of the past decade, which probably delayed the world oil production peak by about a decade, depended on the power of debt. But when debt defaults cascade, an economy may decline much faster than would otherwise be the case (default-led financial crashes have occurred repeatedly in modern history). And debt defaults can cripple the financial and thus the economic system of a nation with plenty of energy resources (as happened in the U.S. in the 1930s).
http://www.resilience.org/stories/2017-09-26/energy-and-authoritarianism/
Honest growth driven by low cost energy is over.
What’s left is fake growth driven by debt and money printing.
I think the illusion of growth created by debt and money printing will eventually end when something awakens the herd to the bubbles and causes it to sell assets in a panic which will harm a lot of people, including innocents without assets.
On the other hand, if I am wrong and central banks continue to succeed with their illusion, then it seems the end game will be 90+% of assets owned by the 1% elite, and 99% of citizens angry and impoverished by a destroyed currency.
It would be so much wiser and safer to accept the necessity of a decline in our standard of living, and to allow the economy to deflate with taxation policies designed to prevent the wealth gap from widening as everyone becomes poorer.
I understand that it may be impossible to orchestrate a gradual deflation without triggering a crash, however every day that we postpone reality increases the pain we will eventually experience.
There is no free lunch.
Vaclav Smil is an intelligent, wise, and knowledgeable expert on a wide range of scientific and social topics related to energy. He is Distinguished Professor Emeritus at the University of Manitoba in Winnipeg, Canada, and is a respected author of many books.
In this September 2015 talk at McGill University he touches on many important topics including:
I agree with almost all of Smil’s points except:
This lecture is a must watch for people seeking to understand the issues that really matter to our experiment with civilization.
A must read by the brilliant Tim Morgan.
Essentially, two things are happening to the average American. First, his or her income is rising less rapidly than the cost of essentials, squeezing the “discretionary” income which is the real definition of prosperity. Second, increases in income are being far exceeded by increases in debt, and also by growing shortfalls in pension provision. So the citizen feels both less prosperous and less secure.
As SEEDS measures it, per capita prosperity was 10% lower in 2016 than it was back in 2000. Neither is this trend likely to reverse – by 2025, the average American is likely to have seen his or her prosperity decline by a further 8% in comparison with 2016. At the same time, per capita debt has increased by almost $54,000, in real terms, since 2000, a problem now being compounded by a rapidly-growing systemic shortfall in pension provision.
‘Conventional’ economics cannot capture any of this. A perspective which ignores both “borrowed consumption” and the trend cost of energy is baffled by popular discontent, in America and elsewhere. Moreover, ‘conventional’ analysis tends to be misled by the apparently-buoyant values of stocks, bonds and property. These values are misleading, because they cannot be monetized – the only buyers for homes, for example, are the same people to whom they already belong.
For as long as these issues are overlooked, popular anger is likely to go on taking ‘the experts’ by surprise.
The concept of prosperity needs to be understood clearly. Prosperity is not simply the size of someone’s income. Rather, it is the sum left over after essentials have been paid for. This means that prosperity equates to “discretionary” income, which is the sum that he or she can choose how to spend.
The fundamentally energy-based nature of all output creates a natural distinction between “two economies” – the real economy of goods and services, and the financial economy of money and credit. Used properly, the financial system can deliver many benefits. Equally, though, it can be harmful, if it diverges too far from the real economy.
The potential for harm is simple. Money functions only as a “claim” on goods and services, which really makes it a claim on surplus energy. Likewise, since credit is a claim on future money, it is really a claim on future energy.
Financial “claims” – money and credit – can be manufactured out of thin air, and we can create as many of these claims as we like. But, if we create claims that exceed what the real economy can deliver, the excess cannot be honoured. Therefore, it must be destroyed. Inflation is one way of doing this, though default is another.
America is by no means unique in experiencing downwards pressure on prosperity – the same is happening in many other countries, often more severely than in the United States.
The problems posed for America are twofold. First, the deterioration in prosperity makes it impossible for the President to improve the material prosperity of the average American – in attempting to do so, he is about as powerless as was King Canute when he tried to turn back the tide.
Second, the use of cheap money to ‘manufacture’ nominal economic growth is already creating an escalating level of forward risk. Just as Americans are getting less prosperous, they are also becoming ever more indebted, and face ever greater insecurity as provision for pensions deteriorates.
The time cannot be too far off, for America as for the world more generally, where the future (represented by the collective balance sheet) overwhelms the present.
I’ve watched a lot of good documentaries but this one produced in 2007 by Richard Smith for the Australian Broadcasting Corporation is among the very best.
http://www.abc.net.au/science/crude/resources/
http://www.imdb.com/title/tt1551617/
Usually, the more important a non-fiction work is, the more scientific disciplines the author integrates into a coherent story. In this case, Richard Smith does a remarkable job of weaving geology, chemistry, biology, thermodynamics, climate, history, and economics into a fascinating story that follows a carbon atom as it moves about the planet over the last 200 million years.
I often marvel at, and wonder how we were blessed with such a large quantity of crude oil which we have used to build an amazing civilization. This documentary does a very nice job of explaining how crude oil was formed 160 million years ago on a hot greenhouse planet with near dead and toxic oceans. The photosynthetic bacteria that converted CO2 and sunlight into the carbohydrates that later became crude oil acted to remove CO2 from the atmosphere thus cooling the planet and returning it to a healthy environment for complex oxygen breathing life like ourselves.
Humans are now reversing this process by burning fossil carbon and returning the CO2 to the atmosphere which may return the planet to an environment incompatible with civilization. Unless, ironically, we run out of oil first, which will also cause our civilization to collapse.
What’s different this time is that humans are doing in a hundred years what took geology thousands or millions of years in the past. This speed makes the outcome more difficult to predict but common sense suggests it’s unlikely to be good.
Given that 10 years have elapsed since the documentary was produced it’s a credit to Richard Smith that it’s still relevant and accurate, although it’s a concern to see how far we have unraveled in 10 years with melting poles, record temperatures, stalled economic growth, zero interest rates, money printing, failing oil companies, and global social unrest.
It’s also a concern, but expected in light of Varki’s theory on denial, that we collectively have not yet acknowledged our predicament, let alone taken any steps to make the future less bad.
Highly recommended!
If you’d like a higher quality version than what’s available on YouTube it has been recently ripped in HD and available as a torrent here.
