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.
Hi Rob,
When I first read this, I had not realised this was a re-blog and then after reading the full piece I posted a more detailed comment on Tim Morgans Blog.
If we take your Last Sentence that “We” are in a severe state of overshoot. I would argue that “We” are not all in this together. The current Debt Based money system is very much a Them and Us dynamic and the Myths of Scarcity are very important to supporting the idea of Debt and the owners and controllers of the Debt through Interest (Usury).
Whilst Fractional Reserve banking has had some purpose in the overall banking mythology, under FIAT money systems including those notionally based upon Gold stories explaining Fractional Reserve Banking have been lacking in real exemplars, charitably they are always honoured more in the breach than the observance.
To move to an Energy Based system of priorities rather than a debt based money system of priorities in Political Economy. An analysis of Both systems needs to be clearly based on an agreed understanding of how each would operate in the model we adopt to represent our understanding of each system.
Tim does look at stripping out Borrowed money for consumption from the Total US Debt increase, but the problem with Debt Based money is that All money even that earned and then spent on consumption is Borrowed into existence, the problem with Debt Based money is the Usury and the uncreated money when the money is borrowed into existence and not so much the privilege of seigniorage accruing to the creator of the deposit.
ANother question regarding who can achieve prosperity is part of this prioritisation question, Tim posits a re-distribution scenario where the Rich are somehow sacrificing their Hard won riches to the Less well off, I think that Helmuth Kreutz shows quite well that unearned interest accruing to the wealthy is the process by which most differential wealth leading to huge inequality stems from, this is a derivation of the Exorbitant privilege on Monetary hegemony and the biggest obstacle to Energy Based metrics of political economy are the social control aspects of the current debt based system.
”The monetary and financial system of an economy are part of the socio-politico-economic control mechanism used by every state to connect the economy with the polity and society. This neural network provides the administrative means to collect taxes, direct investment, provide public goods, trade. The money measures provide a crude but serviceable basis for the accounting system which in turn, along with the codification of commercial law and financial regulation are the basis for economic evaluation and the measurement of trust and fiduciary responsibility among the economic agents. A central feature of a control mechanism is that it is designed to influence process. Dynamics is its natural domain. Equilibrium is not the prime concern, the ability to control the direction of motion is what counts.
Money and financial institutions provide the command and control system of a modern society. The study of the mechanism, how they are formed, how they are controlled and manipulated and how their influence is measured in terms of social, political, and economic purpose pose questions, not in pure economics, not even in a narrow political economy, but in the broad compass of a political economy set in the context of society. ”
Martin Shubik
Here is a blog of my more detailed comment on Tims Blog, I intend to give it some more serious thought for a few days and jot down a note of the further questions which occur to me.
http://letthemconfectsweeterlies.blogspot.se/2017/09/energy-economics-miixing-debt-apples.html
The benefit of a fractional reserve system is that it makes credit abundant by borrowing from the future so we can enjoy something today rather than waiting until we have saved enough surplus.
The problem with a fractional reserve system is that it requires infinite growth which is not possible on a finite planet.
Another potential problem, which you appear to be focussed on, is that with inadequate taxation and social policies a fractional reserve system can result in a wealth inequality gap that causes social unrest. This problem is magnified with low interest rates as we have seen over the last decade.
Economic growth is an interesting topic because almost everyone wants it, but very few people understand why it is important, nor why it cannot continue.
You might be interested in this essay that I wrote:
https://un-denial.com/2016/01/30/why-we-want-growth-why-we-cant-have-it-and-what-this-means/
Hi Rob,
The Debt based money system needs growth not to collapse, the reason for this is that only the principal debt is created and not the interest, if More debt is not taken on as debts fall due there is not enough money in the system to pay the interest. Bernard Leitaer explains the way it works in his parable of the 11th round.
http://www.lietaer.com/2010/09/the-story-of-the-11th-round/
I will read your essay properly later, I am familiar with Bartlett’s famous lecture and the Exponential Function.
Carol Quigley understood the distinction evidenced in this quote from Tragedy and Hope.
”Thus, clearly, money and goods are not the same thing but are, on the contrary,
exactly opposite things. Most confusion in economic thinking arises from a failure to
recognize this fact. Goods are wealth which you have, while money is a claim on wealth which you do not have. Thus goods are an asset; money is a debt. If goods are wealth; money is not wealth, or negative wealth, or even anti-wealth. They always behave in opposite ways, just as they usually move in opposite directions. If the value of one goes up, the value of the other goes down, and in the same proportion.”
Quigley Tragedy and hope.
http://letthemconfectsweeterlies.blogspot.se/2016/02/usury-hells-fuel-and-mans-oppressor.html
On the question of Growth, What is Growth? GDP growth, Growth in National Well being etc. Energy Returned on Energy Invested is a hugely important measure in pursuing it I think any Borrowings from the old Debt based money system should be resisted.
http://letthemconfectsweeterlies.blogspot.se/2017/08/technocracy-energy-based-economics.htmlTowards an energy Based Monetary Unit, free of Usury.
Introduction to Technocracy – 1933
https://archive.org/details/introductiontotec00tech
discussions — of ‘value,’ of fluctuating prices, of the gold standard, of changing interest rates, of items of pecuniary wealth which are at the same time items of debt — are
merely discussions looking toward a readjustment of the factors which prevent them
The problem of analysing political choices against the metric of a Monetary measure is the Money as a Thing is most certainly a Variable and as any good technologist, scientist or metrologist will tell you a unit of measurement has to be clearly defined and fixed.
The dollar. He notes that it is a variable. Why anyone should attempt, on this earth, to use a
variable as a measuring rod is so utterly absurd that he dismisses any serious
consideration of its use in his study of what should be done.
He also considers ‘price’ and ‘value’ and the fine- spun theories of philosophers and
economists who have attempted to surround these terms with the semblance of meaning.
These terms, like the monetary unit, may have had meaning to men in the past but they
mean nothing whatsoever to the modern technologist. The standard of measurement is
not relevant to the things measured; and the measuring rod and the things, measured as if
they were stable, are all variables.
http://letthemconfectsweeterlies.blogspot.se/2017/08/conquestofdough-squaring-energy-food.html
I understand the issues you raise but I do not understand the point you are trying to make. If you want to continue the conversation please restate your point in one sentence.
Money does not initiate Economic activity, in all cases, it is an intermediary token or rain check which has profound effects on social relations and commerce between individuals and nations, but money is a mere Idea and can be anything we imagine it to be.
I made a longer Comment awaiting moderation on your Essay post you linked to earlier.
I agree money can be anything we imagine it to be. Our current system is brilliant when the economy can grow, but disastrous when growth is no longer possible, as we will soon learn.
Actually – when it comes to us techno-industrial humans – anything can be anything we imagine it to be! Just sayin’
Soon we’ll be imagining food.
If you’re looking for a concise, short sentence that sums it up, here it is: Don’t eat yer seed corn!. Nicole Foss has said as much. This is old knowledge. Ancient wisdom, if you like. But we have been groomed and conditioned to dismiss anything “ancient” as nothing more than a quaint artifact for our distracted perusal. We are bright, shiny, dynamic and unstoppable – and the world is our “oyster”, the future ours.
And yet, in these times of hypertrophied derangement, delusion and yes…denial…these truisms have been all but obscured. And so those of us with a modicum of awareness are relegated to the sidelines, bearing witness to the unfolding chronicles of demise.
How can it be, in this age of such material accomplishment, where everyone is hooked up to the hive mind and dutifully pays his or her internet bill at the end of the month, that there can be such ignorance and cluelessness? After all, one only need ask a few basic questions.
Nicely said. Hence my interest in inherited denial of reality. It’s the only thing I’ve found that can explain the insanity.
If one did a Stocktake of all potential production with existing energy Resources how would that Look? Prosperity for a Single Income minimum Wage Single Parent in Detroit looks a lot different to An Upper Middle-Class Graduate from Connecticut? If Money is reinvented around Energy Realities rather than the realities of Debt Based Money where would we choose to head, and whose measure of prosperity would we adopt?
War seems to be the present Answer from those stuck in the Old Paradigm, What is the realistic view for an energy based economy?
I thought this Roger Pelke Talk was very good, It would be disastrous to see a marginalisation and Polarisation of the Energy Based Economy debate, in the same way as the Climate Question became so poisoned.
Climate Politics as Manichean Paranoia – Roger Pielke Jr @ The GWPF, July 2017
Assuming that I understand your point, I agree that changing our monetary system to an energy backed full reserve system would be a very wise decision. Our current debt backed fractional reserve system guarantees a civil society destroying crash followed by hyperinflationary destruction of our currency.
I also agree the quality of climate change debate is very bad. Both sides, in my opinion, do not understand the problem. Someone who claims that business as usual can continue if we simply switch to solar panels and Tesla cars is just as ignorant as the person who says climate change is a hoax.
We are in a severe state of overshoot. Any useful discussion must start with this fact.