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.