PARKING THE THESIS
It’s been said that travelling hopefully is better than arriving, but there comes a point at which even the most sluggish and reluctant train pulls into the station. When that happens, the locomotive and the rolling stock are parked in the sidings, leaving the passenger with new decisions to make.
Back in 2013, when the Surplus Energy Economics project began, it was possible to suspect that the fading out of the fossil fuel impetus, first harnessed during the industrial revolution, might be pointing towards a pretty imminent ending of economic growth.
Today, through the application of a series of fundamental precepts, we can know, and at very high levels of confidence, that the economy has stopped expanding, and is heading into contraction.
If this is indeed the case, it matters not one jot if this conclusion is unpopular, or if it contradicts what passes for ‘general knowledge’ in the field of economics. The individual has a choice between believing what he or she is told, or seeking out explanations that accord with logic and with the observation of conditions.
What we also know is that this process of economic inflexion will be accompanied by crises, which might be financial, social, geopolitical or, in all probability, a combination of all three.
We cannot, of course, know exactly when this will happen, but there are plenty of reasons for supposing that the processes leading to this crisis are accelerating. We need to be clear that the ending and reversal of growth can only end in crisis.
The evidence for an ongoing economic inflexion set out here is analytical, but has an abundance of observational corroboration.
The idea, for instance, that there is some kind of temporary and fixable “crisis” in the “cost of living” is ceasing to persuade, mainly because it isn’t true. Governments don’t have “answers” to this problem, because no such answers exist within current political parameters. Worsening hardship, insecurity and inequality are undermining the foundations of Western social and political stability.
International relations, meanwhile, have been degenerating into intensifying competition for scarce and dwindling resources. The financial system has been reaching dizzying new levels of absurdity, with investors now giving serious credence to ideas like mining asteroids, manufacturing on the Moon, travelling to Mars and building data centres in space.
For these reasons, what follows – in an article necessarily longer than usual – is an ‘all in one place’ synopsis of the Surplus Energy Economics thesis. It will form the basis of a report available for download.
The intention, using the previous analogy, is to “park” what we know so far where it is readily available to readers.
To this end, we’re going to proceed from precept and principle, via application, to conclusions and prognoses.
First, though, we must be quite clear that nothing happens ‘quickly’ in the economics of energy, and that a successor to fossil fuels won’t be found in any sudden moment of ‘technology saves the day’.
Part One ~ ABOUT TIME
When we think about the history of the industrial era, there’s an understandable tendency to assume that developments occurred pretty rapidly. We picture James Watt’s 1776 completion of the first truly efficient engine for the
conversion of heat into work as a ‘lightbulb moment’, one that quickly triggered a spate of dramatic industrial expansion.
We likewise imagine a rapid takeover from coal by oil, perhaps beginning with automobile development in the 1890s, or the first flight at Kittyhawk in 1903, or John D. Rockefeller, or the arrival of Ford’s mass-market Model T in 1908.
In practice, nothing could be further from the truth. Watt’s accomplishment itself crowned a long history of experimentation with steam, and was based on an even longer and more gradual advance in foundation technologies, of which metallurgy was probably the most important.
Neither did Watt’s discovery fire some kind of starting-gun – subsequent economic expansion was pedestrian, and the transformative technology of the age, which was the railway, would not arrive until more than fifty years after 1776. Like most new industrial ideas, steam had to be scaled, and its applications refined, and these are never rapid processes.
Likewise, coal remained the primary source of energy into the 1930s, with the ‘age of oil’ not actually beginning until the years after 1945. (Even the mass market automobile, by the way, arrived five decades after the first commercial production of oil in 1859).
The lessons of this history are that energy evolution happens very gradually, and that each progression has required the foundational technologies of its predecessor. There are no ‘lightbulb moments’ and, if we were to find a successor to hydrocarbons – a successor that would ensure seamless economic transition – we would have needed to have found it no later, perhaps, than the 1970s, the 1980s or, at best, the 1990s for it to be ready today.
We have believed, certainly twice, that we have discovered this successor form of energy, first with nuclear fission and then with ‘renewable’ energy from wind and solar power.
For various reasons, neither has taken over from fossil fuels, and time has run out. The very idea that some new discovery will instantly or even quickly transform our energy and economic future is ludicrous.
That’s just not how these things work.
The perception of the essentially gradual progression of energy-driven economic evolution has been reinforced by efforts here to push back the Surplus Energy Economics interpretation well before the SEEDS start-date of 1980.
These inquiries are in their early stages, and the required data becomes harder to find as we scroll back in time.
Nevertheless, preliminary indications, though necessarily tentative, are striking.
As you can see in the first set of charts, annual growth in material economic prosperity accelerated markedly in the post-war decades. Increases in population numbers followed a similar pattern, but in a more muted and time-lagged way.
The result seems to have been that global average prosperity per capita grew by about 2.7% annually in the 1950s, rising to 3.0% in the 1960s.
And these, of course, were the years when then-cheap oil – and, latterly, natural gas as well – were taking over energy leadership from coal. Even conventional economic data, inadequate though it is, indicates that growth between 1945 and 1970 exceeded anything previously or subsequently experienced.
The SEEDS historical analysis goes on to show rates of growth decelerating significantly, such that, by the 1990s, the world’s average person had started getting poorer.
This was a period in which the collapse of the collectivist USSR, combined with the new ability of the West to access (“invest in”) resources in the former COMECON countries, gave rise to notions of a final victory for the neoliberal ascendancy in economics. History had ended in the discovery of the policy elixir for infinite economic expansion.
What actually happened, though, was the onset of ‘secular stagnation’, which in turn led, via “credit adventurism” and the 2008-09 global financial crisis, to the ultimately destructive “monetary adventurism” of modern times. By 2009, the neoliberal ascendancy itself had ended, and had been replaced by the cynical, self-serving post-capitalist expediency (PCE) of our times.
Beyond the comparatively gradual evolution of the economy, the key point to be taken from this sequence is the essential energy causation of economic trends. This, as we shall see, is where the parabolic trajectory of the Energy Cost of Energy (Fig. 1D) fits into the equation.
To understand these processes, our first requirement is a thorough grounding in how the economy actually works – something that orthodox classical and neoclassical economics has signally failed to provide.
Figure 1. Click on the image to enlarge.
Part two ~ PRECEPTS & PRINCIPLES
All investigations must start somewhere, and our ground-zero definition is that the economy, far from being a device for moving money around to no ultimate purpose, is a system for the supply of physical products and services to society.
Prosperity grows when the supply of these goods and services increases, and shrinks when this supply contracts. “Prosperity”, which isn’t remotely the same thing as income or wealth, is something that has long needed to be defined and measured.
The provision of products and services could, at least in theory, happen without the use of money. Though there seem to be few historical examples of large-scale barter, direct exchange without the intermediation of money is certainly possible in principle.
Logically, then, the material could have value (utility) without money, but money cannot have value without the material.
This requires that we frame the concept of money, not as ‘a medium of exchange’, ‘a unit of account’ or ‘a store of value’, but as an exercisable claim.
Obviously enough, money has no intrinsic worth, in the sense that we can’t eat it, or power our cars with it. Money commands value only in terms of those physical things for which it can be exchanged.
This leads to the principle of money as claim. Warren Buffett got this exactly right when he said that he thought of his money as “an enormous number of claim checks on society”. The money that a person holds is neither more nor less than his or her claim on the things that can be bought with it.
This principle tells us two things. The first is that any system of interpretation which concentrates entirely on the monetary, whilst disregarding the material, is necessarily fallacious. This is exactly where classical and neoclassical theory falls down, as a school of thought which hopelessly conflates accountancy with economics.
Second, we must at all times relate the monetary to the material, resulting in the necessity of the principle of two economies.
One of these is the “real” economy of physical products and services, and the other is the parallel “financial” economy of money, transactions and credit.
This raises the inevitable question of whether knowledge of the material can give us forward visibility on the trajectory of the financial.
This question, albeit with caveats, can be answered in the affirmative.
The two economies conception in turn requires that we understand the character of the material economy, something to which a number of critical precepts apply.
The first is that the material is a broad definition. It doesn’t just include goods supplied to consumers, but also encompasses all physical artefacts and infrastructures.
No worthwhile service can be supplied without the use of these artefacts and infrastructures, which is why we can’t operate an online retail business without vehicles and warehouses, or supply digital services without computers and cables. What this means is that services, no less than goods, are physical.
This precept of the materiality of services tell us that the idea that growth in the relative importance of services in proportion to goods can reduce the materiality of the economy is completely fallacious. So, for that matter, is any notion that we can somehow “de-couple” economic activity from the use of energy, a logical impossibility given that the economy IS an energy system.
Our second precept is that of continuity. Whilst some material products are consumed, others either wear out or reach the ends of their useful lives. What we are describing is a continuous process of creation, consumption, disposal and replacement.
Our next principle, therefore, is the primacy of energy. The physical economic system operates by using energy to convert other raw materials into products, artefacts and infrastructures. Nothing that has any utility whatsoever can be produced without the use of energy.
Since money is a claim on products and services, it is, by definition, a claim on the energy required to supply them. Likewise, debt, as a ‘claim on future money’, is in reality a claim on future energy.
From the necessary conception of two economies, it becomes readily apparent that the general level of prices at any given time is the rate of exchange between the monetary and the material.
This leads to the principle of inter-economy inflation. If the monetary economy out-grows its material corollary, this rate of exchange must shift in a way that we experience as inflation. Conversely, if the material were to expand more rapidly than the monetary, the consequence must be deflation. We need to modify Milton Friedman’s famous dictum to the effect that ‘inflation is always and everywhere a monetary and material phenomenon’.
It is, moreover, self-evident that claim and substance must match over time. If they did not, either we would have claims that could never be honoured, or substance for which no claim existed, and both are wholly impossible conditions.
There is, then, an inherent tendency towards equilibrium between the material economy and its monetary counterpart.
This equilibrium force plays a particularly important role in the creation and bursting of financial bubbles.
There is a drastic difference of agency between the “two economies”. We are at liberty to create the human artefact of money in almost limitless amounts, but we cannot similarly create the material counterpart of these claims. Energy and raw materials cannot be loaned into existence by the banking system, or conjured ex nihilo out of the ether by central bankers.
If, therefore, we increase the quantity of money to an extent that cannot be matched by growth in the material, the effect is to create excess claims.
These ‘excess claims’ must, by definition, be destroyed, because they are incapable of being honoured for value.
This restoration of equilibrium can happen in one, or both, of two ways. One of these is the ‘soft default’ of the inflationary destruction of the claim value of money. The other is the ‘hard’ default of claim repudiation.
In all instances of inflation, deflation or default, explanations are to be found in shifts and stresses in the relationship between the financial and the physical.
What the foregoing tells us is that we cannot make sense of the financial economy by comparing money only with itself. Money must be benchmarked to the discrete metric of material supply, and this is where two further critical principles emerge.
One of these, referenced earlier, is the principle of conversion. Even if the availability and cost of energy remained unchanged, economic supply would decrease if the quantity or quality of non-energy resources – including minerals, non-metallic mining products, biomass and water – were to be degraded by depletion. This is a category in which some economic consequences of environmental deterioration belong.
The second is the principle of ECoE, a concept so important that its omission by the mainstream must be seen as one of the single greatest flaws in orthodox economics.
There’s a widespread fallacy to the effect that energy is “free”. Oil, gas and coal, in this misconception, are “free” if they exist beneath our territory, such that we don’t have to pay anyone else for the right to extract them. Likewise, renewable energy is mistakenly said to be “free” because the Sun shines and the winds blow at no expense to humanity.
In reality, this concept of “free” energy is nonsense. Energy has no value at all until it is put to use, and this requires a supply infrastructure, extending from wells and refineries at one end of the spectrum to solar panels, wind turbines, power storage systems and grids at the other.
All of this infrastructure is material, and nothing material can be created, operated, maintained or replaced without the use of energy.
What this means is that, whenever energy is accessed for our use, some of this energy is always consumed in the access process, and is not available for any other economic purpose.
This “consumed in access” component, stated as a percentage of total supply, is known in Surplus Energy Economics as the Energy Cost of Energy.
Trend ECoEs have already risen sharply, from 2.0% of energy accessed in 1980 to more than 11% today, which goes a very long way towards explaining the troubled economic conditions of our times.
The Energy Costs of Energy evolve gradually over time. At the point where use of an energy source such as coal or oil begins, ECoEs are high. They then trend downwards, driven lower by extending geographical reach (as producers search for lower-cost supplies across the globe), economies of scale (as the industry expands), and advances in technology.
We must never forget, when considering the technological dimension, that the potential of technology is always bounded by the laws of physics, within an envelope of possibility set by the characteristics of materials and the laws of thermodynamics.
Energy access technologies have evolved gradually, in conformity with the observation that innovation tends to advance at a rate inversely proportionate to the material importance of the activity in question. A time-traveller from 1926 might be dazzled, and perhaps impressed, by digital technologies, and baffled by AI. But he or she would readily recognize our methods of growing food, producing oil and pumping water.
Once the benefits of reach and scale have been exhausted, a new driver takes over the direction of ECoEs. This driver is depletion, which describes a natural preference for using lowest-cost resources first, and leaving costlier alternatives for later.
Knowing about the sequential role of these drivers enables us to establish a conceptual parabola of ECoE (Fig. 2A). Further, having strong reasons to believe that ECoEs reached their all-time nadir in the high-growth years immediately after 1945, we can infer a longer-term pattern which is shown here as Fig. 2B.
The data necessary for the calculation of ECoEs becomes increasingly patchy as we travel back in time, but the parabola shown here is descriptively effective, and extremely important, even if its earlier history must remain indicative rather than numerically precise.
We might be tempted to regard the parabola illustrated in Fig. 2B as a fossil fuels curve, raising the possibility that a wholly new class of energy supply might start to push all-sources ECoEs back downwards.
But each transition to a new form of energy is enabled by legacy energy from its predecessor. This means that energy evolution is sequential, as was experienced when coal was succeeded, first by oil, and then by natural gas as well.
We are compelled, then, to search for each new energy impulse in its predecessor.
Renewables fit within this sequential process, since they cannot be developed without recourse to legacy energy from fossil fuel sources. Despite claims to the contrary, renewables are not a discrete successor to hydrocarbons.
The problem with renewables is that, far from providing a qualitative advance on fossil fuel energy, they cannot be detached from it, and do not boast meaningful superiorities over it. Renewables can be used for comparatively light industrial activity, such as the assembly of components, but cannot undertake the ‘heavy lifting’ in the economy.
What this means is that renewable energy is not “renewable” in the sense that it can be wholly detached from the use of fossil fuels. Renewables have a significant future role, and one that can be finessed to advantage, but are not a self-sufficient successor to carbon energy.
This is one reason why no giant renewables majors – no Standard Solar Trust or Gulf Wind Inc. – has taken over the baton from John D. Rockefeller and the Seven Sisters.
Figure 2. Click on the image to enlarge.
Part three ~ APPLICATION
Under ideal circumstances, we would use physical units for the calibration of the “real” economy of the material. But a translation into monetary language is required if we’re to use the physical to benchmark the financial. This process commences with GDP, but does not accept it as a meaningful marker for material economic supply.
One of the most popular misconceptions about gross domestic product is that it’s a measure of ‘economic output’, meaning the supply of goods and services to the economy. In fact, GDP is no such thing. It is a measure of transactional activity in the system, which is a very different concept.
The fallacies of GDP become readily apparent as soon as we start trying to gauge the “importance” of activities based on their proportionate contributions to it. According to such comparisons, agriculture is “only” about 6% of the world economy, implying that the remaining 94% could carry merrily on its way even if all capability to supply food were lost. On this fallacious basis of measurement, energy is even “less important” than farming.
It is, moreover, perfectly possible, indeed commonplace, for money to change hands without any material value being created.
Starting from this mistaken premise, orthodox economics draws a wholly fallacious conclusion about the “flow” and “stock” of money, contending that these are discrete components. On this basis, it has become customary, for example, to express the stock of government or broader debt as a percentage of the flow measured as GDP.
In fact, though – and as we have established – money, whether as stock or as flow, has the common characteristic of claim. The “flow” of money constitutes the exercise of claims in the present, whilst “stock” consists of claims set aside for exercise in the future.
Monetary stock is routinely denominated over long periods, typified by thirty-year bonds and mortgages. No such equivalent longevity exists (or can exist) in physical inventories. We can’t back thirty-year bonds with thirty-year inventories of oil, wheat or steel.
Extended-longevity claims are, therefore, predicated on assumed rather than assured levels of material economic prosperity in the future.
The continuity of growth which informs this assurance can seldom, if ever, have been more mistaken than it is today.
Almost all modern money is loaned into existence, and the only reason for borrowing money is to spend it. This connects the creation of stock with the exercise of flow, such that the flow of money increases when stock is expanded by the creation of credit. This relationship is variable, but its existence is beyond dispute.
Accordingly, stock and flow are not discrete entities. The more credit we create, the more transactional activity increases. This connection is confirmed by available data showing strong correlations between rates of credit creation and recorded growth.
We saw a first-hand example of the stock-flow effect during the pandemic. What happened was that, as the flow of the material slumped, the authorities sought to shore up the flow of the monetary by increasing its stock. The result was the creation of extreme disequilibrium between the material and the monetary economies, of which the only possible result was inflation.
By way of illustration, British reported real GDP fell by 10% during lock-downs, but this decline would have been about 20% without the very large fiscal deficit run by the government, underpinned by the central bank, and spent by the public.
There have, moreover, been continuous as well as one-off examples of inflating monetary flow through the expansion of stock. Over the past twenty years, when the mathematical average of real GDP growth in the United States was 2.1%, net borrowing by government alone averaged 6.9% of GDP.
We can, as we choose, be impressed by American growth, or worried by the escalation of debt.
What we should not do is to try to isolate one of these trends from the other.
When considering this distortionary ‘credit effect’, we need to note the increasingly important role played by NBFIs (non-bank financial intermediaries, colloquially known as “shadow banks”) in the supply of credit. Along with banks, central banks and public financial institutions, NBFIs form part of the aggregate of financial assets, and these, by definition, are the liabilities of the non-financial economy, since nobody else can honour them.
There’s been a long-running debate about whether NBFIs “create” money, whether “shadow banks” create “shadow money”, or whether they simply reallocate money created by the regulated banking system.
From our perspective, though, what matters is that NBFIs contribute, through collateralization, to expansion in the useable supply of claims.
We can, in short, reference recorded growth in GDP both to narrow increases in debt and to broader expansion in the assets of the financial system. The latter has to be estimated, because financial assets are not reported in full.
As can be seen in Fig. 3A, global debt has expanded by almost $300 trillion PPP in real terms – and broader financial assets by not less than $800tn – over a twenty-year period in which reported real GDP increased by only $102tn.
The pattern shown in Fig. 3A is, not of course, remotely sustainable. There are limits to how long we can carry on adding $3 of debt, within at least $8 of new broader claims, for each dollar of reported “growth”, especially when a large proportion of this “growth” is nothing more than the statistical effect of spending ever larger amounts of borrowed money.
Between 2005 and 2025 – years in which reported real GDP growth averaged 3.4% – debt grew by an average of 9.8% of GDP, as shown in Fig. 3B. The compound annual rates of real growth during this period were 3.4% for GDP and 4.7% for debt. Estimated financial assets, meanwhile, grew at a far higher compound rate of 5.8%.
What all of this means is that we can calculate the course of reported economic output in the absence of that expansion in debt and broader financial liabilities known in Surplus Energy Economics as the credit effect. For the period between 2005 and 2025, growth thus calculated falls to 1.4% from the reported 3.4% (Fig. 3C).
There is no ‘year zero’ in economics, but the retroactive application of these revised rates of growth as underlying or “clean” output (“C-GDP”), illustrated in Fig. 3D, reduces real “growth” since 2005 from the reported 94% to 32%.
Figure 3. Click on the image to enlarge.
With a monetary proxy for material economic output now established, we are able to undertake two critically important calculations.
One of these, shown in Fig. 4A, is to compare “clean” C-GDP output in constant dollars with energy consumption expressed in exajoules. From this we can measure the ratio at which energy use converts into the supply of material economic value.
As we can see in Fig. 4B, this conversion ratio has been trending gradually downwards, which informs us that the quality of the non-energy resource base has been depleting slightly more rapidly than the broad swathe of conversion technologies has been advancing.
What this means, for example, is that ore grades have declined more quickly than mining methods have improved, and that agricultural land has degraded more rapidly than farming techniques have progressed.
Looking ahead, the working assumption made here is that a changing prioritization of energy use – in favour of necessities and away from discretionaries – is likely to flatten the forward curve of conversion ratios.
But it’s equally possible that the effects of environmental degradation on the quality of the non-energy resource base might cause the downwards trajectory to steepen.
Even more importantly, we’re now in a position to apply the ‘first call’ made by ECoE both to the use of energy and to the supply of material economic value.
Between 2005 and 2025, whilst total energy use expanded by 34%, rising ECoEs reduced growth in surplus (ex-ECoE) energy to only 25% (Fig. 4C). As mediated by the conversion ratio, global economic output rose by 32% over this period, but ex-ECoE prosperity expanded by only 24% (Fig. 4D).
Before moving on, we need to be clear about how economic output, energy and ECoE interconnect in these equations.
Top-line economic output is a function of total energy consumption, whilst economic prosperity is the corollary for the availability of ex-ECoE surplus energy.
It will, meanwhile, have occurred to the reader that neither conversion ratios nor ECoEs have gained any place at all in conventional discussions about the economics of environmental change. It is unfortunate that the professionalism of climate science isn’t complemented by an equivalent professionalism in economic interpretation and measurement.
Figure 4. Click on the image to enlarge.
Within any given quantity of material economic prosperity, uses of these resources can, for facility of interpretation, be divided segmentally into: meeting the need for essentials; undertaking investment in new and replacement productive capacity; and supplying discretionary (non-essential) products and services to consumers.
The SEEDS calculation of essentials combines spending on public services with household necessities. Expenditure on public services differs from total government spending because it excludes both transfer payments (such as pensions and welfare benefits) and debt interest expense.
Governments are often wasteful, and much of the money spent on public services might not fit obviously into the category of “essential”. But SEEDS treats it in this way because the taxpayer has no discretion about paying for it.
Household necessities can only ever be estimated, not least because the distinction between “necessity” and “luxury” varies, both geographically and over time. But many of these core necessities are energy-intensive in character, which connects changes in their real costs to trends in the Energy Cost of Energy.
Between 2005 and 2025, the aggregate real cost of essentials, thus estimated, increased at an annual average rate of 3.7%, comprising a 2.5% rate of increase per capita combined with a rate of population growth averaging 1.1%.
At 2.5% annually, the per capita real rate of increase may not seem all that dramatic, and mightn’t matter all that much if prosperity per person was continuing to increase. But aggregate prosperity expansion since 2005 (+24%) has fallen slightly but significantly behind increases in population numbers (+25%) over that period (Fig. 5A).
What we can see in Fig. 5B is the real explanation for the non-temporary, non-“crisis” in the “cost of living”. Average prosperity per capita, long stagnant at best, has now inflected downwards, whilst the real costs of essentials have been rising relentlessly.
Looking ahead, we can see how the unfolding downturn in prosperity combines with rises in the real costs of essentials to impose severe leveraged compression on the affordability of discretionaries (Fig. 5C).
Thus far, discretionary consumption has been propped up by runaway credit expansion, and this leads us into the next phase of our analysis, which is the impending failure of the credit-backed simulacrum of ‘business as usual’.
Figure 5. Click on the image to enlarge.
Part four ~ PROGNOSIS
With due deference to Benjamin Franklin, more can now “be said to be certain” than mortality and taxation. The first thing we know, and are learning in real time, is that ‘infinite, exponential growth on a finite planet’ is indeed the preserve of madmen and economists.
The other is that this inevitability will be denied, up to, and even beyond, its point of demonstration.
Economic growth is generally regarded as a process by which material economic prosperity is advanced. But growth serves at least three other (and very important) purposes for society.
First, it enables individuals, businesses and entire nations to escape from the consequences of their own mistakes and misfortunes. For all of their diligence and hard work, Germany and Japan could not have emerged so prosperously from the ruins of war without global economic expansion during the years between 1945 and 1970. Growth makes the same road to rehabilitation open to households and enterprises.
Second, growth has made possible the comfortable assumption that each new generation will have greater opportunities than its predecessor, an assurance that is only now, and with reluctance, being lost.
Third, economic growth alone enables some to prosper without a corresponding detriment to others.
The loss of growth thus has profound psychological and political implications far beyond the simply material. With growth ending, we will have to “own” the consequences of our misjudgements and excesses, relinquish notions of seamless generational improvement, and address once more the vexed questions of inequality and redistribution.
As we have seen, the ending and reversal of meaningful economic growth has been preceded by a long period of deceleration and stagnation. Over the past twenty years, expansion in global material prosperity has been out-grown – modestly, but significantly – by increases in population numbers. Latterly, the real costs of essentials have been rising, a relentless and predictable trend almost universally – and falsely – presented as some kind of temporary and fixable “crisis” in the cost of living.
It should come as no surprise whatsoever that decision-makers have long tried, both to deny deceleration and to counter it. The 1990s repay study as the years in which these long processes of denial and manipulation really got under way.
Early in that decade, the collapse of the collectivist USSR was portrayed as a final, triumphant vindication of the neoliberal ascendancy that had displaced the post-war Keynesian consensus during the energy traumas of the 1970s. History, we were told, had ended in a final victory for the ideals of liberal market capitalism. With the resources of the former communist countries now open for Western “investment”, the stage was set for a rapid acceleration in growth.
Instead, the early 1990s were marked by the onset of deceleration known to some as “secular stagnation”. This was something that ‘the powers that be’ could neither explain nor accept. Their recourse was to a relentless promotion of borrowing, a process wholly consistent with the de-regulatory enthusiasms of the age.
As we now know, the economy was already starting to experience the adverse consequences of rising ECoEs. This, though, couldn’t be accepted, even presupposing that it could be understood.
The policy response to deceleration was the promotion of super-rapid credit expansion. This was being made necessary anyway by the penchant for globalisation, since rising debt was the only way to shore up Western consumption as production and well-paid jobs were shipped out to lower-cost locations.
But the main hope was that a flagging material economy could be reinvigorated using monetary expansion. Keynes had never made any such claim, contending only that fiscal and monetary policies could smooth what was then known as the “trade cycle”.
Stating everything at constant 2025 values for convenience, debt increased by about $115tn PPP between 1995 and 2007, a period in which reported real GDP grew by only $45tn. Broader financial assets weren’t even reported until 2002, and the data remains incomplete to this day, but we can reasonably infer that these assets of the financial system expanded by upwards of $6 for every dollar of reported “growth” between those years.
The inescapable result, of course, was the global financial crisis of 2008-09, which was countered by compounding the earlier “credit adventurism” of debt expansion with the even more dangerous “monetary adventurism” of QE, ZIRP and NIRP.
What this involved was the overthrow of the neoliberal ascendancy, not by its inveterate enemies but by its erstwhile friends.
As its name implies, the ideals of market capitalism required that markets remain free to conduct price discovery and put a price on risk, whilst investors should be able to earn positive real returns on their capital. Both of these requirements were over-ruled in response to the GFC.
According to these precepts, the reckless and the over-extended, along with the merely unfortunate, should have been wiped out in the 2008-09 crisis, something against which expediency and naked self-interest necessarily rebelled. Moreover, debts and quasi-debts were now so large that they could no longer be serviced at rates meaningfully above inflation.
The latter meant that we were now trapped within the variable geometry of rising debt and stagnating output.
The abrogation of the ideals of market capitalism led to the establishment of a post-capitalist expediency, a new ascendancy characterised by naked self-interest, and by the absence of anything even resembling economic principle.
One of the less recognised effects of responses to the GFC was the unleashing of moral hazard. What this term means is that anyone once rescued from the consequences of their own mistakes and misfortunes expects, understandably, to be bailed out again should the same conditions recur.
In essence, the interventions of 2008 forcibly rebalanced the drivers of sentiment, promoting “greed” whilst undermining the necessary corrective of “fear”.
More practically, the consequence of “monetary adventurism” was to realign the relationship between assets values and all forms of income, the latter including yields as well as wages, salaries and pensions.
Since the prices of assets tend move inversely to the cost of capital, the result has been the inflation of an “everything bubble” across most asset classes. This manipulation of the relationship between assets and incomes has been a major driver of widening inequalities.
It’s very important that we remember, at this point, that assets only ever command paper values, and can never be monetised in the aggregate. The only possible buyers for the entirety of the stock market, or for the whole of a nation’s housing stock, are the same people to whom these already belong.
Accordingly, it might be contended that those who advocate a political rebalancing of inequalities of wealth and income might, in reality, need to do no more than wait for the collapse, not just of most paper wealth, but also, very possibly, of fiat money itself.
Even the wealthiest are only ever one market crash, or one currency collapse, away from losing almost everything.
When looking back at the course of decision-making in modern times, we’re entitled to ask whether feasible alternatives even existed at critical moments in this sequence.
Confronted with the “secular stagnation” of the 1990s, could the authorities really have made any choice other than the gamble of rapid credit expansion? Then, faced, in 2008, with the consequences of this failed gambit, could policymakers simply have allowed the wipe-out of the over-exposed, combined with dire consequences for the banking system – or were they compelled to adopt “unconventional” monetary expedients?
This sequence strongly implies the existence of an arc of inevitability, one in which policymakers, far from being able to select at will from a smorgasbord of policy possibility, are driven into each successive choice by the conditions created by the consequences of previous decisions.
It’s certainly a possibility that this arc of inevitability is connected, via the very limited choices of politically-feasible decisions available to policy-makers, to the corresponding “arc of prosperity”, as pictured in Fig. 6.
What this might well mean is that future decisions can be anticipated by reasoned progression along this arc. When the next, much bigger and inescapable crisis occurs, can policy-makers simply sit back and watch the collapse of paper wealth – or will they feel compelled to engage in the futility of yet more recklessness in their defence of the status quo?
Figure 6. Click on the image to enlarge.
We cannot make effective predictions about the future unless we bear in mind that the economy is a human as well as a material and financial system. The notion that “a country is more an idea than a place” has an equivalent application in economics.
As we have seen, we’re being stripped of the ability to recover from past mistakes, to accept inequalities on the basis that these will not unduly antagonise majorities, and to trust that each successive generation will enjoy ever-increasing opportunities.
On top of all this disruption of accepted notions, there has been routine official denial that any of this has actually been happening at all, a set of claims which has been so at variance with experience as to undermine popular trust in institutions. Within this narrative, developments which have been detrimental to the quality of life have been presented as “progress”, when their real effect has been the further promotion of inequalities.
Together, the ending and reversal of growth have combined grief and shock into something which we can describe as a collective post-growth derangement syndrome.
Just when our thinking needs to be at its most rational, the basis of decision-making has been travelling in the opposite direction.
This departure from rationality has led to enormous amounts of faith being invested in the two false deities of economic resurgence.
One of these false deities is monetary stimulus, which is widely – but fallaciously – assumed to be capable of reinvigorating a flagging material economy.
The second of these fallacies is the enormous collective faith placed in the supposedly “limitless” capabilities of technological innovation. The reality, as mentioned earlier, is that the potential of technology, far from being limitless, is confined to an envelope of possibility determined by the characteristics of materials and the laws of thermodynamics.
Both of these false notions are extraordinarily hubristic, since it is our monetary originality, and our technological genius, that are supposed to defy the reality of material finality, and repeal the laws of physics, in order to make possible the impossibility of ‘infinite growth on a finite planet’.
Classification of these fallacies has at least the merit of informing us about the ways in which denial will fail. Collective faith in technology will be undermined just as monetary excess pushes the financial system ever closer to collapse.
Absolute faith in the potential of technology is already starting to wane, not least as the enshittification of the ‘ads and algorithms’ business model pushes Big Tech into massive investment in AI, as well as into making claims about the technological future which increasingly strain credulity.
Markets that place any faith at all in space tourism, lunar manufacturing, the mining of asteroids, data centres in space and travelling to Mars – and that buy in to AI promises that far exceed available resources – are markets that have already travelled a long way down the rabbit-hole of wishful thinking and implausibility.
Anyone familiar with our concept of the two economies will recognise the unfolding shift of emphasis, in official circles, from a concentration on the monetary to a focus on the material.
Most obviously, the United States, within weeks of seizing the leader of energy-rich Venezuela, joined with Israel to attack Iran, thereby courting closure of the Straits and the destruction of a great deal of energy infrastructure on both sides of the Persian Gulf. The aim, whether acknowledged or not, has been the denial of resources to the non-American world in general, and to China in particular.
This renewed emphasis on the material brings the debate onto territory on which the energy-informed observer will be comfortable.
We already know that the supply of oil and natural gas has stopped growing and is heading into contraction, with the mathematics of production turning against us. More recent sources of supply, such as tight sands in the United States, have far more rapid rates of natural decline than their predecessors, putting the industry onto a drilling treadmill, where producers have to run ever faster just to stand still.
Renewables have significant areas of promise, but cannot be detached from their umbilical resource connection to carbon energy. They are not qualitatively superior to oil and gas in the same way that hydrocarbons were superior to coal. The only way in which renewables can expand is by diverting legacy fossil fuel energy to their support, at the expense of other uses of this energy.
Neither can we rely on some kind of technological breakthrough to free renewables from these constraints. As we have already seen, our contemporary fascination with “tech” can all too easily blind us to the fact that technological potential, far from being “limitless”, is bounded by an ‘envelope of possibility’ determined by the characteristics of materials and the laws of thermodynamics.
The potential efficiencies of wind turbines and solar panels are governed, respectively, by Betz’ Law and the Shockley-Quiesser Limit, and best practice is now about as close to these maxima as we are likely to get. The issue of storage, connected to the problem of intermittency, is essentially a matter of portability, and the limits of possibility are set by what we might call the Energy Cost of Storage.
The mathematics here are complex, but what emerges from them is that renewables are not a qualitative improvement on hydrocarbon energy, and cannot provide the kind of economic uplift that was experienced when oil took over from coal.
Markets are in a confused state of mind about this contradiction. On the one hand, investors are willing to put huge amounts of capital into the supposed technological uses of a new generation of energy supply. But there has been scant investment in the industries that are supposed to supply this energy. We have, by analogy, a proliferation of would-be successors to Henry Ford, but few, if any, corporate heirs to John. D Rockefeller.
The unfolding of energy compression pits preference against possibility. We can, if we are so minded, convert a significant proportion of Western automobile use from ICE vehicles to EVs, but this will always be less efficient than investing in mass transport systems such as railways and trams.
The problem that eventually arises with renewables is how to replace their capacity in a future in which the resources made available by the use of fossil fuels are declining. Any given quantity of fossil fuel energy can be used to extract resources and use them to build renewables infrastructure, or it can be used to power cars and aircraft; but this same quantity cannot be used for both.
Neither can any form of electrification necessarily assume all of the functions of fossil fuels, meaning that not even the long-promised accomplishment of fusion could free us from significant carbon energy dependency.
The central-case SEEDS energy scenario is illustrated in the next set of charts. These show total supply continuing to increase, albeit gradually, for some years to come (Fig. 7A).
But the killer equation here is the Energy Cost of Energy, whose relentless, exponential rate of advance we are powerless to moderate, let alone reverse (Fig. 7B).
What we also need to remember is that energy is quite unlike any other product or commodity. A shortage of coffee might or might not prompt consumers to drink tea instead, but the lack of either beverage does not make people poorer. But prosperity IS undermined when access to energy is reduced.
This is why rising ECoEs have two economic effects, not one. As well as pushing producers’ costs upwards, higher ECoEs also reduce the prosperity of consumers. This is why worsening scarcity cannot be assumed to drive energy prices ever upwards, but is likely, instead, to impair quantities produced.
As this process unfolds, we can expect the price-points of demand destruction to decline, something reflected in comparatively muted market reactions to the severe loss of supply from the Persian Gulf..
Meanwhile, as the supply of surplus energy turns downwards, so population numbers are expected to carry on increasing, albeit at decelerating rates.
This means that surplus energy per capita, which is already on something of a plateau, is in the process of inflecting into contraction (Fig. 7D).This can only result in a decline in material economic prosperity, a process exacerbated by increases in the real costs of energy-intensive necessities.
Figure 7. Click on the image to enlarge.
It doesn’t help that the orthodoxy of classical and neoclassical economics has evolved into a set of beliefs which are as one-dimensional as they are mistaken.
Those precepts which economists have been pleased to call the “laws” of their pseudo-science are, in reality, nothing more than behavioural observations about the human artefact of money, and are not in any way analogous to the laws of the physical sciences.
There’s a certain irony in the fact that the foundation treatise of orthodox economics – Adam Smith’s The Wealth of Nations – was published in the same year, and in the same country, as James Watt’s completion of the first truly efficient heat-engine.
What Smith was describing was the economy under pre-industrial conditions. In those agrarian times, the vast majority of the energy used in the economy was sourced from human and animal labour, itself the product of nutritional energy.
The quantity of labour and nutritional energy available to the economy could increase or decrease from year to year, in accordance with factors such as weather conditions, wars and social instability.
But the qualitative characteristics of this energy were invariable – nobody, within any meaningful time-frame, was going to develop a more effective “Mod 1.1” version of the human worker or the draught animal, or a more energy-efficient “Mk II” version of grain.
From the outset, then, qualitative energy issues were left out of the calculus as being invariable.
In this context, what mattered – and appeared to be the only moving component in the economic equation – was investment, meaning the extent to which people were prepared to go without current consumption in order to expand the scale or quality of productive capacity. If a farmer enjoyed a bumper harvest, did he spend this surplus on feasting and fine apparel, or on a new barn or improved agricultural implements?
Such decisions are implemented through the use of money, implying that economic processes could be explained in terms of money alone.
This orthodoxy gained traction even as the precepts of Smith were being invalidated by the heirs to Watt. Energy is no longer an invariable, tied to virtual constancy by the immutable characteristics of labourers, farm animals and crops.
By 1960 – when the global population was only 3 billion – almost all land capable of supplying food was already under cultivation, and the subsequent increase to more than 8 bn has been made possible only by increases in the energy used in agriculture, and in the inputs made available by energy.
Adam Smith, of course, couldn’t possibly have foreseen any of this, but his successors have adhered rigidly to money-only causation even as the significance of the material in general, and energy in particular, has become ever more self-evident.
The excessive faith vested in monetary innovation and the wonders of technology has at least served the purpose of telling us where to look for failure. More specifically, the process of technological disillusionment will be dwarfed by the consequences of desperate financial recklessness. Thanks to the muddled thinking and the moral hazard introduced in 2008, there is a glaring misappreciation of the true scale and nature of financial risk.
When we take into account the trajectory of claims expansion (Fig. 8A), and the severity of disequilibrium stress between the monetary and the material economies (Fig. 8B), two conclusions become readily apparent.
The first is that, in accordance with the arc of inevitability, inflationary pressures will be fed by policy imperatives. The second is that market risk, already extreme, will carry on increasing to a point at which the markets will collapse.
Systemic financial risk, in turn, falls into two distinct categories. One of these is quantitative, and the other is qualitative. Quantitative risk can be measured by the divergence in rates of expansion between reported real GDP (which has grown by $102tn PPP since 2005), and rises in debt (+$297tn) and broader financial assets (at least +$800tn).
More important, though, has been the rapid expansion of qualitative risk. We can estimate that, within the expansion of the claims (“assets”) of the financial system over the past twenty years, barely 28% has been sourced from regulated banks, and at least 64% from the opaque and largely unregulated shadow banking sector.
This constitutes a marked migration of risk from the relatively cautious centre of the system to its far more dangerous periphery. This rise in quantitative and qualitative risk has resulted in the increasing complexification of the system towards truly Byzantine levels of cross-collateralisation, to a point at which nobody really knows which part of the system, perhaps seemingly small in itself, will, by failing, implode the entire financial soufflé of the times.
Financial collapse, of itself, will be a game-changer in a broader adaptation to the implications of negative growth. Vast amounts of paper wealth, and the influence that goes with them, will be destroyed, and the structural shift away from discretionary consumption will accelerate.
There exists, too, the possibility that efforts to prop up an unsustainable status quo might send currencies on a death-ride, which might otherwise be regarded as an accelerating race to the bottom, a process which could have the effect of trashing the purchasing power of fiat money.
Figure 8. Click on the image to enlarge.
Part five ~ CONCLUSIONS
None of the foregoing need mean that a post-growth economy is unmanageable. A perfectly plausible post-growth model exists, one in which top-down, centralised institutions fail, and are replaced by localised, bottom-up alternatives, which operate at a more human scale, and are more in keeping with environmental sustainability. The astute will be starting to create these localised alternatives even before over-centralised systems collapse.
At the same time, and as the affordability of discretionary (non-essential) products and services retreats, an economy increasingly starved of surplus energy will become progressively more labour-intensive.
The problem, as ever, is ‘getting from A to B’, when “A” is a society hubristically wedded to notions of infinite growth whilst “B” is a more stable-state situation better geared to meeting needs than to fostering the avaricious psychology of consumerism and paper wealth.
Our understanding of finance, when benchmarked to the material, should inform us that the moment of monetary failure will coincide with the attainment of absolute peak valuation.
Policy desperation will combine with ignorance of economic processes to ensure that a theoretical wealth based on non-monetizable notation, and on a complete inability to match claim with substance, will hit its zenith at the very point at which markets complete their failure, and money is stripped of the only substantive value that it can ever possess.
By the same author:
The Looming Crash ~ How the Physical Derails the Financial
The Long Run ~ Adventures in Thermo-Economics
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