https://surplusenergyeconomics.wordpress.com/2025/12/21/316-the-class-of-26/
Foreword

By convention, this is the season when analysts and others make their predictions for the year ahead. The near-ubiquity of this practice is a very good reason for not following suit.

Instead, and in thanking you for your interest and your contributions to our debates during 2025, I’d like to point out that the coming twelve months will mark the 250th anniversary of the most important year in modern history.

In 1776, Adam Smith published The Wealth of Nations, the foundation treatise of classical economics, whilst the United States Declaration of Independence was promulgated. Most important of all, James Watt completed the first truly efficient steam engine.

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People had long used coal and other fuels to warm their homes and prepare their food. What was transformative about Watt’s discovery was that it enabled us, for the first time, to convert heat into work. The entirety of the industrial age flowed from that breakthrough.

As most of us know, none of the planet’s resources are infinite, and it’s wholly natural that we deplete reserves by using lowest-cost sources first, and leaving costlier alternatives for later.

Our fundamental problem today is resource depletion, which is driving a wedge between preference and possibility. We want growth to continue; it can’t. We seem to favour wide inequalities between social groups; this is becoming unsustainable

This problem is most acute with fossil fuel energy.

In a sense, we’ve been here before, when the economics of coal deteriorated during the inter-war years. Fortunately, oil and natural gas were available to take over from coal, and their superior characteristics gave the global economy its biggest burst of growth in the quarter-century after 1945.

Our predicament now is that we have failed to find a successor to hydrocarbon energy.

Recent reports from Rystad Energy and the IEA have pointed towards a looming decline in the supply of oil and natural gas.

It’s always been true, of course, that the production of natural resources will decline in the absence of sufficient investment in new sources of supply. But two things are different now.

The first is that a large and rising proportion of oil and gas supply comes from unconventional sources, which have particularly rapid rates of natural decline.

The second is that prices are nowhere near high enough to fund investment at levels sufficient to put much of a brake on a rapid fall in production.

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Orthodox economics would assure us that this problem will be ‘sorted out by the markets’ – supply shortages will drive up prices, deterring consumption whilst incentivising investment in new sources of supply.

This market case seemed proven by the events of the 1970s, when the price spikes triggered by the oil crises prompted exploration and development in new basins – most obviously the North Sea and Alaska – whilst depressing demand, and encouraging rapid advances in fuel efficiencies.

By the mid-1980s, OPEC’s pricing power had been broken, and the world was awash with oil.

Any such assurance, though, is dangerously misplaced, for two main reasons. First, energy is not like any other commodity. A shortage of coffee and a rise in its price do not make us poorer, but energy shortages and higher costs do make us less prosperous.

The economy works by using energy to convert other raw materials into products, artefacts and infrastructures, so a decrease in the amount of ex-cost energy available to the system makes the economy smaller.

Second, there was no material shortage of oil in the 1970s – on the contrary, petroleum was abundant, and the cost of extraction remained very low. Far from being market events, the oil crises were political, caused by a falling out between the biggest users of oil and the most important exporters.

The critical measure of the condition of energy supply is the Energy Cost of Energy, a calibration of how much energy, being consumed in the energy access process, is unavailable for any other economic purpose. Driven by the depletion of fossil fuel resources, global trend ECoEs have risen relentlessly, from 2.0% in 1980 to more than 11% today.

Fig. 1

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It might be thought that the consequences of surging ECoEs have been modest. Using the above numbers, the proportion of produced energy available to us may have fallen from 98% in 1980 but remains at 88%, which, we might be tempted to think, is surely enough to keep the economy growing.

This, though, ignores critical leverage in the system. Most of the energy available to the economy – perhaps 95% in complex advanced economies, and 90% or so in emerging market countries – is required simply for system maintenance. It has to be devoted, not just to repairing and replacing infrastructures and productive capabilities, but also to the support of the population.

The West has long since passed the ECoE threshold beyond which growth becomes impossible, and the same is now happening in less complex, more ECoE-resilient EM economies.

Renewables cannot take ECoEs back down to growth-capable levels. In addition to their intermittencies and lesser portability, these renewables depend, for their expansion, maintenance and replacement, on legacy energy from fossil fuels.

This is a material explanation for the financial fact that renewables are reliant on subsidies. This is why no hugely-valuable, enormously profitable renewables corporations have taken over from the oil and gas majors.

Seen in material rather than monetary terms, the whole of the economy is ‘subsidised’ by the energy industries. This subsidy is gradually being withdrawn by rising ECoEs, which can usefully be thought of as the economic rent levied on us for the use of the planet’s energy resources.

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There are plenty of reasons for not panicking about the ending and reversal of economic growth. We retain more than enough economic resources to supply household essentials and necessary services to the World’s population.

A decrease in the over-consumption of energy and other resources might be our best hope of staving off worsening environmental deterioration. Discretionary products and services are, by definition, things that we might want, but don’t actually need.

This, unfortunately, is where politics clouds the picture.

Post-war optimism combined with rapid economic expansion to support a Keynesian consensus in the quarter-century after 1945.

During the 1970s, a neoliberal ascendancy took over from the Keynesian consensus, by persuading the public that the hardship and stagflation of the times were caused, not by the oil shock, but by “over-mighty” organised labour and “left wing” governments.

At the start of the 1990s, the collapse of the collectivist USSR seemed to mark the final victory of market liberalism, not least because it opened up resources in the former Eastern Bloc to Western investment.

But this triumphalism proved misplaced, as “secular stagnation” – in essence, a trend inflexion – set in. The real cause, as we know, was rising ECoEs, for which no ‘fix’ exists.

But the response favoured at the time was “credit adventurism”.

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We can’t reinvigorate a flagging material economy with monetary tools, any more than we can cure an ailing house-plant with a spanner. The result of super-rapid credit expansion was the global financial crisis of 2008-09, which more or less compelled decision-makers to adopt the “monetary adventurism” of QE, ZIRP and NIRP.

Nothing, however, compelled them to carry on with monetary adventurism long after the immediate “emergency” had passed. What was really happening was that the GFC marked an epic failure for the neoliberal ascendancy.

Accordingly, new forces – known here as the post-capitalist expediency (PCE) – moved into the space vacated by the failure of 1990s triumphalism.

Each new regime adapts some of the precepts of its predecessor to its own uses. The PCE can be expected to continue to favour low taxation of high incomes; a resistance to the taxation of capital gains and inheritance; a fiscal bias favouring investment returns over earned incomes; deregulation; and, where possible, a small state.

But the PCE will differ from the neoliberals in favouring tariff wars and exclusion zones over globalisation, a closer alignment between political interests and economic policy choices, and a preference for nationalism over the cosmopolitan ethos of the globalisation era.

The latter may, in large part, have been no more than a veneer, but its abandonment has changed the tenor of public debate.

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Lest the prospect of a self-serving, all-powerful PCE should dampen your festive celebrations, let’s be clear that the PCE cannot win.

The forces of resource degradation and rising ECoEs cannot be halted by political diktat.

The use of super-rapid liquidity expansion to sustain a semblance of normality will result in a massive financial crisis, part of which will be a wholesale destruction of super-inflated paper asset wealth.

The financial recklessness required to maintain a simulacrum of ‘business as usual’ has already put wide swathes of the discretionary economy on life-support.

Our best guides to the future are ECoEs, and the resource conversion ratios which determine material prosperity; and the relationship between the “real economy” of material products and services and the parallel and proxy “financial” economy of money, transactions and credit.

There’s nothing new about self-interest and a lack of candour in politics. We can also trace, as our arc of inevitability, the mechanisms that drive economic and financial policy.

This might not be the most uplifting way to end 2025, but knowledge is always to be preferred over even the most palatable versions of ignorance.

Fig. 2
Posted in Uncategorized | Tagged climate-change, Energy, Environment, post-capitalist-expediency, renewable-energy, sustainability | 187 Replies
#315: Madmen and economists
Posted on December 11, 2025
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THE ESCALATING DANGERS OF ECONOMIC DENIAL

Foreword

One of the greatest mysteries of our times is why the authorities have not only permitted but actively, through their policy choices, promoted the formation of the biggest bubble in financial history, whilst knowing perfectly well, all along, how this must end.

They cannot have done this simply to further enrich the already wealthy, since they must know perfectly well that asset value aggregates can never be converted in their entirety into spendable money.

The answer is that fears of the consequences of a bursting bubble are out-matched by an even greater fear – that the ending and reversal of economic growth might move from the land of theory into the realm of established fact.

If it ever became known that the economy had stopped growing and started to shrink, no existing set of social, political or commercial arrangements could survive.

The denial of economic inflexion is the sine qua non for the defence of the status quo. Nowhere in the world is worse equipped than the West for surviving the ending and reversal of growth.

There may indeed be people in authority who sincerely believe that monetary stimulus can reinvigorate a faltering material economy.

Many might also have swallowed the parallel tarradiddle, which is that human technological ingenuity can overturn the laws of physics to make possible the alchemist’s dream of ‘infinite economic growth on a finite planet’.

What seems to have happened is that the only lever that decision-makers can pull in a slumping economy is the lever of financial stimulus, the use of which in turn triggers a runaway compounding process of escalating risk.

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This article must begin with an apology for the hiatus since #314: How wealth dies was published on 2nd November. Whilst the ending and reversal of growth has long been predictable, the sheer pace at which decline has been accelerating has called for considerable reflection.

As you may know, the Surplus Energy Economics interpretation of economics is based on a comparison between the “real” economy of material products and services and the parallel “financial” economy of money, transactions and credit.

The productive process which drives the underlying “real” economy works by using energy to convert other raw materials into products, artefacts and infrastructures, as part of a continuous cycle of production, consumption, relinquishment and replacement.

Though depletion has subjected the non-energy resource base – including minerals, non-metallic mining products, biomass and accessible water – to gradual degradation, the primary factor driving the material economy from growth into contraction has been a relentless rise in the proportionate cost of energy.

Measured here as the Energy Cost of Energy, this cost has climbed from 2.0% in 1980, and 4.3% in 2000, to more than 11% today.

Fig. 1

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A long-standing debate about the economy is whether material constraints will, or won’t, eventually put an end to growth.

Kenneth Boulding famously said that only “a madman or an economist” could believe that exponential economic growth could carry on forever on a finite planet.

His view was reinforced and quantified by the authors of the contemporaneous The Limits to Growth (LtG), who set out the interconnected processes which would put an end to economic expansion.

But “eventual” has always been a key word in this argument. Though no timescales were specified in LtG, the accompanying charts appeared to put this ending of growth somewhere between 2020 and 2030, which was a matter of little immediate concern when the report was published back in 1972.

LtG has been revisited on a number of occasions, and these reviews have tended to vindicate the original thesis. As this has happened, time has moved on, and the moment of inflexion from economic growth into contraction has drawn ever nearer.

SEEDS analysis concurs with the LtG projections, indicating that material economic growth might already have ended, and that the economy will have inflected into contraction by the end of this decade.

This has been a matter of modelled calculation, but there’s an abundance of external evidence to support it.

Living costs are rising in a way that cannot be explained away as some kind of temporary and self-correcting “crisis”.

In domestic affairs, economic hardship and financial insecurity are combining with elevated levels of inequality to undermine social and political cohesion.

International relations have been degenerating into bare-knuckled fights over scarce and dwindling resources.

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But the single most compelling piece of evidence for the onset of economic contraction is the gigantic bubble that has been inflated across almost all classes of assets in modern times.

Over the past twenty years, aggregate debt has increased by 165% in inflation-adjusted terms, and broader liabilities – incompletely reported as the assets of the financial system – have expanded by not less than 210%. The real-terms value of global equities has increased by about 250% since 2004.

Against this, reported real GDP has grown by 96%, meaning that each dollar of reported growth has been accompanied by net new financial liabilities of at least $8.

Even this calculation drastically understates the severity of the situation, for two main reasons.

First, the aggregate financial liabilities referenced here do not include enormous “gaps” in the under-resourcing of forward pensions promises.

Second, and even more seriously, most of the “growth” reported in recent times has been cosmetic, amounting to nothing more than the transactional spending of vast amounts of borrowed money.

SEEDS analysis puts real growth in prosperity since 2004 at only 25%, reflecting a 37% increase in energy consumption, a dramatic rise in ECoEs, and a gradual decline in the rate at which energy use converts other resources into economic value.

The scale risk of extreme increases in liabilities has been compounded by rising complexity risk as the financial system has morphed into a bafflingly Byzantine structure of inter-dependent cross-collateralisation.

We can estimate that, over the past twenty years, the regulated banking system has accounted for barely a quarter of the increase in financial commitments, with the unregulated NBFI (“shadow banking”) sector contributing about two-thirds.

In essence, qualitative risk has increased as the centre of gravity of credit supply has migrated from the comparatively transparent and conservative centre of the financial system to its opaque and dangerous periphery.

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Everyone knows how the reckless over-inflation of bubbles always ends, and many are familiar with the truism that “you can’t taper a ponzi”.

“Everyone” in this context necessarily includes the authorities, which raises the question of why decision-makers have acquiesced in the inflation of a bubble which far exceeds, both in scale and in qualitative risk, anything previously experienced.

In fact, the authorities haven’t just acquiesced in the inflation of the “everything bubble”, but have been conspicuously active in its creation.

Starting in the 1990s, they promoted “credit adventurism” by making debt easier to obtain than ever before. After the GFC of 2008-09, they doubled down with the “monetary adventurism” of QE, ZIRP and NIRP.

The monetary tightening introduced during the immediate period of post-pandemic inflation is already being relaxed, and there’s every reason to suppose that a reversion to QE looms in the very near future.

Meanwhile, governments have become primary drivers of credit expansion, with public debt soaring as fiscal deficits now routinely exceed – in some cases, far exceed – reported “growth”.

But why would governments and central banks knowingly court the chaos that must result from the bursting of ‘the bubble to end all bubbles’?

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Charles Hugh Smith has given us the clue to this seemingly inexplicable behaviour in a particularly perceptive recent article in which he explained that “the entire bubble economy is a hallucination”.

A “hallucination”, of course, is ‘a perception that differs from material reality’, or, in the simplest of terms, a false narrative. The “false narrative” to which we have been subjected is that economic growth not only hasn’t stopped, but won’t.

If it ever had to be admitted that economic growth had ended, you see, all existing social, political and commercial arrangements would be invalidated. The succeeding priority would be the sustenance of the generality.

This is a change of direction that might be survived by Russia or China – albeit not without significant difficulties – but would put an end to the post-capitalist expediency (PCE) now prevalent in the West.

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This takes us to the two arguments customarily advanced against the idea that material finality might ever put an end to growth.

The first of these is that, since the economy can be explained and managed in terms of money alone, our complete control over the human artefact of money puts our economic destiny entirely in our own hands.

The second is that the continuity of growth will ensured by human ingenuity, enacted as limitless technological advance.

The recurrence of the word “human” in both of these arguments points to their inherent super-hubris. We are, we’re told, Lords of Creation, who can financially innovate, and technologically circumvent, any obstacle to ‘infinite, exponential economic growth on a finite planet’.

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Neither of these claims survives rational appraisal.

First, the economy is not shaped by money. Within our two economies conception, we know that money has no intrinsic worth, but commands value only in terms of those material things for which it can be exchanged. This, in Surplus Energy Economics, is the principle of money as claim.

We can indeed create money in virtually limitless amounts, but we cannot similarly create those material things without which money has no meaningful value. Unlike money, energy and raw materials can’t be loaned into existence by the banking system, or conjured out of the ether by central banks.

In essence, money is a proxy for material economic prosperity, whilst the basis of this prosperity is the use of energy to convert natural resources into material products and infrastructures.

The second claim is, if possible, even more hubristically fallacious than the first. Far from being limitless, the potential of technology is contained within an envelope of possibility whose boundaries are set by the laws of physics and the characteristics of materials.

This comes down to a vindication of what Kenneth Boulding said more than half a century ago. The claim that ‘exponential growth can go on forever in a finite world’ is made, if not exactly by ‘madmen and economists’, then on the basis of orthodox economics and cornucopian fantasy.

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Beyond its sheer size, what’s truly fascinating about the mania for all things AI-related is the way in which it fuses together the monetary and technological delusions that support the claim of never-ending economic growth.

Critical to this fusion is a disregard for the constraints of material finality.

Whatever promise the technology itself might offer, the current Western business model for AI makes vast demands for material resources, the most significant of which are energy and water. Even if these resources actually exist at the requisite scale – which is very far from certain – they can only be channelled into AI at the direct expense of households and other businesses.

The AI bubble also differs in other significant ways from previous exercises in irrational exuberance. For a start, whereas most of the money lost in the dotcom bust was equity, most of the value at risk in AI is debt, with significant cross-financing involved.

The assets used as collateral for this debt are likely to have remarkably little residual value – it’s hard to foresee much money being recovered from fire-sales of burned out or obsolete GPUs, or much of a post-crash market for vast single-purpose buildings ‘in the middle of nowhere’.

Whilst also noting the likelihood of AI degradation through the regurgitation of its own slop, it would be unwise to dismiss the transformative potential of artificial intelligence.

Rather, it seems likely that an alternative business model for AI will emerge, one that uses less capital, requires fewer resources, and, perhaps, sets itself less ambitious objectives.

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What we have been seeing, then, is the use of reckless financial expansion in an effort to either counter, or disguise, the ending and reversal of economic growth.

Before we leap to the conclusion that this has been a deliberately-promoted false narrative, we need to allow for the fact that fiscal and monetary stimulus is an addictive drug, and a particularly alluring one when no other course of action is available.

Either way, we have long known that a financial system entirely predicated on the false presumption of economic expansion in perpetuity couldn’t possibly survive the ending and reversal of growth.

What recent events have been telling us is that, whilst policy-makers seem to be panicking, the moment of economic inflexion is drawing very close indeed. It might, in this context, be of interest that “the astronomical level of insider selling of publicly traded stocks” has now reached levels second only to those of 2007 – and we know what happened after that.