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Posted on May 22, 2026
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HOW THE PHYSICAL DERAILS THE FINANCIAL

Foreword

Even if the flow of shipping through the Straits of Hormuz were to resume immediately – and there’s very little likelihood of that – more than enough damage has already been done to ensure that the economy will take a very big hit within a matter of months.

This blow will initially be physical, not financial, though a severe financial crisis will follow swiftly in its wake.

This is a physical event because it’s axiomatic – but it can’t, in these circumstances, be reiterated too often – that we cannot expect the banking system to lend energy and other raw materials into existence, or ask central bankers to conjure these resources, ex nihilo, out of the ether.

One of the basic tenets of Surplus Energy Economics is the principle of money as claim. This states that “money, having no intrinsic worth, commands value only in terms of those material products and services for which it can be exchanged”.

Money, then, is claim, and has no value in the absence of substance, and a severe loss of substance is now nailed on within a very short time.

This, in the bluntest terms, will dis-anchor money.

What this necessarily entails is a materially-triggered wholesale destruction of the excess claims created by the reckless financialisation of the Western economies.

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The almost staggering thing about the crisis in the Persian Gulf has been the sheer insouciance of governments and the markets. All of these events might have been taking place, not at the most important material economic node on the planet, but in ‘some far away country of which we know little’.

Most Western governments have totally failed. They have made no efforts to contain non-essential energy consumption. They have developed no ideas about how to prioritize vital over less important uses of energy. They have done nothing to prepare for rationing of energy and other necessities.

Investors, meanwhile, have seen nothing anomalous about markets hitting new highs even as the material economy heads into a train-crash.

There’s a lamentable tendency, in economics and decision-making alike, to concentrate on the monetary whilst almost wholly disregarding the material. There are likely to be sincere expressions of genuine surprise when the long-predictable crunch in the material economy triggers an extreme financial crisis, something which is highly likely to occur by the autumn of this year.

When this happens, the mainstream media – writing its customary first draft of history – can be expected to pin the blame firmly on Donald J. Trump. It is indeed true that the President has mishandled the Iran situation ‘like a bull in a China strategy’. But the looming crisis hasn’t been created in days or weeks, but over years and even decades.

Western leadership cadres seem to have two overriding priorities. Externally, the aim has been to continue Western (and largely American) hegemony over the rest of the world. At home, there’s been an absolute determination to sustain and widen differentials between a favoured minority and everybody else.

Neither objective is achievable, but failure won’t occur through a lack of trying.

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The incoming financial crisis – an inevitability, even if we can dodge a bullet this autumn and eke out few more years of pseudo-stability – has been a direct consequence of Western folly. Having narrowly failed to bring down the banking system in 2008, decision-makers seem to have spent the intervening years assiduously working to build a bigger and better crash.

Importantly, financial crises are always the product of ambition triumphing over possibility to a point at which rationality flies out of the window.

In a well-conducted world, such crises simply wouldn’t happen.

No sensible person would have bought a single tulip bulb for the price of a large country house. No rational investor would have seen enormous value in a monopoly of British trade in South Seas controlled, wholly and inimically, by His Most Catholic Majesty in the Escorial.

More recently, no competent regulator would have allowed sub-prime mortgages, primed with detonators in the form of ARM clauses, to be bundled into opaque packages and sold to the managers of the public’s savings, pensions and insurances.

One of the problems with 2008 was that blame for the global financial crisis extended far beyond bankers and rating agencies. Governments and regulators were complicit, as was anyone who took out a ‘liar loan’ mortgage, or took on vastly too much debt in pursuit of a quick return.

The mechanics of financial crashes are well understood. Easy access to credit is essential if investors are to lose more than they actually possess. Lax regulation helps, as does an ability to trade speculative investments as far away as possible from recognised exchanges.

Ultimately, though, bubbles are psychological, and occur when a culture of greed so overwhelms prudence and reasoned appraisal that rational behaviour is over-ruled.

It’s been observed that “a country is more an idea than a place”, and something not dissimilar can be said of an economy. Physical and financial facts set the framework of possibility, but how events unfold within this envelope is determined by how people think about things.

This is why, in recent articles, we’ve discussed the very real possibility that, as economic expansion comes to an end, shock and grief have combined to create a post-growth derangement syndrome.

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Anyone wishing to weather the coming storm to best effect has two principal requirements. One is to understand how the economy actually works, something that cannot be gleaned from the textbooks and pronouncements of a failed economics orthodoxy.

The other is a clear grasp of the chronology of crisis.

As you may know, the world enjoyed its fastest-ever period of economic growth in the quarter-century following the Second World War. There were human factors in this success, but the primary explanation is to be found in energy.

In 1945, few people wanted to return to the “business as usual” of the Wall Street Crash, the Great Depression and the rise of political fanaticism. Keynes had given policymakers new tools for the management of what was then known as “the business cycle”.

A desire to use the same organizational techniques which had won the war to “win the peace” led to the mixed economy of optimised private and public provision. The architecture of the post-war settlement – Bretton Woods, the World Bank and the IMF – might have been far from perfect, but it was well suited to a world in search of progress rather than regression.

All of this, though, would have had limited results had it not been for energy transition. The impetus of coal, which had powered the industrial economy since its inception in the symbolic year of 1776, began to flag in the inter-war years, and the arrival of oil – and latterly of natural gas – reinvigorated the economy after 1945.

These were years in which massive petroleum reserves were discovered and developed in places far distant from the industry’s origins in the Pennsylvania of the 1850s. To the benefits of this extended geographical reach were added the economies of scale associated with the industry’s super-rapid expansion.

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The oil crises of the 1970s were political rather than material in character.

Oil remained cheap and abundant when, in October 1973, a falling out between major consumers and leading producers distorted the market and created dislocating rises in crude prices.

On the principle of ‘never let a good crisis go to waste’, opportunistic politicians succeeded in persuading the public that the traumas of the decade were caused, not by oil crises – as was in fact the case – but by “left-wing” government policies and “over-mighty” organised labour.

As oil markets rebalanced in the 1980s, these assertions gained a veneer of respectability, and the collapse of the USSR at the start of the 1990s seemed to confirm some final, end-of-the-argument victory of market liberalism over collectivist alternatives. This, and the opening up of former COMECON resources to western “investment”, seemed to set the world on a path to economic nirvana.

Behind the scenes, though, what was actually happening was that the proportionate cost of energy supply – known here as the Energy Cost of Energy – was rising, because the benefits of reach and scale had been exhausted, and the new driver of costs was depletion.

Though ECoEs began the 1990s at 3.0%, and reached only 4.2% by the end of the decade, this was a sufficient headwind to create the phenomenon known as “secular stagnation”.

Since this causation wasn’t recognised – let alone admitted – decision-makers had recourse only to the “credit adventurism” of making debt ever cheaper and easier to obtain.

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This necessarily led to the GFC of 2008-09, to which official responses amounted to adding “monetary adventurism” to the failed credit version.

The consequences of how the GFC was mishandled have still to be fully understood by the generality of opinion, and these consequences can be listed as follows.

The structural effect of QE, ZIRP and NIRP has been a relentless proliferation of ever-riskier debt and quasi-debt.

The psychological effect is known as “moral hazard”. What this means is that anyone who has once been rescued from the consequences of their mistakes or misfortunes becomes persuaded that such a rescue will be repeated if these conditions recur. This, in essence, is a licence to speculate.

The social consequence of 2008 was that the policies then adopted favoured the owners of assets over everyone else.

Finally, there were two big economic shifts associated with post-GFC policies.

One of these was the abandonment of market capitalism, an ascendancy overthrown, not by its established enemies, but by its erstwhile friends.

Market capitalism is a system that has two basic requirements. The first is that governments mustn’t interfere with the ability of the markets to conduct price-discovery and to put a price on risk. The other is that investors must earn a sufficient real return on their capital.

Once both of these precepts were abrogated, the neoliberal market-capitalist ascendancy was replaced by post-capitalist expediency.

The second economic consequence of the 2008 policy choices has been rampant financialisation. In Surplus Energy Economics terms, what this means is the expansion of the amount of money attached to any given quantity of material economic substance.

More colloquially, what it means is that incentives shift, such that it’s more profitable to make money than it is to make things.

It’s been observed that financialisation preceded the collapse of the Roman, Spanish, Dutch and British empires.

The financialisation of the Western economic hegemony is thus a step along a well-travelled path.

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No ascendancy ever retires gracefully, and the false claims made now on the score of ‘infinite economic growth on a finite planet’ are two in number.

The first is that we can use monetary tools to reinvigorate a flagging material economy. The claim nature of money makes this wholly illogical.

The second is that the consequences of material economic finality can be circumvented using “limitless” technological innovation. This is fallacious because, 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.

Regular readers will know this, but what matters now is how these fallacies have combined into a techno-financial nexus.

These fallacies, though, are useful to anyone wanting to anticipate ‘what happens next’.

Essentially, what we can know now is that the false deities of finance and technology will fail.