Ctd.... Fig. 4

3.6

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’.

Fig. 5

Part four

PROGNOSIS

4.1

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.

4.2

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.

4.3

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.

4.4

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.

4.5

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?

Fig. 6

4.6

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.

4.7

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.

4.8

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.

4.9

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.

Fig. 7

4.10

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.

4.11

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.

Fig. 8

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.