Friday, February 15, 2013

Our Bonzo Economies

Sometimes, it seems to me, the disconnect with the reality that is being reported in the media and the other reality that isn’t getting much attention can make you question your own sanity. I’m talking in particular about the state of the global economy. Not a day goes by at the moment where we don’t hear self-flagellating reports of the state of the economies of Europe, followed up swiftly by news that the US economy is ‘on track’ and ‘growing’. 

Why is the US economy ‘growing’ (apologies for the quotation marks, which I find I have to use to denote verbal irony on an increasingly regular basis)? Is it because of the digital mint at the Fed relentlessly churning out computerized funny money? Or perhaps because the Americans have ‘grasped hard realities’ and are ‘taking things in hand’? Who knows? The subtext to all this reporting seems to be that we Europeans are a bunch of idle debt-junkie slackers and the hard-working Americans – led by the charismatic Mr Obama and his nice wife – somehow have chanced upon a magic formula for success.

This is of course all pig-stinking flapdoodle.

Nowhere recently have I heard any mention of energy, except in reference to the fantasy that the US is undergoing a shale revolution and will soon become a net exporter of oil. Of course, these claims don’t stand up to much analysis. The hype surrounding shale gas has brought in so much capital that it was inevitable that there would be a crash in the price of gas, thus rendering any further production uneconomic. As for the claim that the US will become self-sufficient in energy, well, that one might actually be true if demand destruction (called 'energy efficiency' by the media) in the home market continues – as it will.

And what portion of this fabled GDP growth in the US can be put down to QE? Injecting digital money into a pool of ‘money’ that is made up of 99% credit is like pouring a glass of clean water into an atrophied fishing lake choked with algae and expecting all the fish to start breathing again. They won’t. The ever clever Nicole Foss put it nicely last week on her podcast interview with Jim Kunstler (listen here) when she compared the whole credit vs assets thing to a game of musical chairs, with one chair for every hundred people. As the music plays, people don’t notice there is only one chair per hundred – they are too busy dancing to the music and having a good time. It is only when the music stops that we realise, and by then it is too late to adopt a policy of loitering next to the only chair as the others dance around you.

QE, it seems, is simply window dressing and it is being used to inflate another stock market bubble. How else to explain the rising stock market despite the falling economic activity (yes, the US experienced shrinkage in the last quarter, although this was immediately explained away by an army of analysts who said it was due to decreased spending on defence – nothing to see here). If the US economy is doing so well, why are asset managers in top Wall Street firms publicly buying shares and proclaiming their faith in recovery, but privately cashing in around seven times that amount and squirreling the money away to somewhere safe? What do they know that the media echo chamber isn’t willing to tell us? It just doesn’t add up.

Of course, we have QE over on this side of the Atlantic as well; indeed it is one of the Bank of England’s favourite policy tools at the moment. Like a doctor in a white suit, the Governor administers doses of QE to the ailing patient and then stands back to watch the result. The media pounce on any sign of improvement in the condition: More Land Rovers sold to the Chinese! Tesco had an exceptional Christmas! The alcohol and gambling industries are booming! [Hey, wait a minute on that last one, says the doctor.]

Unfortunately for the Bank’s surgeons, there is also Doctor Death, standing there in the shadows with his vial of hemlock which he drips into the patient’s ear muttering ‘Don’t worry, this will only hurt for a little while …’ in his sinister voice. Yes, the chancellor, George Osborne is busy making sure the patient never gets out of bed again with his relentless thumb-screw turning austerity measures, designed to placate the sleeping dragon that is the City of London.

Because if and when this dragon awakes, turns a cold eye over the economic landscape and decides to flap lazily into the sky and find another mountain in another country on which to roost, the true shambles of the UK economy will be revealed to all. Having off-shored a lot of the productive economy back in the 70s and 80s and de-skilled the work force to such an extent that most people can now only operate computerised systems to service the debt-strangled consumers of the fabled ‘service economy’ the only things keeping the economy afloat are a massive property bubble and North Sea oil.

But property bubbles aren’t exactly a sensible way to conduct business and North Sea oil and gas, as we all know, are running out fast. How many years left? Not many, that’s for sure. Economic policy makers are tying themselves in knots trying to find a solution to this unsolvable predicament. Interest rates are already so low they just can’t lower them further, boosting manufacturing won’t work because it tends to involve using energy that increasingly isn’t available – and anyway nobody can afford the capital - and so boosting the money supply with QE and tampering with the exchange rate are the only feeble instruments left in the tool shed. What they are praying for, of course, is that the magic Knight of Growth will ride in to save the day on his horse like a Findus ready-made lasagne in a just-in-time delivery system.

But, and here’s the downer, growth of the type we have been led to expect just can’t happen in a world economy where oil hovers at around $100 a barrel. With our entire way of life predicated to run off abundant and cheap oil, we are like flies gazing longingly at a glowing light bulb but finding our feet well and truly stuck to a strip of fly paper. Alas, this is the situation we find ourselves in, and there will be a lot of angry buzzing around us for the foreseeable future.

Of course, there’s a lot of talk about switching to new forms of energy, from wind power to thorium reactors to shale gas, in order to maintain the wasteful energy-intensive lifestyles we think of as normal. Each one of these energy plans is fatally flawed for various reasons, and in any case, switching an economy from a highly concentrated form of energy to a lower one a) Has never been done before b) Is prohibitively expensive in terms of money, energy and capital and c) Would take a minimum of several decades – or maybe up to a century if you go for a long-shot gamble with an unproved technology like thorium reactors. This doesn’t mean we shouldn’t try to salvage some form of electrical energy, but we should have started the transition thirty or so years ago, and there is still no serious talk of doing so, so we can reliably expect the lights to be going out over the next handful of years.

In fact, the policy measures pronounced by finance ministers and presidents day in, day out, remind me so much of a toy dog I had as a child. He was made of plastic, with clockwork innards, and had rough polyester fur glued onto his injection moulded body. His name was Bonzo, and if you turned a key in his belly he would emit a mechanical yapping noise and his little plastic legs would make him scamper forwards until he reached a wall or other immutable obstacle, where he would invariably fall over, the yapping noises growing ever weaker as he spent his mechanical energy on the useless task of spinning around on his side and barking.  

The UK chancellor George Osborne is almost exactly the same age as me, with only a couple of weeks separating us. Sometimes I can’t help but wonder whether out mothers shopped at the same toy shops, and whether Mr Osborne also had a Bonzo dog like mine. If so, perhaps the young George (or Gideon, as he was called in those days) sat in his cot staring at the spinning, yapping mechanical dog and somehow the image became ingrained in his world view and manifested itself decades later as economic policy.

It’s the only logical reason I can think of for the endless slew of ‘stimulative’ measures he is coming up with in the face of the sitting room wall of declining net energy. Expect more of the same until the key stops turning.


  1. So the Coalition is a sort of Bonzo Dog Doodah band?

  2. I suppose, as there is nothing that can be done regarding the energy problem, we cannot expect our glorious leaders to do anything at all.
    Can we?

    1. Well, a bit of leadership would be nice and some efforts at conservation of what energy we have left. Instead we are getting grand projects, such as HS2 and more airports, roads etc that will actually speed up the depletion rate.

      What's more, the government seems hell-bent on trashing the commons that we all depend on - witness the increasing row over fishing exclusion zones.

      I still believe we get the leaders we deserve and, at present, most people still want more jobs, more consumer goods and more travel - so in a way you could say that our elected leaders are at least trying to do what we asked them to.

    2. So, I was right, there is nothing that can be done. ;-}

  3. And, the less than obvious is lost on the Western World citizens, that the other six billion plus people just do not care. We are being brought down to their level and their life styles. We are being forced to live on our fair share of the earth's resources and not the multiples we believe to be our 'right'. And about time!

    1. True. 'We' don't have any more rights to life on this planet than, say, a group of Somali goat herders.

      People keep talking about the government needing to create jobs - the irony is that with their current policies, they are. The fact that most of those future jobs will involve working in fields hasn't quite registered yet ...

  4. I am currently reading "The Enigma of Capital" by David Harvey. If his analysis is correct and I understand what he is saying then the need of Capital to grow exponentially is essential to our economic system. Among other things, the existence of jobs which in a capitalist economy is the only way to distribute wealth to all the participants in this culture depends on this exponential growth. Conventional economic analysis by and large ignores natural resources. Capital and the size of the economy which is required to grow at an exponential rate is after all not measured in any concrete terms like barrels of oil or bushels of wheat or tons of copper but rather in abstract monetary terms. And so economists hope that a decline of oil can be dealt with by moving the money into some new bubble that can be inflated for a while even though oil and other resources become more scarce. I see how the reasoning goes, but absent resources, economists are currently puzzling over how to make people feel rich in the absence of stuff that is made out of the declining resources. I wish them luck.
    As for exponential growth, the only thing that matters is your own pile of money. If that is growing exponentially, then you're set. Economists also have an ace in the hole. If your economy no longer grows exponentially, you can collapse it and destroy a sufficient amount of wealth to regrow what is left at an exponential rate. Supposedly Lebanon escaped the 2008 real estate bubble collapse because they were so busy rebuilding cities that were bombed out in the previous war that they continued to grow merrily.
    Perhaps our leaders can make us feel rich in an economy where we live in 200 square foot apartments and eat gruel every day as long as we have an endless progression of new electronic gadgetry and an endless stream of infotainment to divert our attention from the state of the planet. Ah yes and fusion powered maglev trains to take us on vacations.

    1. Yes, the idea that an economy should grow exponentially (or even at all) is a peculiar anomaly of our times. The fact that it's also impossible should be apparent to anyone - even small children.

      Purveyors of standard economic theory might think we can have infinite substitution to go with it, but they'll soon find out that isn't the case. So, yes, maybe it does all come down to managing our expectations.

  5. The reality is that we are in a depression and there is no growth in prospect unless energy prices drop significantly. Unemployment is not going up because there are lots of people who are self employed and making enough to get by without spending too much. This is what a zero growth economy looks like and the more people learn to shift for themselves the better off they will be. Many working people have taken on board that their personal debts need to be reduced and they are spending less too. Freedom from debt slavery is liberating but the rentier class have their teeth into us big time.

    We have seen limited austerity so far and it is going to be increasingly about cutting benefits to price people into low paid jobs who ever is in power. Not good for those who rely on benefits. Not good for savers either as our savings are stolen by ZIRP type policies and inflation to replenish the balance sheets of our oligarch banksters.

    The only way foward I see see is self reliance in resilient communities. That in itself will lead to even less growth, which suits me. Its going for growth that is wrecking our environment and from hereon we are in a battle to salvage a livable environment for future generations.

    1. I'd have to agree with you on that, Phil. I can't remember the figure, but I read recently that millions in Britain have become self-employed. This means that, in theory, they can be earning £50 a week but still be classed as employed. At the rentier end of things, some 1.5 million buy-to-let mortgages have been taken out in the last year. That's not going to end well.

      I also agree that austerity is just starting - we ain't seen nothing yet. Take a look at this video for an idea of where we are heading:

      Growth, as measured by GDP, is dead as I see it. True 'growth' will come in all sorts of interesting new forms.

    2. Jason, the comments to that video are more interesting.
      It very quickly descends into talk of separationism and reparation for past 'wrongs'.
      Very worrying for society if/when things start to really get bad.

    3. Yep - the North vs South split has been festering for a thousand years. I was born in the North and grew up in the South ... so I'm choosing to avoid both and move to an extremity with its own history and culture in the SW.

  6. There are always peaks and valleys within larger cycles. Some of the economic news in the U.S. is good. They are building homes in new areas (a leading edge indicator), and their are preliminary reports that new hires of 2012 college graduates is up.

    Obviously the overhang is huge. But the very deflationary collapse in (non-food, non-oil) assets is going to lead to some opportunities for growth. Call it bumping up and down against the plateau of limited resources.

  7. Russell, but what do you do when 'growth' itself is the problem?

    1. Clyde: My comment is about noise, not the underlying issues. To some degree bumping against a plateau (or ceiling) comments on your point.

      The overly simple answer would be something like: Suffer or find another way to make yourself happy.

      On another note. I just saw a report that Europe had the worst January autosales since 1990, which makes me suspicious about the European part of the growth story in and case.

  8. Why is the US economy ‘growing’ (apologies for the quotation marks, which I find I have to use to denote verbal irony on an increasingly regular basis)? Is it """because of the digital mint at the Fed relentlessly churning out computerized funny money? Or perhaps because the Americans have ‘grasped hard realities’ and are ‘taking things in hand’? Who knows? The subtext to all this reporting seems to be that we Europeans are a bunch of idle debt-junkie slackers and the hard-working Americans – led by the charismatic Mr Obama and his nice wife – somehow have chanced upon a magic formula for success."""


    Magic formula? How about a Federal government gearing up for a shoot-out, martial law and total surveillance, speaking of hard realities. Which, you'ld think Europeans would know what authoritarianism looks like by now, but then, they gave the guy the Nobel.

    Otherwise, I expect he will go down as the worst Prez in US history (at least until the next one, assuming there is), unless of course he issues an interest-free currency from the Treasury. Which I expect has a likelihood of 0%.

    Excellent writing, btw.

  9. thanks for making me feel sane for a few minutes while I read that.


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