BREXIT — from an Economics and Energy perspective.
Here’s a selection of choice observations that give light to the underlying reasons why the Brexit vote is both potentially the ‘end of the beginning’ — if indeed the financial shock is severe enough to wrest the last semblance of control from the central bankers and politicians, and an opportunity to reframe the discussion so people are mentally prepared for the probable future.
Some potential positives from the Brexit vote from my personal perspective:
- Overt racism, if it comes out, can be dealt with. When it’s all whispered, snidey, fear based, ignorant comments which I’ve witnessed regularly as a mixed race white (or ‘stealth Indian’) in the UK growing up (and also since I’ve been in NZ), then it’s much harder to address.
- The GFC Mk 2 which has been brewing over the last couple of years may gain some steam. I don’t see this as a positive either because I’ve been predicting it, or because I want to see failure happen. It’s simply my perspective that we avoided a whole load of pain in 2008 through a mixture of money printing and accounting fraud (particularly in terms of GDP reporting) and late in the piece though it is, I think it’ll be better to take the pain now, than for the can to be kicked down the road for another few years…
Let me start by thinking about this in the Wise Response strategic context:
“In the midst of chaos, there is also opportunity.” — Sun Tzu
Assuming that Brexit really came as a surprise, then it slightly shifts things in our favor. Let me explain why.
We must understand this in the context of the big picture — the entire human species is in a “do or die” situation that must be meaningfully resolved in the next several decades. One piece of this resolution involves a “civilization level” reboot. We will not survive using the set of tools that got us through the 20th Century.
Accordingly, effectively none of the lower level issues discussed in what one might call “linear politics” are particularly relevant. The value of the pound or the closing price of a stock market are, in their particularly, a distraction. As are the specific motivations behind “leave” voters — whether they be racism, legacy nationalism, or whatnot. The survival or failure of Great Britain as a political entity is, in this context, irrelevant. As is the survival or failure of the EU.
It’s a real problem that the mainstream discussion of the affair wholly misses the underlying ‘crisis of civilisation’ (hat tip Nafeez Ahmed) that is ongoing:
While the MSM concentrates on racism as a central reason for Brexit, exploding world population and overshoot don’t get a look in. Personally, I think that deep down, people everywhere are finally starting to feel that ‘something’s wrong’, and that certainly ‘the system is no longer working’, and that quite likely it’s our masters’ fault. And not too soon either…..
John Pilger writes:
The majority vote by Britons to leave the European Union was an act of raw democracy. Millions of ordinary people refused to be bullied, intimidated and dismissed with open contempt by their presumed betters in the major parties, the leaders of the business and banking oligarchy and the media.
…I do of course wonder if Pilger himself understands that as we enter the world of Limits to Growth, it becomes inevitable that the resources needed to feed the growth monster that supports the NHS in the UK (and Medicare here) are running out, and that the inevitable ‘end of abundance’ horizon is fast approaching. Nor that there are no solutions to fixing this problem, we will sooner or later be on our own, and anyone not prepared for this is in for a very rude shock… which is of course most people.
This is exacerbated because the majority of economists fail to put the result in its proper context too, due to their own narrow thinking, failing to understand the underlying ‘limits to growth’ related causes:
The larger question is why there is building discontent with global economic and political integration not only in Europe, but also in the United States as evidenced by the candidacies of Donald Drumpf and Bernie Sanders.
…In the conversation about the rising revulsion against further integration, one factor is not being discussed: energy. With oil, natural gas and coal, the world’s primary energy sources, all far below their high prices of the last decade, all would seem well on the energy front.
Britain, of course, had been reaping the benefits of oil and natural gas deposits in its sector of the North Sea since the 1970s. However, after 2005 the country ceased to be a net exporter of crude oil and natural gas liquids. Imports of natural gas have risen steeply with 2014 imports reaching 19 times what they were in 2000. Both these trends point to the decline of the North Sea fields and Britain’s re-entry into the league of oil and gas importers, a sudden reversal of a previous long-term trend and a net negative for the British economy.
As you’ll see below, this trend combined with the effects of high energy prices on productivity growth had a negative effect on the incomes of middle- and lower-class voters who simultaneously paid a higher proportion of their incomes for increased energy bills. This double whammy has likely contributed to discontent among such voters who were looking for a way to express their frustration and found it in the Brexit vote.
I highly recommend that you take the time to read the entirety of the article I quoted above, as it’s a very insightful look at the dynamic interplay between energy and economics that most orthodox economists miss. This appears to be because their training does not permit them to consider the role of energy (or banks, debt and money, onforb.es/1BzrBfo onforb.es/1MbprDW, or the non-linear, chaotic nature of our financial systems: onforb.es/1FPJt3x as heterodox economist Steve Keen regularly points out) in the economy.
I note here that Steve Keen also does not appear to recognise the bigger picture of Limits to Growth within which the story is playing out it, and has a significantly different perspective on the probable path forward from this point: http://www.forbes.com/sites/stevekeen/2016/06/27/what-next-after-brexit/#23996e5a46f8.
Of particular note is the evidence quoted that the declining quality of energy reserves, and therefore the diminishing return on energy / capital is offered as the key factor driving wage stagnation.
…So, here’s what all this had to do with the Brexit vote: Stagnant or declining living standards [due to declining productivity growth caused by the greater portion of profit that is required for energy extraction activities, and therefore wages] breed discontent among a populace used to rising standards.
I prefer this line of reasoning to the polarising ‘them vs us’ greedy 1% narrative. I think the fear based ‘must preserve our profitability to protect our outlook / jobs / families’ line of reasoning dominates corporate thinking, notwithstanding a small number of psychopaths who have risen to key positions of power…
As has been pointed out repeatedly, and by people whose job is to take risk seriously (such as the military forces of the world), a major threat is the one of oil supply (thanks again to Nafeez Ahmed):
According to another MoD report published by the DCDC in December 2015, over the next 20 years, oil majors will be driven to explore expensive resources in search of new profits as reserves become more scarce, but will face increasingly prohibitive costs in extracting those resources.
By 2035, the report says, the world may face a situation of dramatic “fossil fuel scarcity” due to rising demand and production costs.
…An even more stunning verdict came last Friday from a new Chatham House report by petroleum economist Professor Paul Stevens. Stevens, who won the OPEC Award for his energy research in 2009, argues that the global oil industry faces a complete shutdown within 10 years without a radical transformation of its business model. Even Saudi Arabia is preparing for a world after oil.
Where might this lead..? As net energy supply rates continue their decline, there will be less surplus energy available for other economic activity. This will mean a reduction in GDP, as decoupling of economic activity (measured in GDP) from energy expenditure and concomitant pollution is recognised to be unattainable even by the likes of Forbes Magazine these days (onforb.es/1pPLvuQ).
The dynamics of these parallel narratives weave a complex picture in terms of our outlook, but to exclude them from our reasoning because it’s ‘too hard’, is unwise. There are many trying to understand these dynamics:
When the price falls from $100 per barrel to $50 per barrel, the incomes of many people are adversely affected. This is a huge negative with respect to world economic growth.
If the price of oil drops from $100 per barrel to $50 per barrel, this change adversely affects the income of a large share of people who formerly benefited from the high price. Thus, the drop in oil prices affects the incomes of many of the people listed in the previous section.
Furthermore, this drop in income tends to radiate outward to the rest of the economy because each worker who is laid off is forced to purchase fewer discretionary items. These workers are also less able to take on new debt, such as to buy a new car or house. In some cases, they may even default on existing debt.
The real danger at this point is colourfully pointed out in this piece:
…When things fall apart in stressed complex systems, they tend to fall apart fast. It’s called phase change. Too many things in 21st century life have depended on sheer trust that the people-in-charge know what they are doing. That trust has subsisted on the doling out of money-from-nothing: debt, reckless bond issuance. TARP, QEs, bailouts, bail-ins, Operation Twists, Ponzi schemes… the whole sad-ass armamentarium of banking necromancy. The politicians let it get out of hand. Things that can’t go on don’t, and now they won’t.
…Of course, that’s what the monkeyshines of banking and finance have done: postponed the inevitable reckoning with the realities of our time: growing resource scarcity, population overshoot, climate change, ecological holocaust, and the diminishing returns of technology.
Britain illustrates the problem nicely: how to produce “wealth” without producing wealth. It’s called “the City,” their name for the little district of London that is their Wall Street. In the absence of producing real things, the City became the driver of the UK’s economy, a ghastly parasitical organism that functioned as the central transfer station for the world’s swindles and frauds, churning the West’s dwindling residual capital into a slurry of fees, commissions, arbitrages, rigged casino bets, and rip-offs. In the process, it enabled the European Central Bank (ECB) to run the con-job that the European Union (EU) became, with the fatal distortions of credit that have put its members into a ditch and sent the private European banks off a cliff, Thelma and Louise style.
The next stage of this protean global melodrama is what happens when currencies and interest rates become completely unglued from their assigned roles as patsies in financial racketeering. Sooner or later we’ll know what’s going on in the vast shadowy gloaming of “derivatives,” especially the “innovative” arrangements that affect to be “insurance” against losses in currency and interest rate “positions” — bets made on the movements of these things. When currencies rise or fall quickly, these so-called “swaps” are “triggered,” and then some hapless institution is left holding a big bag of dog-s**t. A zombie is a terrible thing to behold, but a zombie holding a bag of dog-s**t is like unto the end of the world.
Once this contagion starts burning, the people-in-charge won’t be able to quell it the way they did last time: by drowning it in torrents of money-from-nowhere. At least not without inducing real-deal inflation, the kind that leads to epochal ruin and more intense political upheaval: the nation-changing kind.
As Glenn Greenwald at the intercept unwittingly notes, all mainstream efforts to understand are overly simplistic:
Media reaction to the Brexit vote falls into two general categories: (1) earnest, candid attempts to understand what motivated voters to make this choice, even if that means indicting their own establishment circles, and (2) petulant, self-serving, simple-minded attacks on disobedient pro-Leave voters for being primitive, xenophobic bigots (and stupid to boot), all to evade any reckoning with their own responsibility.
He points, to the growing wealth inequality later in the article, and whilst I agree with this as a contributing factors, it’s not the main driver at work. I do agree with his observation that:
…IN SUM, THE West’s establishment credibility is dying, and its influence is precipitously eroding — all deservedly so [because they ignore / are ignorant of Limits to Growth]. The frenetic pace of online media makes even the most recent events feel distant, like ancient history. That, in turn, makes it easy to lose sight of how many catastrophic and devastating failures Western elites have produced in a remarkably short period of time.
A pretty impartial observer of such affairs, Ugo Bardi, has re-posted an interesting article on his first hand observations of the European Parliament that seems to corroborate many of the criticisms leveled by promoters of the ‘leave’ vote, summed up by Greenwald above:
Two years ago, I was in Brussels for a hearing at the European Parliament; it was a shock. The Europe I knew, the Europe I thought I knew, wasn’t anywhere to be found. What I found was a bunch of ill-advised, pompous bureaucrats wandering in a gigantic and useless palace. The ghosts of the founders had been thoroughly exorcised and now what was left was an empty shell; a structure that just perpetuated itself without any clear purpose, except drilling more fossil fuels out of the ground, and — maybe — make war to Russia. The dream of a Europe of the peoples acting for peace and justice was gone. Requiem for a dream.
And now what? It seems clear that Europe, as it is now, cannot survive this blow and maybe this is not a bad thing. Can we reform this Europe? Or can we restart from scratch? Impossible to say.
This crisis of faith in our institutions will be accentuated in the UK because of the financial crisis that the Brexit vote, and governmental response has precipitated:
Right now, the euphoria, rather like a hallucinatory drug, has blinded many of us from realising what exactly we’re stepping into: in the name of staving off economic woes due to EU-imposed migration and austerity, Britain has just voluntarily jumped off an economic cliff.
Cliff, you say? More doom-mongery, scoff Leave voters. It won’t be that bad, hope Remain voters.
Sorry to burst your bubble, but it’s bad.
Ongoing uncertainty over how the government will handle the Brexit vote, and the prospect of Britain pulling out of a free trade arrangement that the country itself had done so much to create, means a recession is highly likely.
The Economist this morning says that investors, fearing losses, will have little choice but to pull back from Britain and other places where the UK is involved in trade deals achieved through EU negotiations.
So how bad is this?
“Worse Than Lehman” — European Bank Bloodbath Sparks Dollar Funding Crisis
For European banks, today is worse than Lehman with a 13%-plus collapse in the broad index. The major banks — like Credit Suisse and Deutsche Bank — have crashed over 15% to record lows as “Lehman moments” loom. This crisis prompted massive demand for USDollars, sending basis swaps (and other funding vehicles) spiking which it appears is why The Fed said it was ready to provide liquidity.
The broad EU banking system is collapsing…
A sensible approach would be to recognise the inherent issues with ‘think big’ and the reality that big will be impossible to sustain given the issues outlined above:
Years ago, the great Austrian economist Leopold Kohr argued that overwhelming evidence from science, culture and biology all pointed to one unending truth: things improve with an unending process of division.
The breakdown ensured that nothing ever got too big for its own britches or too unmanageable or unaccountable. Small things simply worked best.
Kohr pegged part of the problem with bigness as “the law of diminishing sensitivity.” The bigger a government or market or corporation got, the less sensitive it became to matters of the neighbourhood.
In the end bigness, just like any empire, concentrated power and delivered misery, corruption and waste.
…For Kohr understood that God made atoms small, that small business invigorated the economy, that only a small number of people created real social change and that virtue came in a small box. He appreciated that we lived in a microcosmos, not a macrocosmos.
He, too, recognized that “Monopolies are to economics what great powers are to politics.” As such, Kohr was a profoundly conservative (and mischievous) thinker who respected limits.
Kohr’s darkly masterful and humorous work, The Breakdown of Nations, argued the root of most evil lies in big government and big institutions. Whenever power reached it, a critical mass, its wielders, no matter how nice or educated, tended to abuse it. Bigness not only allowed but invited the abuse.
The only way to stop the cancer of bigness was to return to the modesty of smallness.
“If a society grows beyond its optimum size, its problems must eventually outrun the growth of those human faculties which are necessary for dealing with them,” wrote Kohr.
The problem, he added, “is not to grow but to stop growing; the answer not union but division.”
Scale, however, does not seem to be an issue modern politicians understand, let alone contemplate. In fact, the typical political response to almost every problem today is to somehow make it bigger so more technocrats can make it impossible to resolve.
A wise response to this would be to work proactively at the local and regional level to create resilience and remove our structural dependences on globalised supply chains. At the national level, advocacy against ‘think big’ trade deals, and regulation that limits flexibility to respond appropriately at the local and regional level should be dismantled.
I would love to think that this painful crisis can lead somewhere good:
We live in the beginning phase of a global revolution which will turn societal conditions upside down. We cannot stop this transformation, but we can influence where it will go. Will the disintegration of the globalized systems lead to fascist violence and molecular civil wars as some fear or will it lead to a process of planetary renewal and liberation?
The news of Brexit triggered shock waves around the globe, chaos in stock markets and plunging Pound and Euro exchange rates. As the surprise settles and even more uncomfortable sobering spreads: the disintegration of the globalized power blocks may happen much faster than we have originally imagined. Our sense of stability and reliability to the political and societal order we have grown accustomed to may not reflect reality.
…Community is the key word for a humane future in Europe and worldwide. We human beings are communitarian beings in essence. We genuinely thrive to the extent that we are bound with fellow human beings in solidarity and trust. The insanities of today’s late stage capitalism could only be invented and executed by people who have lost their social and ethical anchor. The era we are coming from, the epoch of patriarchy, imperialism and capitalism has systematically destroyed communities and isolated people from one another.
We really do have some tough times ahead on the path towards a better future…
It’s an inconvenient truth that due to the biophysical nature of the resource depletion drivers, there are only two broad choices available at this point:
- A proactive response based on consideration of the broad risk environment we face, giving the possibility of a better future.
- A reactive response giving the probability of a prolonged period of denial and disasters with no certainty of a positive future.
The question is which do we choose..?
Late June 2016
m: +64 21 209 6286
My recent Innov8 Invercargill talk was on the subject of the story we tell ourselves to achieve sustainable outcomes for our community, region, country and species. We really need to replace our neoliberal ‘Sacred Money and Markets’ story with something closer to a ‘Sacred Life and Living Earth’ story (as David C Korten has described the choice). Here’s a link to the presentation and a recording, outlining some of the possible positive responses: bit.ly/1pWlsXS and a voice recording: bit.ly/1MiV70h
In it I outline some of the key principles of resilient communities, as described by the likes of think tank’s such as the Post Carbon Institute (bit.ly/1Udyq0t) and the Post Growth Institute (bit.ly/1pq34qw).
‘The Simpler Way’
This is my preferred framing of a positive response to the future we face.
We cannot achieve a sustainable and just world order unless we change to:
Simpler lifestyles, much less production and consumption, much less concern with luxury, affluence, possessions and wealth.
Small, highly self-sufficient local economies, largely independent of the global economy.
More cooperative and participatory ways, enabling people in small communities to take control of their own development.
A new economy, one not driven by profit or market forces, and a zero-growth or steady-state overall economy, which produces much less than the present economy.
Some very different values, especially cooperation not competition, and frugality and self-sufficiency not acquisitiveness and consuming.
The Simpler Way is about ensuring a very high quality of life for all without anywhere near as much production, consumption, exporting, investment, resource use, environmental damage, work etc. as there is now. There are many rich alternative sources of satisfaction other than material acquisition and consuming. Consider having much time for arts and crafts and personal growth, living in a rich and supportive community, having to go to work for money only two days a week, living in a diverse and productive leisure-rich landscape, having socially worthwhile and enjoyable work with no fear of unemployment…and knowing you are not contributing to global problems. There is no need to sacrifice modern technology to achieve these benefits.
A note on ‘techno-fixes’ to the problems we face:
A focus on highly complex technological fixes to problems created by technology is ‘using the same thinking to fix the problem that created it (to paraphrase Einstein).
The solution to the unintended consequences of modernity is, and has always been, more modernity — just as the solution to the unintended consequences of our technologies has always been more technology. — Ted Nordhaus and Michael Shellenberger
The Simplicity Institute’s co-director, Samuel Alexander, has been doing some work recently with the Melbourne Sustainable Society Institute, and has just published the first of a number of working papers, entitled ‘A Critique of Technology Optimism: Efficiency without Sufficiency is Lost’:
‘Technological optimists believe that humanity will be able to solve environmental problems primarily through technological application and advancement, while continuing to focus attention on economic growth. From this widely held perspective, sustained growth of the global economy will eliminate global poverty and raise living standards for all, without destroying the necessary ecosystems that sustain life as we know it. There can be no doubt that this promise of technology is seductive — material abundance for all, while solving environmental problems. But is this promise credible? If not, what are the implications? This paper presents an evidence-based critique of techno-optimism, arguing that the vision of progress it promotes is unrealisable due to the limits of technology and the inherent structure of growth economics. The considered application of technology is, without doubt, an essential part of any transition to a just and sustainable world, but it is argued that there must also be a value-shift away from growth economics toward a ‘post-growth’ or ‘steady state’ economy based on material sufficiency.’
The full paper is available at the following link: http://bit.ly/1AiDzeT and I recommend reading it to the committee. My suggestion is to focus on finding appropriate, low technology fixes that will be able to be sustained locally through what is going to be a painful period of adaption to reality globally, once the financial bubble we’re currently trapped in bursts.
Another note, on EV’s:
I was all for passenger EV’s as part of “The Transition” we have to make. However, I must admit I’m a little wary of the breathless advocating for high tech solutions to the issues we face, as I outline above.
Of course it’s sort of valid to say people don’t need to understand, and the more BEV’s we roll out, the longer our fuel supplies last. But this argument seems to miss the front loading of the life cycle energy demand and emissions profile compared to fossil fuel powered vehicles due to the manufacture of Gigafactories, etc…
This article (http://bit.ly/291x8R1) from Josh Floyd’s ‘Beyond This Brief Anomaly’ inquiry is helpful to understanding the limitations in terms of resource throughput to build sufficient (eventually 650) Gigafactories to roll this out as a BAU transition strategy globally. This is assuming we stick with current battery technology, which seems to be at about the limits of what chemistry can practically support, after 200 years of R&D (http://bit.ly/291xd7f).
And please don’t expect battery electric trucks any time soon with current Li-Ion battery tech:
“For example, a truck capable of going 621 miles hauling 59,525 pounds, the maximum allowable cargo weight, would need a battery weighing 55,116 pounds, and could only carry about 4,400 pounds of cargo (den Boer et al. 2013).” http://bit.ly/28JIgCG
The capital and resources all this would take away from the other parts of the economy is something Charles Hall has pointed out repeatedly. Over time, more and more resources go into getting energy, with less and less left over to actually use for anything else:
“Any transition to solar energies would require massive investments of fossil fuels. Despite many claims to the contrary — from oil and gas advocates on the one hand and solar advocates on the other — we see no easy solution to these issues when EROI is considered. If any resolution to these problems is possible it is probable that it would have to come at least as much from an adjustment of society’s aspirations for increased material affluence and an increase in willingness to share as from technology. Unfortunately recent political events do not leave us with great optimism that such changes in societal values will be forthcoming" http://stanford.io/1yifujq
There are some more very helpful articles on Brexit collected in these two summary posts by The Automatic Earth blog: