The Economics that George Osborne wants to hide

How do you make money?  If you are in the majority, then you sell your time over and over to the same employer in exchange for wages.  Some of you will be self-employed, which means that you not only have to sell your time but you must also spend additional time drumming up new business.  A handful will own businesses, in which case you will make or provide goods and services to sell to customers in exchange for money.  You will either sell directly to consumers, or you will sell to other firms.  Either way, if you cannot supply your goods or services at an affordable price and at a high quality, you won’t get paid.

So if you want to spend more money, what must you do?  Well, either you have to work harder/produce more, or you have to cut back on your current spending.  You can borrow money of course, but only within the limits of your current budget – you have to be able to service your debt.   If you fail to do this, you risk being forced into bankruptcy.  So you understand only too well why you need to run a budget surplus when times are good in order to protect yourself when things go wrong.

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So far so good – we are now at the level of understanding of the economy that Osborne and his friends want us to be.  Using the comely image of the small town householder, Osborne would like us to believe that running the government (which, incidentally, is not the same thing as running the economy) is pretty much the same.  “We can’t pay ourselves more than we earn.”

But let us just take a step back for a moment to consider the question we began with.  I did not ask how you obtain money; I asked how you make money.  And the answer (with a small number of exceptions) is that neither you, me nor the organisations that we work for makes money.  We make widgets (all of the goods and services we produce or contribute to in the course of our work).

So who does make money?  Most of us – even politicians and economists – understand that the Royal Mint makes money.  They produce all of the cash in circulation.  Indeed, it is illegal for anyone other than the Royal Mint to make cash.  So most of us – including more than 70 percent of our politicians – believe that the Bank of England (via the Mint) makes all of the money in circulation.  And if you/they believe this, then you/they must also believe that government surpluses are bad for the economy.

To explain this, let me ask another question: what gives money its value?  Most people – again, including most politicians – think that somewhere in a dark bank vault is a pile of gold bars whose value corresponds to the value of all of the money in circulation.  After all, our banknotes still carry the words “I promise to pay the bearer on demand the sum of…” harking back to the days when a One Pound note was equivalent to a pound in weight of Sterling silver.  In fact, Britain ceased to operate a “gold standard” in the 1930s.  In the years 1944 to 1971 we operated on the Bretton Woods system in which the US Dollar was tied to gold, while all other currencies were linked to the US Dollar.  So, by default, our money was – at least in theory – as good as gold.  But the Americans cheated.  They printed vast sums of paper currency to fund their war in Vietnam, their cold war arms industry and projects like NASA’s Apollo Program.  When other countries refused to trade in dollars and demanded gold instead, the Nixon administration simply reneged on the deal.  Since 1971, all currencies have been free-floating and tied to nothing more than the trust people have in the governments concerned.

So what gives money value?  To put it another way, why should we trade in money rather than widgets or even precious metals?  Indeed, why don’t we trade in a whole range of currencies like dollars, yen, euros and yuan?  In our currency system, there are two reasons.  First, we have a law that obliges us all to accept the state currency as legal tender.  Second – and more importantly – we are obliged to pay tax in the state currency.

So, let us return to how most politicians view the economy.  They believe that the Bank of England (through the Royal Mint) creates money.  This money goes to the Treasury, where the Chancellor and his minions choose where to spend it.  It may be used to fund pensions and benefits; it might be made available as grants to organisations; or it may be used to fund public services.  Either way, the recipients of the money will use it to buy widgets in the private sector.  So, this is how (they believe) money moves from government to the firms and households that make up the economy.

Figure 1:  The politicians' view of money and the economy.

So what does running a government surplus involve?  It has to involve some combination of increasing the amount of taxes coming in and/or cutting the amount of money being spent out. 

Figure 2: How austerity would affect the private sector in this model.

As an aside, this is where much of what passes for a political debate occurs.  Broadly, neoliberals (like Osborne) opt for cutting taxes and cutting spending even further, while social democrats (like Corbyn) prefer to increase spending and increase taxes even further.  Either way, in this two sector (public/private) view of money, austerity and/or increased taxation must result in less money circulating in the economy.  And when you have less money in circulation, you also get low or even no growth, deflation, underemployment and unemployment… just like we have had since 2010.

Fortunately, all of this is a myth.  For while it is true that government is the only body legally allowed to create cash it is far from the only body that is allowed to create money.  This is because we live in a three sector economy – public/private/banking.  For more than thirty years, private banks have created almost all of the money in circulation.  This is because almost all of the transactions in the economy today are in the form of electronic transfers between bank computers.

Figure 4: The role of banks in money creation.

The real reason austerity will not work is not because cuts and taxes prevent money getting into the private economy.  Indeed, the austerity cuts made in the early 1980s paved the way for the long economic upswing in the 1990s and early 2000s.  But the reason it worked then – and why Cameron and Osborne are trying to repeat it today – provides us with an insight into why it cannot work today. To understand this, we need to know how a bank creates money.  Most economists and politicians think that banks operate a “loanable funds” model in which money is transferred from savers to borrowers.  Banks act merely as middle men, taking a fee for arranging the transfer.  In practice, however, no money disappears from a saver’s account anywhere in the system when a borrower takes out a loan.  All that happens is that a computer operative in the bank types a series of numbers into the borrower’s account and types the same numbers as an “asset” in the bank’s accounts ledger.  Through the magic of double entry book keeping, new money is created out of thin air.  A recent Bank of England paper explained it this way:

“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

This debt-based money now accounts for 97 percent of all of the money in circulation.  And it comes with a big drawback… “Compound interest”.  Imagine for a moment that you were the first person to borrow money into existence by taking out a loan for £100 at an interest rate of 10 percent.  At that moment, there would be just £100 in circulation.  But the total amount of debt in the system would be £110.  Where is the other £10 going to come from?  If you don’t find that extra £10 from somewhere pretty soon, the process of compounding is going to cause it to double up over time.

Figure 5: The massive increase in debt-based money.

The fundamental problem with our currency system is precisely that there is always more debt outstanding than there is money in circulation.  And the only legitimate and politically acceptable way of addressing the problem is to keep borrowing ever more debt-based money into the system.  Might there be a problem with this?

Back in the early 1980s when the Reagan and Thatcher governments brought in the financial deregulation that allowed the current system of fiat currencies to take off, borrowing money into existence was less of a problem.  This was in part because there was plenty of unmet demand for goods and services, and in part because very few people had debts – here you might begin to glimpse what Thatcher’s “home-owning democracy” was really about, and what Osborne’s “Help to Buy” scheme was trying to achieve. 

Neoliberals like Thatcher and Reagan believed that politicians and governments could not be trusted with money creation.  It was all too easy for politicians to make rash promises at election time, and then fraudulently fund them by printing money.  When they did this, the result was always the same – inflation.  Although this was experienced as rising prices, in fact inflation is the devaluation of money.  But if governments could not be trusted with money creation, who could?  Enter the bankers!  In the late 1970s and early 80s, chastised by economic crises, bankers were a highly conservative bunch.  The credit that they were prepared to extend went only to guaranteed winners – those with the very highest credit ratings.  Who better to entrust with the nation’s money supply?  Let the banks decide how much debt-based currency would be created and who it would go to.  What could possibly go wrong?

The trouble is that bankers are no different to you or me in that we all think we are above average.  When bankers loaned new money to sure-fire businesses, their success rate was high.  This, they assumed, was down to their personal abilities rather than to a general upturn in the economy.  So they became emboldened to lend even more money into existence.  But there are only so many guaranteed winners out there.  Once these have borrowed what they need, new borrowing has to come from less credit-worthy firms and households.  Fortunately, though, with the economy booming, house prices rising and consumer demand going stratospheric, even these “sub-prime” loans paid off; further fuelling bankers’ self-confidence.

In the up phases, the problem of the interest outstanding on all of the debt-based money does not look so daunting.  So long as new borrowing is increasing, there is enough money in circulation.  Does this sound a little bit like a Ponzi scheme?  If it does, that is because it is.  A Ponzi scheme is a pyramid scheme that involves drawing in exponentially more investors at each level of the pyramid in order to pay earlier investors.  The trouble is that it eventually reaches the point that there is nobody else left to invest.  At this point the whole scheme collapses.

Debt-based money can only survive so long as there are an increasing number of borrowers prepared to enter into the system.  When we reach the point – as we did in 2008 – when nobody else wants to borrow, the system collapses…  or at least it would have done had governments not chosen to sacrifice the people in order to (temporarily) save the banks.  Today private sector debt is close to 400 percent of GDP – dangerously close to where it was in 2007.

Figure 6: The spectacular rise of UK private sector debt.

So how does Osborne’s attempt to force governments to run surpluses impact on the economy in these circumstances?

In order for austerity to work, the private sector would need to be able to borrow more money from the banking sector than the government takes out of the private sector in taxes and austerity cuts.  As we have seen, this worked in the 1980s because few people had debts.  Today we have the double-whammy of what has been called “peak debt”, where there are not enough borrowers, together with a technically insolvent banking sector that is desperate to reduce borrowing.  We might think of this as “banking austerity”.

Figure 7:  When both government and banks take money out of an indebted private sector, growth falls and the economy stalls.

So the reason that running a government surplus (or even trying to cut the deficit) is a really dumb idea is that it is bound to crash an over-indebted private sector.  It matters not one jot that we are able to produce lots of widgets.  It will avail us of nothing if we all try to work like the Chinese.  With insufficient actual money entering the system, the result is bound to be low or even no growth, deflation, underemployment and unemployment… just like we have had since 2010.

So where does this get us?  I think we are in a similar position to US General Pershing in 1918.  He took the view that in order to win the war, Germany had to be crushed and its people had to know from experience that they had been defeated. By not marching into and occupying Germany, he believed the allies would have to do it all over again at some point in the future.  Sadly, in 1939 his fears came home to roost.  In a similar manner, the proponents of austerity and the nonsense of permanent government surpluses will have to fail and be seen by all of us through direct experience to have failed.  Only when the policies of Osborne and Cameron, and their equivalents in Europe, Japan and the USA finally preside over the destruction of the banks and the writing off of debt that should have occurred in 2008 will we be able to have a sensible debate about the future management of the UK economy.  Until then we are in for something of a bumpy ride.

Tim Watkins' Book, Austerity... will kill the economy!  is available in paperback and Kindle formats

Volkswagen, emissions and diminishing returns

The Volkswagen emissions scandal looks like becoming the car industry equivalent of the Libor and Forex scandals in banking.  According to European campaign group Transport and Environment, cheating on emissions tests is widespread across the car industry and applies to both petrol and diesel engines.  The group claim that there is as much as a 40 percent gap between the emissions during testing and emissions under real road conditions.

At face value, the Volkswagen scandal appears to be just another example in a tediously long list of psychopathic corporations putting short-term profit ahead of long term sustainability.  Indeed, in Volkswagen’s case, there may not be a long-term now that sales are plummeting, record fines are anticipated, and investors seek alternative investments.  When we discover – sadly unsurprisingly – that other car companies have also been fiddling their emissions data, we may simply assume some undocumented cartel-like behaviour in which everyone involved turned a blind eye.

There may, however, be a darker story here.  Why would a trusted company that has led the world in engineering risk everything on a short-term gamble to fiddle the data?  The stock answer is “profits”.  But this doesn’t stack up.  German companies have a track record of investing for the long-term.  They tend not to suffer the British disease of having to put the immediate gains for shareholders and bankers ahead of the long-term development of their companies.  So what else might be going on here?  An alternative answer is “diminishing returns”.

In the late 1970s and early 80s, the internal combustion engine was under threat from two directions.  First, and most painfully, the oil shocks in the 1970s had demonstrated just how vulnerable western countries were to any future shortage of oil on international export markets.  Second, a growing environmental lobby was raising concern about the damage to the atmosphere caused by millions of cars belching out carbon dioxide and other noxious emissions.  With millions of jobs worldwide dependent upon the car industry and the oil industry that feeds it, these concerns threatened a major economic upheaval. 

The absence of an electric car with anything like the performance of petrol or diesel cars undoubtedly saved the internal combustion engine.  Moreover, with the temporary glut of oil coming out of the newly profitable North Sea fields, the crisis seemed less urgent.  But the car industry did not emerge totally unscathed.  In a concession to detractors, the industry had promised that they could cut emissions and improve the fuel efficiency of their cars.

Initial technical improvements to engine design, improved exhaust systems and the use of catalytic converters were simply lying around waiting for someone to deploy them – they had simply been ignored back in the days when performance was considered to be the prime aim of car engineering.  The problem was that environmental and fuel concerns did not go away or even stand still.  The price of fuel continued to rise even as awareness of man-made climate change was spreading.  Having made the initial easy gains, the car industry was obliged to deploy growing teams of scientists and engineers to continually improve fuel efficiency and lower emissions.

As with all such processes, having made the initial gains, each new small increment came at an increasing cost.  More scientists and engineers were needed to work on the problems, while solutions came with an increasingly steep price tag.  Eventually they were doomed to reach a point beyond which improvements would render the vehicles unprofitable.

Of course, both the governments responsible for the emissions tests and the manufacturers themselves had vested interests in maintaining the illusion of progress.  Indeed, since the crash of 2008, exports are one of the few areas where GDP growth can be generated; and cars make up a large proportion of exports.  So both governments, struggling with balance of payments deficits, and manufacturers desperate to maintain market share, were willing to allow lax testing and inflated results.  That they would get caught out in the end was certain.  But as with all things economic in the current depression, kicking the can down the road has become the only workable approach.  Volkswagen undoubtedly hoped that someone else would be caught out first.  However, it appears to have been the high-tech manner in which they fiddled the figures that has singled them out for particular disapproval.  Where other companies have deployed low-tech cheats like sloping the test bed, ensuring batteries are fully charged, and smoothing and hardening the tyres, Volkswagen deployed their software engineers to create an algorithm that could sense when their vehicles were being tested.

The deeper issue here is not that companies cheat or that even world-leading Germany appears to have moved into short-termism.  The real problem is with our understanding of progress itself.

Progress has been the religion of the West since the Second World War.  In those heady days we told ourselves that through the white heat of technology, our road to the stars had been mapped out.  There is, we were assured, no problem that science cannot solve, no technology that our engineers cannot create.  .  In the real world, our economic wellbeing has been falling like a rock.  Middle class families that could once operate comfortably on the income of a single (usually male) earner now struggle to get by with both partners working; and often only then by accumulating mountains of debt based on the illusion that their house earns more than they do.  Working class families do not even enjoy this standard of living, finding that even with both partners working it is impossible to buy their own home.  For several decades now our road to the stars has appeared only in Hollywood’s CGI fantasies.

In truth, the story of human “progress”, like the Volkswagen story, is a tale of diminishing returns.  In every field of human endeavour we find the same story.  Initially, great discoveries and inventions could be made by lone scientists and engineers given enough time to retreat to their laboratories and think… something that did not happen too often prior to the industrial age.  Given sufficient time, a Newton could figure out the movement of the planets while a Darwin could put together the basics of evolution.  Throughout the nineteenth century, great discoveries and inventions could be made by single (mostly) men who enjoyed enough spare time.  But by the twentieth century, fewer inventions and discoveries were made by lone individuals.  More often, small research teams were required to make real breakthroughs.  In the modern – internet enabled – world, thousands of scientists and engineers in teams spread around the planet are employed to make incremental advances in our understanding and our technology.

Medical writer and doctor, Ben Goldacre has made this point well in relation to medicine.  He argues that most of the genuinely new medical breakthroughs came in the years between 1929 – with the synthesis of insulin – and 1969 – with the first transplant surgery.  Since then, we have added detail to what we already knew, and we have engineered improvements to technologies we already have.  But – and this is the point – despite vastly more scientists engaged and exponentially more money deployed, we have made very few genuine breakthroughs.  Physicist Tom Murphy has made the same point in relation to technology more generally:

“[Today] the big deals are: the computer revolution, the internet, mobile phones, GPS navigation, and surely some medical innovations. But I would characterize these as substantial refinements in pre-existing gizmos. It’s more an era of hard work than of inspiration. I’m not discounting the transformative influence of the internet and other such refinements, but instead pointing out that the fundamental technological underpinnings—the big breakthroughs— were in place already.

Murphy asks us to imagine what it would be like to be transported from the world of 1885 to the world of 1950.  What would have been new and not understood?  The list includes cars/trucks, airplanes, helicopters, and rockets; radio, and television (but not, just, the telephone); toasters, blenders, and electric ranges; radar, nuclear fission, and atomic bombs.  What would it be like if we were transported from the 1950’s into the present?

“Most things our eyes land on will be pretty well understood. The big differences are cell phones (which they will understand to be a sort of telephone, albeit with no cord and capable of sending telegram-like communications, but still figuring that it works via radio waves rather than magic), computers (which they will see as interactive televisions), and GPS navigation (okay: that one’s thought to be magic even by today’s folk). They will no doubt be impressed with miniaturization as an evolutionary spectacle, but will tend to have a context for the functional capabilities of our gizmos.”

What about the technologies that we have been promised will solve our most dangerous and conflicting problems – energy insecurity and climate change?

“Solar, wind, hydro/tidal, geothermal, nuclear fission (including thorium), wave, biofuels, fuel cells, etc.: all were demonstrated technologies before I was born. Where are the new faces? It’s not as if we have lacked motivation. Energy crises are not unknown to us, and there have been times of intense interest, effort, and research in my lifetime. Tellingly, the biggest energy innovation in my time is enhanced recovery techniques for fossil fuels: perhaps not the most promising path to the future.”

This brings us back to the Volkswagen scandal, because of its part in the fight against climate change and energy shortages.  What it tells us is that we cannot escape the process of diminishing returns.  For a while, at an increasing cost in resources, energy, capital and labour, we can enjoy some incremental improvements.  But ultimately we reach the point of denial – the point where the only thing left to us is cheating and fiddling the figures.  But when it comes to curbing carbon emissions and deploying clean energy generation, cheating will not do.  Quite simply, if humanity has a future, the lesson here is that we need to invest far more than is currently the case if we are to have even the remotest chance of coming up with a game-changing new technology.  The alternative is that, sooner or later – and probably sooner – much of what we take for granted in our western lifestyle – private motoring, constant electricity, affordable heating, abundant drinking water, free medical care and education, and much more – is going to disappear.

We can cheat for a while – as governments have been doing with their GDP figures, and oil companies have been doing with their reserves – and we can hide in a CGI-generated fog of denial – as we have been doing with climate change.  But we are fast coming up against limits that will not be ignored – we might be able to defy gravity and thermodynamics in a Hollywood movie; but in the real world these hard physical laws result in collapse and decay.

Dear tired old "New" Labour,

I understand that you think you have something to say... and have been all too keen to feed the media with anti-Jeremy Corbyn interviews and soundbites.  But we need to get one thing clear:

You lost!

I don’t mean just that you lost the Labour leadership election this weekend.  In case you hadn’t noticed, you lost the 2015 and 2010 general elections too.  And you only managed to win the 2005 election (on just a third of the vote) by conning people into thinking that Gordon Brown was an alternative to the war criminal Blair.

You managed to lose the Scottish government to a minority SNP administration in 2007, and since 2011 the SNP has governed alone in a Scottish Parliament that was designed to prevent government by any one party – just how useless do you have to be to achieve this? Worse still, your presence alongside Cameron during the independence referendum paved the way for the annihilation of Scottish Labour in May 2015. 

Unless the situation in Scotland can be reversed, Labour cannot form a majority under the first past the post system.  Yet it is far from clear how “appealing to Tory voters” – essentially taking Mr Miliband’s lead in promoting Tory-lite – is going to win back Scotland from the SNP.  To win in 2020, Labour will need to appeal to everyone, not just swing voters in Tory marginals.

This summer you have had every opportunity to present a vision of what a future Blairite Labour government might be like.  Instead, your candidates chose not to campaign at all; preferring instead to attack Jeremy Corbyn – the one candidate who did campaign on policies.  To a man, your ageing Grandees were wheeled out to tell Labour members and supporters that Jeremy Corbyn would be a disaster.  The war criminal Blair was all over the media reminding us of how he and his acolytes used to hand policy edicts down from on high.  Just as during your time in office, you treated the rank and file of your party as donkeys – not to be involved in politics, but merely to turn up to deliver the leaflets during election campaigns. Gordon Brown, Jack Straw, David Blunkett and Charles Clark were wheeled out to tell us why we should not trust Corbyn.  Their pronouncements were all too reminiscent of the war poster published by the discredited Chamberlain government in 1939… “Your courage will bring us victory”.  We – the ordinary people of Britain – must forget about our needs and aspirations so that you – the Westminster elite – can enjoy the privileges of office.  Not one of you offered any kind of vision for the future that ordinary people could rally behind.

Your sitting MPs also threw their rattles out of the pram.  Irrespective of the wishes of the rank and file, they made clear that they were not prepared to work with Corbyn.  It is precisely this contempt for the views of ordinary Labour members and supporters that resulted in your defeat in May.  Thousands of your core "supporters" either stayed at home because they could see no reason to vote for you, or worse still, chose to vote UKIP, SNP, Green and even (one suspects) Tory.  Just prior to the election, despite being aware that you needed every vote you could get, Rachel Reeves – one of your number who refuses to work with Corbyn – told 8 million benefits recipients that “Labour is not the party for you”… with friends like that, who needs enemies?

You accuse Corbyn of wanting to recreate the past.  But it is you who seem to want to recreate the glory days of 1997 (which, in case you hadn’t noticed) was 18 years ago, and we've been through the deepest recession in living memory since then.  

Like all arrogant people, you choose to believe that Labour's success in 1997 was entirely down to you.  You conveniently overlook the fact that by the end of 18 years in office, a tired Tory party had alienated large swathes of the electorate.  The reversal over the Poll tax, the economic debacle over the exchange rate mechanism and the constant squabbles over Europe sealed the Tories' fate.  Rather like your own period after government, the Tory party of 1997 to 2005 was so full of tired old men clinging to the fading memory of power that there had been no room for the new generation of leaders to emerge.  Hague was a joke (albeit often a very funny one); IDS was as disastrous for the Tories as leader as he now is for Britain’s poor; Michael Howard was unpopular beyond the Tory rank and file.  It took the Tories a decade to develop a leadership that could take you on.  And once you were faced with a coherent opposition, you wilted away.  In that light, what political credibility do you really have?

The Labour party rank and file were devastated by the 2010 election result.  More importantly, the ordinary people of Britain, who are now shouldering the burden of your bank bailouts, were devastated. The expectation had been that either Gordon Brown would scrape a small majority together or, at worst; you could form a coalition with an apparently left-leaning Liberal party.  Instead, we got Cameron, Osborne and the hapless Clegg…  and you couldn’t even beat them in 2015!

The truth is that, like the 1979-1997 Tories before you, you steadily alienated your supporter base to the point that they would rather vote for someone else.  Many were alienated by your illegal invasion of Iraq.  Others, myself included, defected over the increasingly authoritarian policies you chose to pursue; policies operated with relish by the incoming ConDem coalition. 

Meanwhile, the insistence of your grey and tired old men than they have some unique insight into how to win elections – a position seriously undermined by your inability to get elected or even to win the party leadership – has served to prevent a new generation of leaders from embarking on the process of rebuilding your party following your defeats.  You are unable to tell us what purpose the Labour party serves (beyond keeping you in a job).

I fully accept Corbyn may not be able to win in 2020.  But that is what they said about Thatcher when she became Tory leader in 1975.  I also believe that given the mountains you will have to climb in Scotland, the north of England and Wales, a Blairite Labour leadership would definitely lose.  Frankly, your "power without principle" proposition means nothing to an electorate that is fed up to the back teeth of the Westminster elite.  We understand all too well what the Tories stand for – privilege, the banking and finance sector Ponzi scheme, and the perpetuation of rule by the elite.  What we don’t know is what Labour stands for.  Nor, clearly, did Yvette Cooper or Liz Kendall.  Late in the day, Andy Burnham appeared to come to the realisation that there was a world beyond Westminster.  But by then it was too late.  The task Corbyn must now perform is to foster a new coalition of trade unions, traditional Labour supporters, Greens, Celtic nationalists and new grassroots movements and campaigns that can provide the Labour party with a reason to exist (beyond getting tired old men – and women – re-elected) like a previous generation did in the run up to 1945.

The Labour party will fight the 2020 election after a decade in opposition, 23 years after Blair was swept into Downing Street, and 17 years after Blair chose to invade Iraq.  In 2020 it will have to be relevant to a new generation or it will lose.  You need to understand that just as the politics of 1983 will not work, nor will the politics of 1997.  The baby boomers that you, and the Tories before you, relied upon to win elections are dying away.  Those who haven’t already died by 2020 will be increasingly frail and out of touch.  At the same time, a new generation of “millennials” will be flexing their political muscles for the first time – we see the beginnings of this to an extent with the high proportion of young people active in the Corbyn campaign.  This generation will have an entirely different agenda to yours.  They will want to address genuinely life and death issues such as climate change, population overshoot, and food and energy security.  They will also have immediate concerns around the housing crisis, student debt, unemployment and underemployment, and falling living standards.  These were all issues that your government chose to leave for a future generation to deal with.  Well that future generation just grew up!

You did some good things in office; particularly in your first term.  Devolution, reform of the House of Lords, and the minimum wage are not to be sniffed at.  But they were largely outweighed by what you did later.  The illegal invasion of Iraq will be a permanent stain on your reputation.  Less obviously, your hated Work Capacity Assessment Test has resulted in the premature deaths of nearly 90,000 of the most vulnerable members of our population.  Your Regulation and Investigatory Powers Act together with various so-called anti-terrorism legislation has left Britain one of the most surveilled countries on Earth, and has helped to create a security service that is out of control.

So dear Blairites, let me finish be repeating the words of Cromwell so devastatingly voiced by Leo Amery in May 1940:

“Somehow or other we must get into the Government men who can match our enemies in fighting spirit, in daring, in resolution and in thirst for victory…  Some 300 years ago, when this House found that its troops were being beaten again and again by the dash and daring of the Cavaliers, by Prince Rupert’s Cavalry, Oliver Cromwell spoke to John Hampden…  ‘Your troops are most of them old, decayed serving men ...’  You must get men of a spirit that are likely to go as far as they will go, or you will be beaten still. It may not be easy to find these men. They can be found only by trial and by ruthlessly discarding all who fail and have their failings discovered.   We are fighting to-day for our life, for our liberty, for our all; we cannot go on being led as we are.  I have quoted certain words of Oliver Cromwell.  I will quote certain other words.  I do it with great reluctance, because I am speaking of those who are old friends and associates of mine, but they are words which, I think, are applicable to the present situation.  This is what Cromwell said to the Long Parliament when he thought it was no longer fit to conduct the affairs of the nation: You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!

”

Two States - One Political Crisis

We tend to view events through the personalities of those involved.  Is George Osborne a bumbling economic illiterate or an evil genius?  Is Iain Duncan Smith a scrounger, a sadist or a full-blown psychopath?  Did Labour elect the wrong Miliband?

In truth, public personas are more often shaped by events and circumstances.  Remember how John Major was doomed by Guardian cartoonist Steve Bell’s portrayal of him as a grey wimp who wore his pants outside his trousers.  Despite being a tall (over six foot) and charismatic man, Major was unable to shake off this image.  Why?  Because he, and his hapless Chancellor had presided over economic crises against the backdrop of a Tory party divided upon itself over Europe.

Occasionally in times of profound crisis, history throws up the same personas to act out the same roles.  Leon Trotsky in his History of the Russian Revolution saw this in the persona of Charles I of England, Louis XVI of France and Nicholas II of Russia as each faced the collapse of their particular established order:

“The historic-psychological contrast… between the Romanovs and the Capets can, by the way, be aptly extended to the British royal pair of the epoch of the first revolution.  Charles I revealed fundamentally the same combination of traits with which memoirists and historians have endowed Louis XVI and Nicholas II.”

The passivity in the face of crisis; the political indecision; military failure; the desperate extraction of income from an increasingly impoverished people; the overbearing foreign wife; and the exalted courtiers giving flawed advice, were there on each occasion, playing their respective roles in leading the regime to the scaffold.

What are the chances of all of these actors being mystically reincarnated time and again to play out the same tragic comedy?  None whatsoever – as Trotsky went on to point out – it was the crisis of the regimes in question that brought forward the personas.  Even the foreign wives were simply a measure of the crises, as royal marriages were used in an attempt to cement friendly relations with stronger powers.  Charles I, Louis XVI and Nicholas II were no more grey impassive wimps than was John Major.  They had simply reached the point in the crises of their respective regimes at which any move they made could only hasten the collapse.  So they locked themselves behind the gates of their palaces and partied like there was no tomorrow… because, for them, there was no tomorrow.

It is in this light that I wish to draw attention to two recent articles by John Michael Greer - The Suicide of the American Left and The War Against Change – that highlight the staggeringly similar political decay in the USA and the UK.  In both articles we can easily substitute the UK for America; the Tories for the GOP; and New Labour for the Democrats.  This implies a crisis that goes much deeper than the individual actors who happen from time to time to take centre stage.

Below, I quote extensively from John Michael Greer's articles to reinforce this point.

Much of the political class in the USA and UK have tended to see 1989 (and the collapse of the Soviet Union) as the point when America emerged as the sole global superpower (Americans dislike the word “empire”).  However, as Immanuel Wallerstein has pointed out, the apex of US power came in 1945.  The real era of greatness for America came in the 1950s and 1960s - when the USA could still win wars and take time out to put men on the moon.  Recession and military defeat in the 1970s served notice that no hegemonic power remains at the top forever.  By 1989 the USA was already well into decline (but less so than its Soviet rival).  This decline is most obviously observed today in the USA’s (and its ever weaker UK ally's) inability to impose its will in its various wars and interventions in the Middle East, Asia and most recently Ukraine in the face of a resurgent Russia and a strong China.

The existential regime crisis for both the USA and the UK plays out in the politics of both states.  Like doomed emperors before them, the political class and their corporate backers have locked themselves in their palaces as they try to keep their party going.  They dare not make fundamental changes because any real change at this point will hasten the coming collapse of the system:

“For the last forty years, mind you, America [and the UK] has been moving steadily along an easily defined trajectory. We’ve moved step by step toward more political and economic inequality, more political corruption, more impoverishment for those outside the narrowing circles of wealth and privilege, more malign neglect toward the national infrastructure, and more environmental disruption, along with a steady decline in literacy and a rolling collapse in public health, among other grim trends.”

Collapse is assured anyway of course.  The US-centred global economy is nothing short of a giant Ponzi scheme in which there is now six times more paper “wealth” (in reality non-redeemable claims on future wealth) than there is real wealth to back it up.  As the world hits the limits to resource extraction on a finite planet, sooner or later an economy based on debt-fueled infinite growth must stop functioning.  The next banking collapse is no more than a couple of years away (maybe sooner).  And this time around the “too big to fail” banks will have become “too big to save”:

 “The political consensus in Washington DC [and Westminster] these days can best be characterized as an increasingly frantic attempt, using increasingly risky means, to maintain business as usual for the political class at a time when “business as usual” in any sense of that phrase is long past its pull date. This, in turn, is largely the product of the increasingly bleak corner into which past policies have backed this country, but it’s also in part the result of a massively important but mostly unrecognized turn of events: by and large, neither the contemporary US [and UK] political class nor anyone else with a significant presence in American [British] public life seems to be able to imagine a future that differs in any meaningful way from what we’ve got right now.”

In the political arena the traditional conservative parties (Republican/Tory) have become the radicals – pursuing any and every attack on their own people in an attempt to maintain the privilege of the elite:

“…the Republicans [and the Tories] decided that they’d never met a foreign entanglement or a government handout they didn’t like—unless, of course, the latter benefited the poor.  An ever more intrusive and metastatic bureaucratic state funneling trillions to corrupt corporate interests, an economic policy made up primarily of dishonest statistics and money-printing operations, and a monomaniacally interventionist foreign policy.”

As this plays out, the party of the left (Democrat/Labour) has morphed into the conservative party:

“Back when the two parties still stood for something, for example, Democrats in Congress  [Labour in Parliament] could be counted on to back organized labor and family farmers against their corporate adversaries and to fight attempts on the part of bankers to get back into the speculation business...

“Nowadays? The Democrats [and Labour] long ago threw their former core constituencies under the bus and ditched the Depression-era [post-1945] legislation that stopped kleptocratic bankers from running the economy into the ground…”

There is no longer an alternative vision of the future, merely an ominous warning about how bad things will get if the other party wins power.

“A movement that defines itself in purely negative terms, though, and attempts solely to prevent someone else’s agenda from being enacted rather than pursuing a concrete agenda of its own, suffers from another massive problem: the best such a movement can hope for is a continuation of the status quo, because the only choice it offers is the one between business as usual and something worse. That’s fine if most people are satisfied with the way things are, and are willing to fling themselves into the struggle for the sake of a set of political, economic, and social arrangements that they consider worth fighting for.”

Does this remind anyone of Ed Miliband’s risible election campaign?  Does this not explain why large sections of the working class defected to UKIP and the SNP? 

We even find similarities in the political personas that have arisen in both States.  The crop of sociopaths and misfits who have come forward as potential Republican presidents seem not dissimilar to the Tory contenders for David Cameron’s job once he has messed up the rashly promised EU renegotiation and referendum.  Is it just me or has anyone else noticed the similarities (not just the hair) between Boris Trump and Donald Johnson?

“…no matter how awful a president [prime minister] he’d be, the logic seems to run, at least he’d be different. When a nation reaches that degree of impatience with a status quo no one with access to power is willing to consider changing, an explosion is not far away.”

On the left too, the actors look similar.  For Hilary Clinton read Liz Kendall:

“It’s pretty much a foregone conclusion that she’ll lose this campaign the way she lost the 2008 race, and for the same reason: neither she nor her handlers seem to have noticed that she’s got to offer the American [British] people some reason to want to vote for her.”

What about Andy Burnham, Yvette Cooper and the now retired Chuka Umunna:

“I frankly doubt that the other candidates have a single noble motive for seeking office among them, but they have at least realized that they have to go through the motions of having convictions and pursuing policies they think are right. Clinton [Kendall] and her advisers apparently didn’t get that memo, and as a result, she’s not even going through the motions.”

Even Jeremy Corbyn – the surprise front-runner for the Labour leadership – finds a parallel in Senator Bernie Sanders:

“… what makes Sanders’[and Corbyn's] talking points stand out among those of his rivals is that he isn’t simply talking about maintaining the status quo; his proposals include steps that would restore a few of the elements of the welfare state that have been dismantled over the last four decades. That’s the extent of his radicalism—and of course it speaks reams about the state of the Democratic [Labour] Party more generally that so modest, even timid, a proposal is fielding shrieks of outrage from the political establishment just now.”

Structurally, the UK is in an even worse place than the USA.  Whereas the US Dollar still has some international traction as the nominal reserve currency – backed up by the facade of military power –the British pound is backed by nothing more than an increasingly insincere government promise that future taxpayers will somehow find the cash to pay back all of the loans that are currently keeping the UK economy above water.  In such circumstances, the doomed austerity policy is the only approach that the political elite can pursue that does not involve their giving up any of their own wealth and privilege.

Nor does the UK enjoy the USA's still massive (albeit rapidly depleting) mineral and energy resources.  The North Sea oil and gas fields peaked in 1999 and have been declining rapidly ever since.  What coal and metal reserves Britain might have enjoyed were largely consumed in the building, administering and losing of a global empire (and in fighting two ruinous world wars).  Indeed, the UK today even depends upon imported food and medical supplies to keep its people alive.  In the (very real and imminent) event of a currency crash, the UK will face the kind of humanitarian crisis that we tend to think of as affecting third world populations. 

In the face of this existential crisis, even Jeremy Corbyn/Bernie Sanders are wedded to the increasingly bankrupt 300-year-old economics of infinite growth on a finite planet.  And while the kind of reforms they are offering might ameliorate some of the worst effects of our economic decline, and may curb some of the worst excesses of the political/corporate elite, they are at best too little too late for a system whose fall is already upon us.

Corbyn - Historical Relic or Visionary?

The accusation that Labour leadership contender Jeremy Corbyn is trying to “turn the clocks back” serves to obscure much more than it explains.  In fact, take any time to dig beneath the headlines and we find that Corbyn has not argued for a return to the policies of the 1980s at all.  He did not, it turns out, call for the nationalisation of the means of production, distribution and exchange.  Rather, he made the case that some "natural monopolies" such as the railways and the energy companies should be operated on a not-for-profit basis.  He did not even stipulate that these utilities should be taken into state ownership – a sensible position given the ease with which neoliberal governments have been able to sell off state assets.  Similarly, while the tabloid headlines screamed out that Corbyn wanted to reinstate Clause 4 of the Labour Party constitution, it turned out that he had called for a fundamental rethinking of Labour’s purpose which would arrive at a modern equivalent of Clause 4.

In fact, it is very difficult to make the case that Corbyn is attempting to recreate the politics of a bygone age.  However, this allegation can be made of his opponents.  The New Labour dinosaurs – Alistair Campbell, Alan Johnson, Peter Hain, etc. – all claim that the road to electoral victory lies in recreating the glory days of 1997 when an evangelical Blair (as yet untainted by war crimes and corruption) effectively out-Thatchered the Tory Thatcherites.   In case you haven’t noticed, that was eighteen years ago!

Nor is it just the Blairite wing of the Labour party that is trying to turn the clocks back.  Labour’s Tory opponents have an even bigger problem on their hands since the economics of neoliberalism failed so spectacularly in 2008.  Insofar as Osborne and Cameron have a long-term plan at all (and for the most part, the slogan is little more than a means of deflecting attention away from short-term failure) it is to recreate the politics of 1984 – a confident Tory party that had just secured a massive majority on the back of the Falklands war, freed to deregulate the banking and finance industry; sell off public housing on the cheap in order to pump up house prices; and sell off state run industries on the cheap in order to pump up the stock market.  Today, schemes like Help to Buy and the plan to force housing associations to sell off their housing stock; the sale of the remaining state assets; and using taxpayers’ money to keep the banks solvent, are each intended to revive the glory days of Thatcherism.

There is a major flaw in both the Tory and Blairite positions.  We – those of us who live and work outside the City of London – have been in a depression since 2008.  That depression is the result of the policies put in place in the early 1980s, and developed to their conclusion by Blair.  For more than thirty years, the wages of working and middle class people in the UK have been falling in real terms.  The Thatcherite solution to this was threefold:

1. Encourage female employment.  While this may have been a positive choice for some women who were able to move into relatively high-paid professional careers, for most women it meant low-paid/low-skilled work in the service sector in order to maintain their families’ standard of living 
2. Offshoring manufacturing served to keep the price of goods low, even as it undermined employment and living standards within the UK 
3. The explosion of credit after the “big bang” in 1986 gave working people the illusion of increasing wealth as the value of their homes grew faster than the real value of their wages.  So long as we could keep rolling over the debt, we could keep the economy growing.

All of this came to an end in 2008.  While much of the media has focused on the growing level of government debt, it was actually the limits of private borrowing that provided the underlying crisis.  Although most people (including most MPs) continue to believe that government creates money, in fact more than 95 percent of the money in circulation is borrowed into existence every time a bank makes a loan.  As a recent Bank of England paper explained:

“In the modern economy, most money takes the form of bank deposits.  But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans.  Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” (my emphasis)

This was the dynamic and liberating policy that the Thatcher government unleashed in 1986, and that New Labour took to its logical conclusion between 1997 and 2008.  It worked in the 1980s because the UK economy was emerging from a series of crises and recessions in the 1970s and early 80s.  Businesses were seeking investment to grow, but the old system in which the Bank of England controlled the money supply left business starved of cash.  A similar situation prevailed in the housing sector – people’s mortgage applications were routinely turned down not because they had poor credit ratings, but solely because the banks had already loaned up to the limit set by the central bank.

By 1986, the Thatcher government had largely won the “state v market” argument.  With the deregulation of banking and finance (which was also pursued by Reagan in the USA, and quickly spread across the developed world) the money supply would be determined by the collective actions of bankers – who (probably correctly) were deemed to be wiser than civil servants.  Since banks were thought to be risk-averse, government assumed that they would not engage in reckless lending.  But by underwriting successful business, and by extending prudent levels of credit to consumers, they could play their part in generating economic growth.

By the time New Labour came along, there was no real opposition to this belief.  Rather than reining in the banking and finance industry, Blair removed much of the remaining regulation (mirroring the Clinton administration in the USA).  New Labour became “extremely relaxed” about people getting filthy rich – largely on the back of government contracts and Private Finance Initiative deals that were spectacularly poor value to taxpayers.

The problem was that, despite their celebrity status under Blair and Brown, bankers were not particularly wise.  In fact, after 1986, bankers behaved in more or less the way that bankers have always acted throughout history: 

• Initially conservative as a result of the recessions of the 1970s and early 80s, the bankers tended to lend only to the safest businesses and consumers 
• Since the majority of these tended to be successful and profitable, the bankers convinced themselves that they had some kind of Midas touch, and began lending to riskier ventures and less credit worthy consumers 
• As by now the economy was growing, even these riskier loans tended to be successful and profitable, so the bankers began to take even greater risks, fuelling asset and housing bubbles barely different from the Dutch tulip bulb bubble 
• By the early 2000s, what was in reality a global Ponzi scheme was reaching its limits.  People who should never have been considered credit worthy were being offered 125 percent loan to value mortgages with very low initial interest rates in the belief that rising prices would allow the debts to be repaid.  
• Then2008 happened!

There is one key reason why Osborne and Cameron cannot hope to recreate the conditions of 1986.  Put simply, the 2008 crash was the unforeseen consequence of the Big Bang “solution”.  Our current crisis does not concern the supply of credit (money), but rather the demand.  Private (i.e. company and household) debt is higher today than at any time in our history.  The credit card is maxed out.  Too many people and companies are struggling to service the debts they already have to allow for a new round of credit-fuelled economic growth.  Indeed, without quantitative easing and historically low interest rates the private sector debt bubble would implode, rendering most of the banking and financial sector insolvent.  Put simply, you cannot pump up a debt bubble that is already at bursting point.

If Osbourne and Cameron cannot hope to recreate the conditions of 1986, then any Blairite attempt to regenerate the glory days of the late 1990s are doubly doomed.  The whole New Labour project was based on the myth of what economists called “The GreatModeration” – that somehow globalisation had ended the cycle of boom and bust, and replaced it with a perpetually growing economy based around manageably low rates of inflation.  Governments would be able to afford things live exorbitant PFI deals if the economy kept growing.  Firms could increase workers’ wages in line with inflation.  Consumption could continue for ever.  But each of these has now turned into its opposite.  Government debt is much harder to pay off; companies have stopped investing; wages are falling; and consumers are reluctant to take out new loans.

Another way of looking at this picture is to understand that cyclical crises are an inherent component of capitalist economies.  Every 30-40 years, the economy is plunged into a crisis that is largely the result of the unforeseen consequences of the “solutions” to the previous crisis.  So, for example, the Keynesian state funding in the aftermath of the Second World War created both the boom of the 1950s and 60s, and the conditions for the recessions of the 1970s and early 80s.  Similarly, the privatisation and deregulation that generated the boom of the 1990s also created the conditions for the collapse since 2008.

This change in economic fortunes can also be seen in the radical political fracturing that occurs every 30-40 years too.  Reforms introduced in 1870 to manage industrialisation and the growth of the urban population had run their course by the turn of the twentieth century.  The fracture came in 1906 with the election of a Liberal government that introduced a series of (in their time) radical social reforms, including state pensions and labour exchanges.  They were also the last government to make serious changes to Britain’s unelected House of Lords.  Interestingly, following the First World War, it was the Tories who became the beneficiaries of the Liberal reforms – remaining in office for almost all of the 1920s and 30s, yet not attempting to reverse the reforms.

Something similar began to occur prior to the Second World War.  The depression of the 1930s persisted, particularly in the old industrial regions of the UK.  Many of the political movements that had arisen out of this discontent coalesced around the Labour Party which had entered government in 1940 as part of Churchill’s coalition, and which was swept into office in July 1945.  This government introduced far more radical policies than those of 1906, including the National Health Service, social security and pensions, public housing and nationalised utilities. Once again, it was not the party that introduced the reforms that became its inheritors.  After 1951, three successive Tory governments chose to embrace and build upon the Labour reforms.

The Wilson (Labour) and Heath (Tory) governments reaped the unforeseen consequences of the post-war settlement.  State funding had become inflationary; nationalised industries had become inefficient; and a series of external shocks (such as the OPEC oil embargos) plunged the UK economy into several – seemingly intractable – recessions.  Unusually, it was a Tory party (which had rejected traditional conservatism in favour of a neoliberal radicalism) that (after a failed attempt at austerity between 1979 and 1983) introduced the new politics of the private market.  However, as with previous reforming governments, it was the opposition that was to reap the benefits.  By 1996 it was a resurgent New Labour party – clothed in the vestments of Thatcherism – that was to embrace and build upon the Thatcher reforms; confining the Tories to opposition for 13 years.

So where are we now?  

Arguably we find ourselves in the same part of the economic/political cycle as the Tories of 1905 and 1939, and of Labour in 1979.  We have a government desperately trying to recreate the conditions of its earlier success by implementing the very policies that are now fuelling the crisis.  But we also have the opposition of 1970 and of 1929-31 – parties so wedded to the narrative of the past that they cannot break free.

Insofar as Corbyn (at least potentially) offers a winding back of the clock, it is to early 1945 – when a confident Labour Party felt able to pursue its own policies rather than respond to those of the opposition – or to 1975 when a confident Margaret Thatcher felt empowered to do away with the post war settlement in favour of the private market.  Corbyn could yet play a similar role, defining the new political narrative that will have to emerge out of the ashes of the Thatcher/Blair project.  But this will not be achieved by turning the clocks back – not to 1997 or to 1945 – but by developing the policies that the UK needs to get us out of the current economic and political stagnation.

Whatever your views on climate change, this is INSANE!

If you are someone who believes that climate change is some kind of liberal conspiracy, you will be delighted by the energy policies being pursued by Britain’s Tory government.  Not only have they decided to abolish the subsidies on wind and solar power (as well as tightening the planning laws to make it easier to object to these), but they are finally clearing the way for us to get on with the serious business of hydraulically fracturing large swathes of the British Isles.

Buy it on Amazon

Here is something we can probably agree on – renewable energy is not a replacement for fossil fuels.  Most obviously, our most efficient and easily scalable renewables – wind and solar – are replacements for coal and gas rather than oil.  That is, while they can help us to burn a little less fossilised carbon, they can do nothing to provide the liquid fuels that our complex global transportation system depends upon… and without which, millions of Britons would starve to death.

Let me go further still.  Renewables cannot realistically replace coal, gas and nuclear electricity generation either.  To give just one small example – earlier this year the world’s second largest offshore windfarm, Gwynt-y-Mor, located off the North Wales coast was brought online.  At a cost of £2bn and covering 31 square miles, Gwynt-y-Mor generates 576 megawatts of electricity.  This sounds impressive until you realise that this is about half of the energy generated at the Hinkley Point nuclear power station, and just a third of the energy generated by the coal fired Aberthaw power station; each of which take up less than one square mile.  Without covering perhaps two-thirds of the UK land mass in wind turbines and solar panels and building several new tidal barrages, hydroelectric plants and nuclear reactors, there is simply no way that renewable energy could replace fossil fuels.

“Great, so can we get on with the serious business of hydraulically fracturing the southeast of England now?”

Whoa!  Hold on just a moment.  While I agree that renewables cannot replace fossil fuels, this does not mean we can easily do without them.

You may not realise this, but North Sea oil and gas production peaked in 1999 and have been in permanent decline ever since.  

Source: International Energy Agency.  2014.  Energy Supply Security 2014 (Part 2: Chapter 4)

Source: International Energy Agency.  2014.  Energy Supply Security 2014 (Part 2: Chapter 4)

For fifteen years now, the UK has been a net importer of both oil and gas.  And as our own oil and gas production falls, we find ourselves becoming increasingly dependent upon imports from some of the most violent and unstable areas of the world to maintain our consumption.  Libya, Nigeria and the Middle East are volatile, and supplies of oil and gas might easily be disrupted.  And since we have decided not to be friends with Russia any more, we are unlikely to be able to call on their support in the event of an energy crunch.

Fortunately, for the time being the bulk of our imports come from our North Sea partner, Norway.  But this is not charity – Norway expects us to pay a market price for our imports.  So in the event of global prices rising, our energy gets more expensive.  This is a particular problem when we face increasing competition from fast developing countries like China and India, whose billions of people aspire to the same levels of car ownership, air conditioning and central heating that we take for granted in the UK.  These emerging countries may be less inclined to trade energy on the world market, and may well opt instead for bilateral agreements with oil exporting countries in order to remove some of the price volatility they would otherwise face.  Either way, there is going to be less to go around, so prices will have to rise.

Finally, we face a squeeze simply because those countries that are still exporting oil and gas have been diverting a growing proportion of their production into fuelling the growth of their own domestic economies.  If, for example, Qatar does get to host the 2022 football world cup, the industrial scale air conditioning units that will be essential to cooling the stadia will have to be powered by oil and gas that would otherwise have been exported onto the world market.

We can agree that without energy, nothing gets done.  We might also be able to agree that if there is not enough energy to go around, some economic activities will have to cease.  We already see this in the emergency plans operated by the National Grid where, faced with a lack of supply big industries such as steel works will be disconnected to prevent powercuts to households.

Were energy shortages to become a permanent problem, we would face higher prices, causing the least profitable economic activities (such as, for example, food production) to cease, as only those enterprises that can generate significant profits would be able to afford the higher prices.

“Surely this gives us an even greater incentive to frack as much of the UK as we can!”

Well, fracking could provide us with a bridge between our declining fossil carbon energy generation and a new economy based around renewables and nuclear, but it is a very short-term solution.

The first thing to note about fracking is that it is incredibly expensive in both monetary and energy terms.  Whereas conventional oil can return 20 barrels for every barrel (equivalent) of energy invested, the best case for fracking is that it provides just five – roughly the same return as we get from solar farms and significantly less than wind power or roof-top solar.

Another thing to note is that the US fracking bubble does not provide a blueprint that can be followed elsewhere.  The USA has enjoyed a combination of geological and economic factors that mean that their experience will prove to be unique.  First, and most obviously, the US shale deposits are vast.  So much so, that you could fit the entire land area of the UK inside just one (the Marcellus) shale area.   However, production within the US shale fields is not uniform.  The majority of the oil and gas recovered comes from a handful of “sweet spots”.  The further from these sweet spots you drill, the less profitable you become.  Second, much of the US shale drilling has occurred in sparsely populated regions in which public protest is significantly less (not least because landowners are directly compensated).  Finally, it was the combination of high oil and gas prices, low interest rates and billions of dollars of quantitative easing money looking for a decent return on investment that kick-started the US fracking industry.

A final point to note about US fracking is that wells deplete rapidly, losing an average of 80-90 percent of production in just three years.  This has meant that to increase total production, fracking companies have had to drill exponentially more wells.

Poland has twice the shale deposits as lie beneath the British Isles.  The Polish government is almost unique in being more pro-fracking than the UK government.  Nevertheless, when fracking industry researchers sought to estimate the total recoverable amounts of shale oil and gas beneath Poland, they concluded that it was insufficient to be profitable.  The UK experience may prove similar.  Consider south Wales – one of the UK regions containing shale gas deposits.  The geology of south Wales is horrible for anyone seeking to extract resources of any kind.  A large number of small fault lines cause mineral seams to rise and fall unexpectedly.  This is what caused the south Wales coal industry to be unprofitable.  It is likely that hydraulic fracturing will face similar problem since, while it is now technologically possible to drill horizontally, it is impossible to follow seams up and down across fault lines.

Economically, too, UK fracking may prove unappealing.  While interest rates remain low, all the indications are that they will start to rise in the near future.  Moreover, there are currently much higher returns to be made from investing in UK property – especially in London and the southeast.  UK investors may prove much more reticent about investing in an as yet unproven UK shale industry when there are greater returns to be made on buy-to-let property speculation.

I fear that fracking is simply not going to save the day.  Even if we are able to get some of the gas and oil out of the ground, it will never be sufficient to replace the declines in North Sea production.  We face declining energy supplies, and that means a declining economy.

"I think you've forgotten about these"

Please stop waving your smartphone at me.  I know that we are supposed to be living in a “knowledge economy”.  But in truth, this is more a fairy story that we tell the children so that they can sleep at night.  Consider, if you will, one of the world’s most polluted artificial lakes in Baotou in Inner Mongolia.  This is where all of the toxic waste produced in the manufacture of the Rare Earth Metals used in the manufacture of your mobile phone, your tablet, computer, router, and all of the other electrical items that you depend upon for your knowledge economy.  That is, the illusion of a western knowledge economy is built on the backs of workers in the developing world.  Consider also, that while your mobile phone uses a relatively tiny amount of electricity when you recharge it, if you watch just one hour of video per week, you use the same amount of electricity as if you were running two modern refrigerators.  The reason you do not see this is that in the so-called knowledge economy, energy consumption occurs out of sight at the datacentre.  Indeed, the global ITC infrastructure now consumes more than 10 percent of global energy – more than the energy consumption of Germany, and only less than the USA, China, Russia and Japan.

So what happens to your knowledge economy if there is not enough energy to power the data centres and the communication networks?  I guess we’ll just have to close some more hospitals, eh?

The insanity of the Tory government is not that they are determined to promote fracking – in this they are just grasping at the mirage of future cheap energy.  Nor is it that they continue to subsidise a nuclear industry that will never produce cheap (still less clean) energy.  The real insanity is that they are determinedly undermining renewables at a time when we face real energy shortages in the very near future.

Tim Watkins' book: Britain's Coming Energy Crisis is available in paperback and kindle versions.