Can we save energy, jobs and growth at the same time ?

20 05 2018

I apologise in advance to anyone with a short attention span, this is a bit long at almost one and a half hours……  especially as if you are new to limits to growth, you might have to watch it more than once!
If you ever needed proof that economics is an imbecilic proposal, then this is it.

Published on 30 Jan 2018

Jancovici’s conference in ENS School of Paris – 08/01/2018 To download the Presentation : https://fr.slideshare.net/JoelleLecon… The depletion of natural resources, with oil to start with, and the need for a stable climate, will make it harder and harder to pursue economic growth as we know it. It has now become urgent to develop a new branch of economics which does not rely on the unrealistic assumption of a perpetual GDP increase. In this Colloquium, I will discuss a “physical” approach to economics which aims at understanding and managing the scaling back of our world economy. Biography : Jean-Marc Jancovici, is a French engineer who graduated from École Polytechnique and Télécom, and who specializes in energy-climate subjects. He is a consultant, teacher, lecturer, author of books and columnist. He is known for his outreach work on climate change and the energy crisis. He is co-founder of the organization “Carbone 4” and president of the think tank “The Shift Project”. Original video : https://www.youtube.com/watch?v=ey7_F… Facebook page : https://www.facebook.com/jeanmarc.jan… Website : https://jancovici.com/
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Is this a sign of collapse gathering pace…?

15 05 2018

The articles coming from the consciousness of sheep are getting more and more interesting… after reading this one, I could not help but think that while Australia’s energy dilemmas are different to the UK’s, the following quote really struck a cord with me…:

Underlying all of this is a fundamental truth that few are prepared to contemplate: with the end of the last supplies of cheap fossil fuels, there is no affordable energy mix for the foreseeable future.  No combinations of gas, nuclear and renewables can be developed and deployed at the same time as prices are held at levels that are only just affordable to millions of British households.  Nor is there any option of returning to cheap gas from depleted North Sea deposits; still less reopening coal deposits put out of reach by the Thatcher government.

We are ‘lucky’ to have more coal and gas than we know what to do with, until that is it becomes so obvious we can’t keep burning these climate destroying fuels, we just stop. Hopefully before it’s too late.  But consider this……  if the UK economy collapses, what effect would it have on ours? Oil is creeping up, and our electricity rates are the subject of much moaning all over the country. An economic shock is coming, as sure as the sun rises in the East…..

Centrica may not care

Sometimes a story is repeated so often that its veracity is never challenged.  One such is the myth that British households are in thrall to a wicked energy cartel that puts excessive profits above common decency.  So much so, indeed, that the government and the opposition parties have all signed up to some form of energy cap designed to keep energy prices affordable.

The grain of truth in this story is that, aided by a craven regulator, the “big six” – British Gas, EDF Energy, E.ON, Npower, Scottish Power, and SSE – have on many occasions operated a cartel to hold prices up.  How else can we explain, for example, recent British Gas price increases in the face of a collapse in their customer base?

“British Gas owner Centrica lost 110,000 energy supply accounts in the first four months of the year.  That is roughly equivalent to 70,000 customers as many households buy their gas and electricity from British Gas, so will have two accounts.

“Last year, the company lost 1.3 million energy accounts…

“In April, British Gas announced a 5.5% increase in both gas and electricity bills, which comes into effect at the end of this month.  It blamed the rising wholesale cost of energy and the cost of meeting emissions targets and introducing smart meters.

“Other big energy firms have also announced price increases this year, including Npower, EDF and Scottish Power.”

This is surely evidence of a cartel being operated behind the back of the regulator… or is it?

There is an alternative explanation for the recent behaviour of the soon to be Big Four that should send a shiver through the UK economy.  Toward the end of last year, Jillian Ambrose at the Telegraph reported that:

“Britain’s second-largest energy supplier is eyeing the exit as the Government’s crackdown on energy bills threatens profits.

“SSE, formerly known as Scottish and Southern Energy, may turn its back on supplying gas and power to almost 8m British homes ­after years of political threats against the six largest energy companies comes to a head.

“City sources say the FTSE 100 energy giant is quietly discussing early plans to sell off its customer accounts, or even spin the business off as a separate listed company in order to focus on networks and renewable energy and avoid the Government’s looming energy price cap.”

Some months earlier I took the time to examine Centrica’s (British Gas’ parent company) annual accounts.  The results are not pretty:

“While Centrica profits were down (but still high) the division of British Gas that supplies electricity to UK consumers (businesses and households) actually made a loss of £61.1 million last year – in the household market, the loss was even bigger at £71.9 million.  That is, business electricity consumers are subsidising household electricity to some extent, while Centrica itself is subsidising its UK electricity business out of the profits from its other divisions.  Despite this, of course, electricity consumers are facing increasing bills even as they scale back their consumption.  This is exacerbated by the government decision to load the cost of renewables, new gas and new nuclear onto customers’ bills; effectively creating in all but name an even more regressive tax than VAT.”

Centrica’s response at the start of this year was to axe 4,000 jobs; having previously ceased maintaining the strategically essential Rough natural gas storage facility in the North Sea.  SSE in the meantime has announced a merger with N-Power in an attempt to rationalise both company’s retail energy business.  Unfortunately, no business to date has managed the trick of cutting its way to greatness… particularly in an economic climate in which ever fewer consumers can afford the service.

Centrica’s route out of an increasingly unprofitable domestic energy supply sector will be to focus on its much larger international energy business.  Britain’s remaining retail energy suppliers – all of which are foreign owned – may not enjoy this option.  For example, EDF’s wholesale energy investments are tied up in an increasingly risky and very-likely loss-making nuclear power sector.  Nor is there much to be gained from investment in renewable energy technologies that depend upon uncertain government subsidies that have become politically toxic among ordinary voters.

Underlying all of this is a fundamental truth that few are prepared to contemplate: with the end of the last supplies of cheap fossil fuels, there is no affordable energy mix for the foreseeable future.  No combinations of gas, nuclear and renewables can be developed and deployed at the same time as prices are held at levels that are only just affordable to millions of British households.  Nor is there any option of returning to cheap gas from depleted North Sea deposits; still less reopening coal deposits put out of reach by the Thatcher government.

For the moment, the UK government is content to fill Britain’s energy gap with imports.  However, as global energy supplies begin to tighten once more, pricing and profitability issues are likely to rise up the political agenda again.  Faced with an increasing struggle to remain profitable, and in the face of a government determined to add the cost of green energy onto domestic bills while legislating to prevent those bills from rising, companies like Centrica may simply choose to walk away.  After all, one of the blessings of being a private corporation (as opposed to a public utility) is that nobody can stop you from closing when you run out of money.





As usual….. it’s the money stupid.

12 05 2018





Time to rethink monetary policy

3 05 2018

“But another crisis is brewing; and there are signs that it will be bigger than 2008.  And when that crisis bursts over us, this time around we need to put these changes in place before the economists rally round and persuade our craven politicians that there is no alternative… because there is.”

Lifted from the excellent Consciousness of Sheep blog….

When the first stuffed platypus was presented to European scientists, they dismissed it.  “What we have here,” they opined, “is some unfortunate lutrinae onto which some scoundrel has attached various anatidae parts.”  And so the innocent little platypus, which had been minding its own business until the European explorers arrived, was placed on the same zoological shelf as the Yeti.

The European scientists, you see, had a model.  A map of how the world’s animal species were ordered.  At the apex, predictably, were humans themselves.  Beneath them were anatomically similar apes and monkeys; followed by cats, dogs, pigs, etc.  What all of these “higher” species had in common, however, was that they were all mammals – creatures that carry their young in an internal womb, and that suckle them with milk.  This distinguished them from other, dissimilar species like birds, reptiles, amphibians and insects.

Then along comes this upstart platypus, not just looking like it possesses bird parts, but having the audacity to lay eggs!  For several decades, despite growing evidence that platypuses were real, European scientists continued to dismiss these reported sightings as fake news.  The platypus was an unfortunate intrusion into the scientists’ neatly ordered model of how the world worked.  Despite the philosophy of science demanding that a fact – like the existence of a platypus – that disproves a model is the very essence of falsifiability, the scientists chose to reject the fact rather than deconstruct and rebuild their model.

The same European scientists later – and infamously – rejected evidence for the existence of one of the platypus’s neighbours… the black swan… which brings us to a modern pseudoscience that also famously rejects reality in order to preserve the models that it has spent decades finessing.

Economic models have already proved their – very negative – worth in the worst possible way in the shape of the 2008 financial crash and the ensuing global depression.  This ought to have been enough for the entire economics profession to be given their marching orders and afforded their true place alongside aromatherapists, astrologers and homeopaths.  However, in 2008, governments lacked any acceptable alternative.  So despite knowing that an economic forecast was of equal value to flipping a coin, they put the same economists who had broken the system in charge of fixing it.

The economists did no such thing, of course.  The financial crisis of 2008 was the platypus of our age; something so out of step with the models that it could not reasonably be incorporated into them.  They even used the term “black swan” to describe it.

Any examination of the real economy over centuries, however, demonstrates that cyclical period of boom and bust – frequently punctuated by major financial crashes – are in fact the norm.  It is the so-called “Great Moderation” in the economists’ model that is the aberration… the thing so out of step with reality that it can reasonably be dismissed as fake news.

This, however, is merely the most obvious flaw in an economic model that is based on anomalies.  Most importantly, almost everything that economists are taught about how the economy works is based on what happened in the course of the two decade long mother of all anomalies; the post war boom 1953-1973.  As historian Paul Kennedy explains:

“The accumulated world industrial output between 1953 and 1973 was comparable in volume to that of the entire century and a half which separated 1953 from 1800.  The recovery of war-damaged economies, the development of new technologies, the continued shift from agriculture to industry, the harnessing of national resources within ‘planned economies,’ and the spread of industrialization to the Third World all helped to effect this dramatic change.  In an even more emphatic way, and for much the same reasons, the volume of world trade also grew spectacularly after 1945…”

In other words, economic modelling based on how the economy operated in the decades prior to the First World War might provide a closer fit to the real world in 2018.  The same is true for interest rates. As political economist Mark Blyth has shown, economists have modelled interest rates on the two decades around the historical high point in 1981.  However, for the entire period following the introduction of derivatives by the Dutch in the sixteenth century, the average interest rate is below four percent.

This is no trifling academic issue.  Interest rates have become the primary means by which economists – to whom our politicians have handed the leavers of power – seek to manage the economy.  The aim of “monetary policy” being to raise interest rates sufficiently high to prevent a recurrence of the inflation of the 1970s, while keeping them sufficiently low that they do not trigger or exacerbate a repeat of the 2008 crash.

The problem with this as of 2018 is that despite close to zero percent interest rates – and trillions of dollars, euros, pounds and yen in stimulus packages – the rate of inflation has barely moved.  Indeed, with growth rates stalling in the USUK and Eurozonedeflation is more likely than inflation.  Despite this, the Federal Reserve, Bank of England and European Central Bank remain committed to raising interest rates and reversing quantitative easing… because that is what their model tells them that they should do.

Central to the model is a belief – based on those anomalous decades when we had growth on steroids and interest rates to match – that employment causes inflation.  So with the official rate of unemployment in the USA standing at 4.1 percent and the UK at 4.2 percent, the model is telling the economists at the central banks that inflation is already running out of control… even though it isn’t.  As Constance Bevitt, quoted in the New York Times puts it:

“When they talk about full employment, that ignores almost all of the people who have dropped out of the economy entirely. I think that they are examining the problem with assumptions from a different economic era. And they don’t know how to assess where we are now.”

Larry Elliott at the Guardian draws a similar conclusion about the UK:

“Britain’s flexible labour market has resulted in the development of a particular sort of economy over the past decade: low productivity, low investment and low wage. Since the turn of the millennium, business investment has grown by about 1% a year on average because companies have substituted cheap workers for capital. Labour has become a commodity to be bought as cheaply as possible, which might be good for individual firms, but means people have less money to buy goods and services – a shortfall in demand only partly filled by rising levels of debt. The idea that everyone is happy with a zero-hour contract is for the birds.

“Workers are cowed to an extent that has surprised the Bank of England. For years, the members of Threadneedle Street’s monetary policy committee (MPC) have been expecting falling unemployment to lead to rising wage pressure, but it hasn’t happened. When the financial crisis erupted in August 2007, the unemployment rate was 5.3% and annual wage growth was running at 4.7%. Today unemployment is 4.2% and earnings are growing at 2.8%.”

This is a very different economy to the one that operated between 1953 and 1973; a time when the workers’ share of productivity rose consistently.  In those days a semi-skilled manual worker had a sufficient wage to buy a home, support a family, run a car and afford a holiday.  In 2018, a semi-skilled manual worker living in the UK depends upon foodbanks and tax credits to remain solvent.

In short, despite mountains of evidence that the economists’ model bears no relation to the real world, like their nineteenth century zoological counter parts, they continue to reject any evidence that disproves the model as fake news.  One obvious reason for this is that all of us – whatever our specialisms – get a sinking feeling of despondency when some inconvenient fact comes along to tell us that it is time to go back to the drawing board.  Understandably, we test the inconvenient fact to destruction before deconstructing our models.  But even when the fact proves sufficiently resilient to be considered to be true, there remains the temptation to sweep it under the proverbial carpet and pretend that nothing is amiss.

There is, however, another reason why so many economists spend so many of their waking hours studiously ignoring reality when it whacks them over the head with the force of a steam hammer.  They simply do not see it.  That is, if you are on the kind of salary enjoyed by a member of one or other monetary policy committee, your lived experience will be so removed from the experience of ordinary working (and not working) people that you simply refuse to believe them when – either by anecdote or statistic – they inform you of just how bad things are down on Main Street.

The two proposed solutions to this latter problem involve the question of diversity.  Among its other work, the campaign group Positive Money has highlighted the race and gender disparity at the Bank of England.  However, were we to just swap some white male mainstream economists for some equivalent BME and female mainstream economists, this is unlikely to have much impact.  A second approach to diversity from radical economists such as Ann Pettifor is to break up the neoclassical economists’ monopoly by bringing in economists from different schools of economics.

Arguably, however, neither of these proposed solutions would be sufficient to solve the problem of economists refusal to allow facts to stand in the way of their models.  For this, something even more radical is required – a complete rethink of the way monetary policy is made.  The 2008 crash and the decade of near stagnation for 80 percent of us that followed has demonstrated that the approach of handing economic policy to technocrats has failed.  The unelected Bank of England or Federal Reserve Chairman can no longer be allowed to be the final authority.  Policy must ultimately reside with elected representatives  whose jobs are on the line if they mess up.

Of course it is entirely reasonable that our representatives base their decisions on the advice and recommendations of experts.  It is here that real diversity is required.  Not merely swapping white male economists for black female ones, or opening the door just wide enough for some token contrarian economists.  Rather, what is needed is for monetary policy committees to encompass a range of specialisms far beyond economics and the social sciences, together with representatives from trades unions, charities and business organisations that are more in touch with the realities of life in the real economy.

None of this is about to happen any time soon; not least because nobody voluntarily relinquishes power and privilege.  But another crisis is brewing; and there are signs that it will be bigger than 2008.  And when that crisis bursts over us, this time around we need to put these changes in place before the economists rally round and persuade our craven politicians that there is no alternative… because there is.





It’s the Consumption, Stupid….

2 05 2018

The 2nd Law of Thermodynamics – The Gaping Hole in the Middle of the Circular Economy

paul mobbsA great article by Paul Mobbs, an independent environmental consultant, investigator, author and lecturer, and maintains the Free Range Activism Website (FRAW).

Why the latest buzz-phrase in consumer sustainability is not only failing to tackle the core problem, but why it is doomed to fail

Listening to Radio 4 this morning I heard the two juxtaposed keywords that I’ve learned to dread over the last couple of the years; ‘circular economy’. It’s a great idea, and I can’t fault the true belief of those promoting it. My problem is that the way they describe it has little to do with the physical realities of the world, and hence it’s really just a “get out of hell free” card for affluent consumers – who are, it would appear, the most vociferous proponents of this idea.

As is so often the case with feel-good eco-stories, the Today programme’s[1] interviewer was all light and fluffy; and obviously flummoxed because they did not have the confidence to ask any basic, challenging questions of the interviewee.

The segment was examining the new research[2] from Portsmouth University. They’ve found a ‘mutant’ enzyme from bacteria they found living on plastic in recycling centres. As with all enzymes[3] – like the things they add to washing powder so you can clean clothes without boiling them – these complex molecules accelerate chemical reactions by working on the chemical bonds which hold things together. In this case, the enzyme breaks down the bonds of the polyethylene terephthalate[4] (PET) molecule.

Great idea; and if shown to be ecologically safe, great chemistry. That’s not the issue here.

Enter ‘the Circular Economy’

The scientist then described the value of this enzyme as part of the ‘circular economy’[5] – a concept proposed in the 1980s, and popularized in recent years by organizations such a the Ellen MacArthur Foundation[6], of moving from a linear to a circular economic process:

  • ‘Linear’ economy – meaning that materials are created, used and disposed as waste, requiring that new resources must be reduced to replace them, which is how the core of the global economy works today;
  • ‘Circular’ economy – meaning that all materials and products are manufactured and sold so that their content can be fully recycled and used in new products once more, obviating the need to produce new resources to replace them.

It is a lovely idea. One which I would whole-heartedly support, but for one slight technical hitch I perceive in this concept; The Laws of Thermodynamics[7] – and my particular favourite, The Second Law of Thermodynamics[8].

The Laws of Thermodynamics arose in parallel with industrialization, having first been used to described the operation of steam engines. Over time science has perfected the principles of these ‘laws’ and now finds that they are universal.

The Second Law deals with irreversible reactions – that is, operations which once undertaken cannot be undone.

What the ‘circular economy’ idea would propose in relation to PET plastic bottles is: Take some natural gas (yes, contrary to the idea that plastics come form oil, most plastics are made from the light by-products of oil refining, but mostly natural gas and gas condensate) and turn it into PET plastic; then make a plastic bottle with a blow-moulding machine; use the bottle; then recycle the bottle, and keep recycling after each use – obviating the need to use more natural gas to create plastic. As a result, the use of the bottle becomes ‘circular’.

Sounds great, doesn’t it?

The thermodynamic restrictions of human hope

Of course, there’s always a big hairy “but” in situations like this.

In this case, the use of plastic represents a ‘reversible’ reaction – you can make plastic, and then recycle the plastic to make more plastic. Sorted!

The energy expended in doing that, however, is an irreversible[9] process. It can’t be recovered.

The Second Law dictates that energy can be used, but in the process the ‘quality’ (for which read ‘usefulness’, or ‘density’, or ‘value’) of that energy is degraded; and once degraded, that ‘quality’ cannot be recovered without using even more energy than was expended when the energy was first used.

For example, water flowing downhill can turn a turbine to make electricity; but it takes more electricity than that was generated to pump that same volume of water back to the top of the hill again.

Now at this point proponents of the circular economy will talk about using renewable energy, thereby avoiding the issue of finite resources being used to power the process. That’s true, up to a point; and that point is, what are those renewable energy system made from? Finite resources.

Limits to renewable energy

Just because renewable energy is ‘renewable’, it doesn’t mean the machines we require to harvest that energy are freed from the finite limits of the Earth’s resources[10].

There are grand schemes to power the world using renewable energy. The difficulty is that no one has bothered to check to see if the resources are available to produce that energy. Recent research suggests that the resources required to produce that level of capacity cannot currently be supplied[11].

The crunch point is that while there might be enough indium, gallium, neodymium and other rare metals to manufacture wind turbines or PV panels for the worlds half-a-billion or so affluent consumers (i.e., the people most likely to be reading this), there is not enough to give everyone on the planet that same level of energy consumption – we’d run out long before then.

For example, the first metal humans smelted[12] about 9,000 years ago was copper. Ever since copper has been a brilliant indicator of human development, with consumption increasing in line with human development ever since. One reason for that is that as industrial use has fallen (e.g., replacing copper pipes with plastic) we’ve used more copper for new technologies (e.g., electronics – roughly 14%[13] of the weight of a mobile phone is copper).

Copper also has one of the best, most mature recycling systems, but even then it’s been estimated that only half of all copper is reused[14].

The problem is, due to its long and intensive global use, we’re approaching ‘peak copper’[15] – the point where the remaining amount of copper in the ground, and more importantly its falling ore quality, reduces the amount which can be economically produced annually. And more significantly, the ecological impact[16] of the falling copper ore quality is that the energy consumed and the greenhouse gases emitted by production increase exponentially.

Now of course we’ll use copper more efficiently. And if we run short, rising prices will increase recycling rates – though it will also increase the disruptive theft[17] of copper in society. The difficulty is that, just last week[18], the copper industry announced that it worried about production after 2020.

Strategy is important, but ‘real’ change is critical

OK, back to the ‘circular economy’.

What really matters here is not so much the material used in production, but the energy density of production. Energy density isn’t just a matter of how much energy it takes to produce an article, but how long that article lasts. That in turn affects the ‘return’ on the energy invested in its production – or EROEI[19].

Let’s say a plastic bottle takes six weeks to be manufactured, filled, bought, consumed, collected and reprocessed to the point of re-manufacture. That’s good because recycling plastic can represent a saving of more than 50%[20] on the energy used to produce it compared to virgin materials.

What determines the long-term sustainability of this though is not just the one-time saving, but the viable fraction that can be reclaimed and reused.

Let’s assume that, at best, we can recover 60% of the content of the bottle over each 6 week cycle. After 1 cycle, 6 weeks, we have 60% of the material left. After 2 cycles, 12 weeks, we have 60% × 60% = 36% left. After three cycles there’s 60% × 36% = 22%. After four cycles, 13%, etc.

By the end of one year (8 or 9 cycles) we’d only have 1% of our plastic left.

The obvious response is, “well, let’s recycle more”. The problem is that achieving a higher recovery rate actually requires expending more energy, reducing the energy saved – and as you get nearer to 100% the amount required is likely to exceed the energy involved in producing new plastic from raw materials.

For example, recycling in densely populated urban areas is easy, because waste management is an essential part of being able to run an urban area. But what about more sparsely populated rural areas and villages? At what point does the energy expended running a collection vehicle exceed the energy saved from materials recovery? (answer – it’s completely dependent upon local circumstance, and so has to be evaluated as part of the planning process rather than generalized in advance).

“It’s consumption, stupid!”

It’s the same as the falling copper ore problem. The more diffuse your source, the more energy you have to expend to recover it. Getting the easy to find plastic, let’s say the first half, will be easy. Getting the next 20% might take as much effort. The 10% after that twice again. And the last 20%? It might produce no saving at all.

Alternatively we could extend the life of the bottle – by refilling instead of recycling. That would have a significant effect, but even then, on each refill cycle a certain number of bottles would be rejected.

Don’t ignore this option though. It is arguable that, in lieu of increasing recycling rates, extending the service life of resources probably has the best energy profile – since it reduces not only the need to re-manufacture resources, but also the need to recycle/replace them. The problem is that reuse often requires far greater change and co-operation by consumers – precisely the thing our ‘liberal’ economy hates doing because it involves dictating the actions of consumers.

Forget Bill Clinton’s line about ‘the economy’; “It’s consumption, stupid!”

More importantly, throughout this whole process, energy is expended[21]; and energy is the one thing we can’t recover. Therefore we have to avoid re-manufacture or recovery in the first place. The difficulty is that no one wants to advocate this – combining multiple reuse, high recycling AND longer service life – as it means the effective elimination of consumerism, fashion, ‘innovation’, and many of the other totemic traits[22] of the modern consumer materialist economy.

Then again, given that a large amount of the world’s wealth is derived from resource exploitation, any change to that pattern is likely to have huge implications for the day-to-day economy[23] that the most affluent consumers rely upon in order to consume.

The ‘Circular Economy’ must accept thermodynamic reality

Arthur Eddington[24] was a British scientist (and Quaker) who advanced physics and astrophysics in the first decades of the 20th Century, and popularized the theories of Albert Einstein – against the then anti-German and anti-Jewish prejudice of the science establishment.

In relation to the Second Law of Thermodynamics, Eddington produced a famous statement:

If someone points out to you that your pet theory of the universe is in disagreement with Maxwell’s equations – then so much the worse for Maxwell’s equations. If it is found to be contradicted by observation – well these experimentalists do bungle things sometimes. But if your theory is found to be against the second law of thermodynamics I can give you no hope; there is nothing for it but to collapse in deepest humiliation.

The ‘circular economy’ is, in my opinion, a ruse to make affluent consumers feel that they can keep consuming without the need to change their habits. Nothing could be further[25] from the truth, and the central reason for that is the necessity for energy to power economic activity[26].

While the ‘circular economy’ concept admittedly has the right ideas, it detracts from the most important aspects of our ecological crisis today[27] – it is consumption that is the issue, not the simply the use of resources. Though the principle could be made to work for a relatively small proportion[28] of the human population, it could never be a mainstream solution for the whole world because of its reliance on renewable energy technologies to make it function – and the over-riding resource limitations on harvesting renewable energy.

In order to reconcile the circular economy with the Second Law we have to apply not only changes to the way we use materials, but how we consume them. Moreover, that implies such a large reduction in resource use[29] by the most affluent, developed consumers, that in no way does the image of the circular economy, portrayed by its proponents, match up to the reality[30] of making it work for the majority of the world’s population.

In the absence of a proposal that meets both the global energy and resource limitations[30] on the human system, including the limits on renewable energy production, the current portrayal of the ‘circular economy’ is not a viable option. Practically then, it is nothing more than a salve for the conscience of affluent consumers who, deep down, are conscious enough to realize that their life of luxury will soon be over as the related ecological and economic crises[31] bite further up the income scale.

 

References:

  1. BBC Radio 4: ‘Today’, 17th April 2018 – https://www.bbc.co.uk/programmes/b006qj9z
  2. Guardian Online: ‘Scientists accidentally create mutant enzyme that eats plastic bottles’, 16th April 2018 – https://www.theguardian.com/environment/2018/apr/16/scientists-accidentally-create-mutant-enzyme-that-eats-plastic-bottles
  3. Wikipedia: ‘Enzyme’ – https://en.wikipedia.org/wiki/Enzyme
  4. Wikipedia: ‘Polyethylene terephthalate’ – https://en.wikipedia.org/wiki/Polyethylene_terephthalate
  5. Wikipedia: ‘Circular economy’ – https://en.wikipedia.org/wiki/Circular_economy
  6. Wikipedia: ‘Ellen MacArthur Foundation’ – https://en.wikipedia.org/wiki/Ellen_MacArthur_Foundation
  7. Wikipedia: ‘Laws of thermodynamics’ – https://en.wikipedia.org/wiki/Laws_of_thermodynamics
  8. Wikipedia: ‘Second law of thermodynamics’ – https://en.wikipedia.org/wiki/Second_law_of_thermodynamics
  9. Wikipedia: ‘Irreversible process’ – https://en.wikipedia.org/wiki/Irreversible_process
  10. BioScience: ‘Energetic Limits to Economic Growth’, vol.61 no.1, January 2011 – http://www.fraw.org.uk/library/pages/brown2011.shtml
  11. EU Joint Research Committee: ‘Critical Metals in Strategic Energy Technologies – Assessing Rare Metals as Supply-Chain Bottlenecks in Low-Carbon Energy Technologies’, 2011 – http://www.oakdenehollins.com/pdf/CriticalMetalsinSET.pdf
  12. Wikipedia: ‘Chalcolithic’ – https://en.wikipedia.org/wiki/Chalcolithic
  13. U.S. Geological Survey: ‘Recycled Cell Phones – A Treasure Trove of Valuable Metals’, July 2006 – http://pubs.usgs.gov/fs/2006/3097/fs2006-3097.pdf
  14. Environmental Science and Technology: ‘Dynamic Analysis of Global Copper Flows’, Glöser et al., vol.47 no.12 pp.6564-6572, May 2013 – https://pubs.acs.org/doi/full/10.1021/es400069b
  15. Wikipedia: ‘Peak copper’ – https://en.wikipedia.org/wiki/Peak_copper
  16. Resource Policy: ‘The Environmental sustainability of mining in Australia: key mega-trends and looming constraints’, Gavin M. Mudd, vol.35 no.2 pp.98-115, June 2010 – http://www.fraw.org.uk/library/pages/mudd2010.shtml
  17. Wikipedia: ‘Metal theft’ – https://en.wikipedia.org/wiki/Metal_theft
  18. Mining: ‘Copper supply crunch earlier than predicted – experts’, 10th April 2018 – http://www.mining.com/copper-supply-crunch-earlier-predicted-experts/
  19. Wikipedia: ‘Energy returned on energy invested’ – https://en.wikipedia.org/wiki/Energy_returned_on_energy_invested
  20. Ecological Modelling: ‘Analysis of energy footprints associated with recycling of glass and plastic – case studies for industrial ecology’, vol.174 no.1-2 pp.175-189, May 2004 – https://www.sciencedirect.com/science/article/pii/S0304380004000067
  21. Sustainability: ‘Energy, Economic Growth and Environmental Sustainability: Five Propositions’, vol.2 pp.1784-1809, 18th June 2010 – http://www.mdpi.com/2071-1050/2/6/1784/pdf
  22. Nature: ‘Time to leave GDP behind’, vol.505 pp.283-285, 16th January 2014 – http://www.nature.com/polopoly_fs/1.14499!/menu/main/topColumns/topLeftColumn/pdf/505283a.pdf
  23. International Journal of Transdisciplinary Research: ‘The Need for a New, Biophysical-Based Paradigm in Economics for the Second Half of the Age of Oil’, vol.1 no.1 pp.4-22, 2006 – http://www.fraw.org.uk/library/pages/hallklitgaard2006.shtml
  24. Wikipedia: ‘Arthur Eddington’ – https://en.wikipedia.org/wiki/Arthur_Eddington
  25. Journal of Cleaner Production: ‘Why are we growth-addicted? The hard way towards degrowth in the involutionary western development path’, vo.18 no.6 pp.590-595, April 2010 – https://degrowth.org/wp-content/uploads/2011/05/Van-Griethuysen-why-are-we-growth-addicted.pdf
  26. The Australian National University : ‘The Role of Energy in Economic Growth’, Centre for Climate Economics & Policy, October 2010 – http://www.fraw.org.uk/library/pages/stern2010.shtml
  27. PNAS: ‘Tracking the ecological overshoot of the human economy’, vol.99 no.14 pp.9266-9271, 9th July 2002 – http://www.fraw.org.uk/library/pages/wackernagel2002.shtml
  28. The Corner House: ‘Energy Security: For Whom?, For What?’, February 2012 – http://www.fraw.org.uk/library/pages/cornerhouse2012.shtml
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  31. Proceedings of the Royal Society B: ‘Can a collapse of global civilization be avoided?’, vol.280 no.1754, 7th March 2013 – http://www.fraw.org.uk/library/pages/ehrlich2013.shtml
  32. Melbourne Sustainable Society Institute: ‘Is Global Collapse Imminent?: An Updated Comparison of The Limits to Growth with Historical Data’, Research Paper No.4, August 2014 – http://www.fraw.org.uk/library/pages/turner2014.shtml




Post-work: the radical idea of a world without jobs

23 01 2018

As you may know if you read this blog often enough, I am completely anti jobs and growth. So many jobs are ‘bullshit jobs’ these days, and so much automation is coming on board – like Amazon opening a store with almost no staff as one prime example – that the future of work is hardly well defined, especially as we head into a low energy future. Just this week, I was pointed to a book and an article on these issues that I thought I’d shara and comment on, and as always, your comments are more than welcome…..

Utopia for Realists : and how we can get there - Rutger BregmanThe book I was pointed to is one Geoff Lawton is currently reading, or so he tells me…..  it’s called “Utopia for Realists”. It certainly looks interesting to me, and I might just buy it, even if the Guardian gives it a caning

This is a book with one compelling proposition for which you can forgive the rest. It is utopian visions that have driven humanity forwards. It was the hope we could fly, conquer disease, motorise transport, build communities of the faithful, discover virgin land or live in permanent peace that has propelled men and women to take the risks and obsess about the new that, while not creating the utopia of which they dreamed, has at least got us some of the way. Celebrate the grip that utopia has on our imagination. It is the author of progress.

But if this is the book’s big insight, much of the rest fluctuates from the genuinely challenging to politically correct tosh. My biggest beef is the idea that increasingly grips liberal thinkers desperate for anything radical – the concept of a universal income for all. Financially, behaviourally and organisationally bonkers, this idea is gaining traction on the bien pensant left. The proposition is that because a rogue capitalism is going to automate away most of our jobs, human wellbeing can only be assured by everyone receiving a universal basic income.

I don’t know what this book critic thinks people with no jobs will spend to keep the economy going……  maybe he’ll find out when he loses his job, as journalism is one of the trades under serious threat this century.

Apart from the fact that human needs are infinite, so that today’s predictions of the end of work will prove as awry as those of previous centuries, a universal basic income is no more likely to succeed than communism.

That’s where he really lost me…….  using that word infinite. On a finite planet. Whose tosh are we reading now ?

Fortunately, there are some realist journos at the Guardian, like Andy Beckett, who are able to produce much more interesting and open views……

Work is the master of the modern world. For most people, it is impossible to imagine society without it. It dominates and pervades everyday life – especially in Britain and the US – [the rest of the world don’t count it seems…] more completely than at any time in recent history. An obsession with employability runs through education. Even severely disabled welfare claimants are required to be work-seekers. Corporate superstars show off their epic work schedules. “Hard-working families” are idealised by politicians. Friends pitch each other business ideas. Tech companies persuade their employees that round-the-clock work is play. Gig economy companies claim that round-the-clock work is freedom. Workers commute further, strike less, retire later. Digital technology lets work invade leisure.

As a source of subsistence, let alone prosperity, work is now insufficient for whole social classes. In the UK, almost two-thirds of those in poverty – around 8 million people – are in working households. In the US, the average wage has stagnated for half a century.

As a source of social mobility and self-worth, work increasingly fails even the most educated people – supposedly the system’s winners. In 2017, half of recent UK graduates were officially classified as “working in a non-graduate role”. In the US, “belief in work is crumbling among people in their 20s and 30s”, says Benjamin Hunnicutt, a leading historian of work. “They are not looking to their job for satisfaction or social advancement.” (You can sense this every time a graduate with a faraway look makes you a latte.)

The young French wwoofer working with me at the moment tells me that most of his peers are fast becoming totally cynical of the work ethic, and, interestingly, also seem to be very much aware of the possibilities and consequences of collapse…. I have to say, this has been the case with most of the French wwoofers who’ve been here over the past couple of years, unlike the American ones who have no idea..!  He even tells me there is a growing movement of young people in France leaving cities and going back to the land….

As a source of sustainable consumer booms and mass home-ownership – for much of the 20th century, the main successes of mainstream western economic policy – work is discredited daily by our ongoing debt and housing crises. For many people, not just the very wealthy, work has become less important financially than inheriting money or owning a home.

Whether you look at a screen all day, or sell other underpaid people goods they can’t afford, more and more work feels pointless or even socially damaging – what the American anthropologist David Graeber called “bullshit jobs” in a famous 2013 article. Among others, Graeber condemned “private equity CEOs, lobbyists, PR researchers … telemarketers, bailiffs”, and the “ancillary industries (dog-washers, all-night pizza delivery) that only exist because everyone is spending so much of their time working”.

Precisely…….  could not agree more. Of course, the collapse of the ERoEI of our energy sources – ALL of them – does not get a mention when he writes “The argument seemed subjective and crude, but economic data increasingly supports it. The growth of productivity, or the value of what is produced per hour worked, is slowing across the rich world – despite the constant measurement of employee performance and intensification of work routines that makes more and more jobs barely tolerable.” Of course, like most people, he may not be aware, let alone know of, the energy cliff…… human

I have to say, this bit was rather interesting…

In Britain in 1974, Edward Heath’s Conservative government, faced with a chronic energy shortage caused by an international oil crisis and a miners’ strike, imposed a national three-day working week. For the two months it lasted, people’s non-work lives expanded. Golf courses were busier, and fishing-tackle shops reported large sales increases. Audiences trebled for late-night BBC radio DJs such as John Peel. Some men did more housework: the Colchester Evening Gazette interviewed a young married printer who had taken over the hoovering. Even the Daily Mail loosened up, with one columnist suggesting that parents “experiment more in their sex lives while the children are doing a five-day week at school”.

The economic consequences were mixed. Most people’s earnings fell. Working days became longer. Yet a national survey of companies for the government by the management consultants Inbucon-AIC found that productivity improved by about 5%: a huge increase by Britain’s usual sluggish standards. “Thinking was stimulated” inside Whitehall and some companies, the consultants noted, “on the possibility of arranging a permanent four-day week.”

Of course…… nothing came of it as the North Sea oil was discovered and exploited, everyone back to work, we have a planet to pillage. But it certainly makes you think about what will happen when the oil crisis finally becomes permanent. This article, which I consider a gem and well worth the read, ends with..:

Creating a more benign post-work world will be more difficult now than it would have been in the 70s. In today’s lower-wage economy, suggesting people do less work for less pay is a hard sell. As with free-market capitalism in general, the worse work gets, the harder it is to imagine actually escaping it, so enormous are the steps required.

But for those who think work will just carry on as it is, there is a warning from history. On 1 May 1979, one of the greatest champions of the modern work culture, Margaret Thatcher, made her final campaign speech before being elected prime minister. She reflected on the nature of change in politics and society. “The heresies of one period,” she said, always become “the orthodoxies of the next”. The end of work as we know it will seem unthinkable – until it has happened.

All I can say is that the orthodoxies of the next era will be full of surprises, that’s for sure.





AUSTRALIA’S ‘DUMB LUCK’ ABOUT TO RUN OUT WITH ECONOMY ON THE BRINK OF COLLAPSE

4 01 2018

I recently tried to republish this on DTM, but it gave me so much heartache, I gave up. Now I’ve found a new source that hopefully allows more friendly copy/paste……. I hasten to add I disagree with much of what he has to say at the end of this lengthy article, and I could have edited it out, but there you go…… you make up your own mind.

Written on the 15 November 2017 by Matt Barrie, CEO Freelancer.com

AUSTRALIA'S 'DUMB LUCK' ABOUT TO RUN OUT WITH ECONOMY ON THE BRINK OF COLLAPSE

I RECENTLY watched the federal treasurer, Scott Morrison, proudly proclaim that Australia was in “surprisingly good shape”.

Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970.

I was pretty shocked at the complacency, because after twenty six years of economic expansion, the country has very little to show for it.

“For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour.”

That neighbour is China.

Out of all OECD nations, Australia is the most dependent on China by a huge margin, according to the IMF. Over one third of all merchandise exports from this country go to China – where ‘merchandise exports’ includes all physical products, including the things we dig out of the ground.

Outside of the OECD, Australia ranks just after the Democratic Republic of the Congo, Gambia and the Lao People’s Democratic Republic and just before the Central African Republic, Iran and Liberia. Does anything sound a bit funny about that?

“As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”

Unfortunately for Australia, that “lucky” free ride is just about to end.

Societe Generale’s China economist Wei Yao said recently, “Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses”. Hyaman Capital’s Kyle Bass calls China a “$34 trillion experiment” which is “exploding”, where Chinese bank losses “could exceed 400 per cent of the US banking losses incurred during the subprime crisis”.

A hard landing for China is a catastrophic landing for Australia, with horrific consequences to this country’s delusions of economic grandeur.

Delusions which are all unfolding right now as this quadruple leveraged bubble unwinds. What makes this especially dangerous is that it is unwinding in what increasingly looks like a global recession- perhaps even depression, in an environment where the US Federal Reserve (1.25%), Bank of Canada (1.0%) and Bank of England (0.25%) interest rates are pretty much zero, and the European Central Bank (0.0%), Bank of Japan (-0.10%), and Central Banks of Sweden (-0.50%) and Switzerland (-0.75%) are at zero or negative interest rates.

As a quick refresher of how we got here, after the Global Financial Crisis, and consequent recession hit in 2007 thanks to delinquencies on subprime mortgages, the US Federal Reserve began cutting the short-term interest rate, known as the ‘Federal Funds Rate’ (or the rate at which depository institutions trade balances held at Federal Reserve Banks with each other overnight), from 5.25 per cent to 0 per cent, the lowest rate in history.

When that didn’t work to curb rising unemployment and stop growth stagnating, central banks across the globe started printing money which they used to buy up financial securities in an effort to drive up prices. This process was called “quantitative easing” (“QE”), to confuse the average person in the street into thinking it wasn’t anything more than conjuring trillions of dollars out of thin air and using that money to buy things in an effort to drive their prices up.

Systematic buying of treasuries and mortgage bonds by central banks caused the face value of on those bonds to increase, and since bond yields fall as their prices rise, this buying had the effect of also driving long-term interest rates down to near zero.

In theory making money cheap to borrow stimulates investment in the economy; it encourages households and companies to borrow, employ more people and spend more money.

“An alternative theory for QE is that it encourages buying hard assets by making people freak out that the value of the currency they are holding is being counterfeited into oblivion.”

In reality, the ability to borrow cheap money was mainly used by companies to buy back their own shares, and combined with QE being used to buy stock index funds (otherwise known as exchange traded funds or “ETFs”), this propelled stock markets to hit record high after record high even though this wasn’t justified the underlying corporate performance.

Europe and Asia were dragged into the crisis, as major European and Asian banks were found holding billions in toxic debt linked to US subprime mortgages (more than 1 million US homeowners faced foreclosure). One by one, nations began entering recession and repeated attempts to slash interest rates by central banks, along with bailouts of the banks and various stimulus packages could not stymie the unfolding crisis. After several failed attempts at instituting austerity measures across a number of European nations with mounting public debt, the European Central Bank began its own QE program that continues today and should remain in place well into 2018.

In China, QE was used to buy government bonds which were used to finance infrastructure projects such as overpriced apartment blocks, the construction of which has underpinned China’s “miracle” economy. Since nobody in China could actually afford these apartments, QE was lent to local government agencies to buy these empty flats.

“Of course this then led to a tsunami of Chinese hot money fleeing the country and blowing real estate bubbles from Vancouver to Auckland as it sought more affordable property in cities whose air, food and water didn’t kill you.”

QE was only intended as a temporary emergency measure, but now a decade into printing and the central banks of the United States, Europe, Japan and China have now collectively purchased over US$19 trillion of assets. Despite the the lowest interest rates in 5,000 years, the global economic growth in response to this money printing has continued to be anaemic. Instead, this stimulus has served to blow asset bubbles everywhere.

So if one naively were looking at markets, particularly the commodity and resource driven markets that traditionally drive the Australian economy, you might well have been tricked into thinking that the world was back in good times again as many have rallied over the last year or so.

The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets.

This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg in a report entitled “The World’s Most Extreme Speculative Mania Unravels in China”.

Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016 — exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion.

While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps.

Steel, of course, is made from iron ore, Australia’s biggest export, and frequently the country’s main driver of a trade surplus and GDP growth.

Australia is the largest exporter of iron ore in the world, with a 29 per cent global share in 2015-16 and 786Mt exported, and at $48 billion we’re responsible for over half of all global iron ore exports by value. Around 81 per cent of our iron ore exports go to China.

Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50 per cent of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens.

In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Last January, China pledged “supply-side reforms” for its steel and coal sectors to reduce excessive production capacity. In 2016, capacity was cut by 6 per cent for steel and and 8 per cent for coal.

In the first half of 2017 alone, a further 120 million tonnes of low-grade steel capacity was ordered to close because of pollution. This represents 11 per cent of the country’s steel capacity and 15 pe rcent of annual output. While this will more heavily impact Chinese-mined ore than generally higher-grade Australian ore, Chinese demand for iron ore is nevertheless waning.

Over the last six years, the price of iron ore has fallen 60 per cent.

Australia’s second biggest export is coal, being the largest exporter in the world supplying about 38 per cent of the world’s demand. Production has been on a tear, with exports increasing from 261Mt in 2008 to 388Mt in 2016.

While exports increased by 49 per cent over that time period, the value of those exports has collapsed 38 per cent, from $54.7 billion to $34 billion.

Losing coal as an export will blow a $34 billion dollar per annum hole in the current account, and there’s been no foresight by successive governments to find or encourage modern industries to supplant it.

“What is more shocking is that despite the gargantuan amount of money that China has been pumping into the system since 2014, Australia’s entire mining industry – which is completely dependent on China – has struggled to make any money at all.”

Across the entire industry revenue has dropped significantly while costs have continued to rise.

According to the Australian Bureau of Statistics, in 2015-16 the entire Australian mining industry which includes coal, oil and gas, iron ore, the mining of metallic & non-metallic minerals and exploration and support services made a grand total of $179 billion in revenue with $171 billion of costs, generating an operating profit before tax of $7 billion which representing a wafer thin 3.9 per cent margin on an operating basis. In the year before it made a 8.4 per cent margin.

Collectively, the entire Australian mining industry (ex-services) would be loss making in 2016-17 if revenue continued to drop and costs stayed the same. Yes, the entire Australian mining industry.

Our “economic miracle” of 104 quarters of GDP growth without a recession today doesn’t come from digging rocks out of the ground, shipping the by-products of dead fossils and selling stuff we grow any more. Mining, which used to be 19 per cent of GDP, is now 6.8 per cent and falling. Mining has fallen to the sixth largest industry in the country. Even combined with agriculture the total is now only 10 per cent of GDP.

In the 1970s, Australia was ranked 10th in the world for motor vehicle manufacturing. No other industry has replaced it. Today, the entire output of manufacturing as a share of GDP in Australia is half of the levels where they called it “hollowed out” in the US and UK.

In Australia in 2017, manufacturing as a share of GDP is on par with a financial haven like Luxembourg. Australia doesn’t make anything anymore.

 

“With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed avocado.”

The Reserve Bank of Australia has cut interest rates by 325 basis points since the end of 2011, in order to stimulate the economy, but I can’t for the life of me see how that will affect the fundamental problem of gyrating commodity prices where we are a price taker, not a price maker, into an oversupplied market in China.

This leads me to my next question: where has this growth come from?

“Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other.”

A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, “upswings” last 13 years).

In 2016, 67 per cent of Australia’s GDP growth came from the cities of Sydney and Melbourne where both State and Federal governments have done everything they can to fuel a runaway housing market. The small area from the Sydney CBD to Macquarie Park is in the middle of an apartment building frenzy, alone contributing 24 per cent of the country’s entire GDP growth for 2016, according to SGS Economics & Planning.

According to the Rider Levett Bucknall Crane Index, in Q4 2017 between Sydney, Melbourne and Brisbane, there are now 586 cranes in operation, with a total of 685 across all capital cities, 80% of which are focused on building apartments. There are 350 cranes in Sydney alone.

By comparison, there are currently 28 cranes in New York, 24 in San Francisco and 40 in Los Angeles. There are more cranes in Sydney than Los Angeles (40), Washington DC (29), New York (28), Chicago (26), San Francisco (24), Portland (22), Denver (21), Boston (14) and Honolulu (13) combined. Rider Levett Bucknall counts less than 175 cranes working on residential buildings across the 14 major North American markets that it tracked in 3Q17, which is half of the number of cranes in Sydney alone.

According to UBS, around one third of these cranes in Australian cities are in postcodes with ‘restricted lending’, because the inhabitants have bad credit ratings.

This can only be described as completely “insane”.

That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe “one of the biggest housing bubbles in history”. “Australia”, he added, “is the only country we know of where middle-class houses are auctioned like paintings”.

Our Federal government has worked really hard to get us to this point.

Many other parts of the world can thank the Global Financial Crisis for popping their real estate bubbles. From 2000 to 2008, driven in part by the First Home Buyer Grant, Australian house prices had already doubled. Rather than let the GFC take the heat out of the market, the Australian Government doubled the bonus. Treasury notes recorded at the time say that it wasn’t launched to make housing more affordable, but to prevent the collapse of the housing market.

Already at the time of the GFC, Australian households were at 190 percent debt to net disposable income, 50 per cent more indebted than American households, but then things really went crazy.

“The government decided to further fuel the fire by “streamlining” the administrative requirements for the Foreign Investment Review Board so that temporary residents could purchase real estate in Australia without having to report or gain approval. It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?”

I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation – Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.

UBS estimates that $500 billion worth of “not completely factually accurate” mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.

The astronomical rise in house prices certainly isn’t supported by employment data. Wage growth (see graph below) is at a record low of just 1.9 per cent year on year in 2Q17, the lowest figure since 1988. The average Australian weekly income has gone up $27 to $1,009 since 2008, that’s about $3 a year.

Foreign buying driving up housing prices has been a major factor in Australian housing affordability, or rather unaffordability.

Urban planners say that a median house price to household income ratio of 3.0 or under is “affordable”, 3.1 to 4.0 is “moderately unaffordable”, 4.1 to 5.0 is “seriously unaffordable” and 5.1 or over “severely unaffordable”.

At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of “severely unaffordable”. Melbourne is 9.6x.

This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.

If you borrowed the whole amount to buy a house in Sydney, with a Commonwealth Bank Standard Variable Rate Home Loan currently showing a 5.36% comparison rate (as of 7th October 2017), your repayments would be $6,486 a month, every month, for 30 years. The monthly post tax income for the average wage in Sydney ($80,277.60) is only $5,081.80 a month.

In fact, on this average Sydney salary of $80,277.60, the Commonwealth Bank’s “How much can I borrow?” calculator will only lend you $463,000, and this amount has been dropping in the last year I have been looking at it. So good luck to the average person buying anything anywhere near Sydney.

Federal MP Michael Sukkar, Assistant Minister to the Treasurer, says surprisingly that getting a “highly paid job” is the “first step” to owning a home. Perhaps Mr Sukkar is talking about his job, which pays a base salary of $199,040 a year. On this salary, the Commonwealth Bank would allow you to just borrow enough- $1,282,000 to be precise- to buy the average home, but only provided that you have no expenses on a regular basis, such as food. So the Assistant Minister to the Treasurer can’t really afford to buy the average house, unless he tells a porky on his loan application form.

The average Australian is much more likely to be employed as a tradesperson, school teacher, postman or policeman. According to the NSW Police Force’s recruitment website, the average starting salary for a Probationary Constable is $65,000 which rises to $73,651 over five years. On these salaries the Commonwealth Bank will lend you between $375,200 and $419,200 (again provided you don’t eat), which won’t let you buy a house really anywhere.

Unsurprisingly, the CEOs of the Big Four banks in Australia think that these prices are “justified by the fundamentals”. More likely because the Big Four, who issue over 80 per cent of residential mortgages in the country, are more exposed as a percentage of loans than any other banks in the world, over double that of the US and triple that of the UK, and remarkably quadruple that of Hong Kong, which is the least affordable place in the world for real estate. Today, over 60 per cent of the Australian banks’ loan books are residential mortgages. Houston, we have a problem.

It’s actually worse in regional areas where Bendigo Bank and the Bank of Queensland are holding huge portfolios of mortgages between 700 to 900 per cent of their market capitalisation, because there’s no other meaningful businesses to lend to.

“I’m not sure how the fundamentals can possibly be justified when the average person in Sydney can’t actually afford to buy the average house in Sydney, no matter how many decades they try to push the loan out.”

Indeed Digital Finance Analytics estimated in a October 2017 report that 910,000 households are now estimated to be in mortgage stress where net income does not covering ongoing costs. This has skyrocketed up 50 per cent in less than a year and now represents 29.2 per cent of all households in Australia. Things are about to get real.

It’s well known that high levels of household debt are negative for economic growth, in fact economists have found a strong link between high levels of household debt and economic crises.

This is not good debt, this is bad debt. It’s not debt being used by businesses to fund capital purchases and increase productivity. This is not debt that is being used to produce, it is debt being used to consume. If debt is being used to produce, there is a means to repay the loan.

If a business borrows money to buy some equipment that increases the productivity of their workers, then the increased productivity leads to increased profits, which can be used to service the debt, and the borrower is better off. The lender is also better off, because they also get interest on their loan. This is a smart use of debt. Consumer debt generates very little income for the consumer themselves. If consumers borrow to buy a new TV or go on a holiday, that doesn’t create any cash flow. To repay the debt, the consumer generally has to consume less in the future.

Further, it is well known that consumption is correlated to demographics, young people buy things to grow their families and old people consolidate, downsize and consume less over time. As the aging demographic wave unfolds across the next decade there will be significantly less consumers and significantly more savers. This is worsened as the new generations will carry the debt burden of student loans, further reducing consumption.

So why are governments so keen to inflate housing prices?

The government loves Australians buying up houses, particularly new apartments, because in the short term it stimulates growth – in fact it’s the only thing really stimulating GDP growth.

Australia has around $2 trillion in unconsolidated household debt relative to $1.6 trillion in GDP, making this country in recent quarters the most indebted on this ratio in the world. According to Treasurer Scott Morrison 80 per cent of all household debt is residential mortgage debt. This is up from 47 per cent in 1990.

Australia’s household debt servicing ratio (DSR) ties with Norway as the second worst in the world. Despite record low interest rates, Australians are forking out more of their income to pay off interest than when we had record mortgage rates back in 1989-90 which are over double what they are now.

“Everyone’s too busy watching Netflix and cash strapped paying off their mortgage to have much in the way of any discretionary spending. No wonder retail is collapsing in Australia.”

Governments fan the flame of this rising unsustainable debt fuelled growth as both a source of tax revenue and as false proof to voters of their policies resulting in economic success. Rather than modernising the economy, they have us on a debt fuelled housing binge, a binge we can’t afford.

We are well past overtime, we are into injury time. We’re about to have our Minsky moment: “a sudden major collapse of asset values which is part of the credit cycle.”

Such moments occur because long periods of prosperity and rising valuations of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values.

Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

Today 42 per cent of all mortgages in Australia are interest only, because since the average person can’t afford to actually pay for the average house- they only pay off the interest. They’re hoping that value of their house will continue to rise and the only way they can profit is if they find some other mug to buy it at a higher price. In the case of Westpac, 50 per cent of their entire residential mortgage book is interest only loans.

And a staggering 64 per cent of all investor loans are interest only.

 

“This is rapidly approaching ponzi financing. This is the final stage of an asset bubble before it pops.”

Today residential property as an asset class is four times larger than the sharemarket. It’s illiquid, and the $1.5 trillion of leverage is roughly equivalent in size to the entire market capitalisation of the ASX 200. Any time there is illiquidity and leverage, there is a recipe for disaster – when prices move south, equity is rapidly wiped out precipitating panic selling into a freefall market with no bids to hit.

The risks of illiquidity and leverage in the residential property market flow through the entire financial system because they are directly linked; today in Australia the Big Four banks plus Macquarie are roughly 30 per cent of the ASX200 index weighting. Every month, 9.5 per cent of the entire Australian wage bill goes into superannuation, where 14 per cent directly goes into property and 23 per cent into Australian equities – of which 30 per cent of the main equity benchmark is the banks.

In 2015-16 there were 40,149 residential real estate applications from foreigners valued at over $72 billion in the latest data by FIRB. This is up 244 per cent by count and 320 per cent by value from just three years before.

Even more shocking, in the month of January 2017, the number of first home buyers in the whole of New South Wales was 1,029 – the lowest level since mortgage rates peaked in the 1990s. Half of those first home buyers rely upon their parents for equity.

This brings me onto Australia’s third largest export which is $22 billion in “education-related travel services”. Ask the average person in the street, and they would have no idea what that is and, at least in some part, it is an $18.8 billion dollar immigration industry dressed up as “education”. You now know what all these tinpot “english”, “IT” and “business colleges” that have popped up downtown are about. They’re not about providing quality education, they are about gaming the immigration system.

In 2014, 163,542 international students commenced English language programmes in Australia, almost doubling in the last 10 years. This is through the booming ELICOS (English Language Intensive Courses for Overseas Students) sector, the first step for further education and permanent residency.

This whole process doesn’t seem too hard when you take a look at what is on offer. While the federal government recently removed around 200 occupations from the Skilled Occupations List, including such gems as Amusement Centre Manager (149111), Betting Agency Manager (142113), Goat Farmer (121315), Dog or Horse Racing Official (452318), Pottery or Ceramic Artist (211412) and Parole Officer (411714) – you can still immigrate to Australia as a Naturopath (252213), Baker (351111), Cook (351411), Librarian (224611) or Dietician (251111).Believe it or not, up until recently we were also importing Migration Agents (224913).

You can’t make this up. I simply do not understand why we are importing people to work in relatively unskilled jobs such as kitchen hands in pubs or cooks in suburban curry houses.

At its peak in October 2016, before the summer holidays, there were 486,780 student visa holders in the country, or 1 in 50 people in the country held a student visa. The grant rate in 4Q16 for such student visa applications was 92.3 per cent. The number one country for student visa applications by far was, you guessed it, China.

While some of these students are studying technical degrees that are vitally needed to power the future of the economy, a cynic would say that the majority of this program is designed as a crutch to prop up housing prices and government revenue from taxation in a flagging economy. After all, it doesn’t look that hard to borrow 90 per cent of a property’s value from Australian lenders on a 457 visa. Quoting directly from one mortgage lender, “you’re likely to be approved if you have at least a year on your visa, most of your savings already in Australia and you have a stable job in sought after profession” – presumably as sought after as an Amusement Centre Manager. How much the banks will be left to carry when the market turns and these students flee the burden of negative equity is anyone’s guess.

In a submission to a senate economics committee by Lindsay David from LF Economics, “We found 21 Australian lending institutions where there is evidence of people’s loan application forms being fudged”.

The ultimate cost to the Australian taxpayer is yet to be known. However the situation got so bad that the RBA had to tell the Big Four banks to cease and desist from all foreign mortgage lending without identified Australian sources of income.

Ken Sayer, Chief Executive of non-bank Mortgage House said “It is much bigger than everyone is making it out to be. The numbers could be astronomical”.

“So we are building all these dwellings, but they are not for new Australian home owners. We are building these dwellings to be the new Swiss Bank account for foreign investors.”

Foreign investment can be great as long as it flows into the right sectors. Around $32 billion invested in real estate was from Chinese investors in 2015-16, making it the largest investment in an industry sector by a country by far. By comparison in the same year, China invested only $1.6 billion in our mining industry. Last year, 20 times more more money flowed into real estate from China than into our entire mineral exploration and development industry. Almost none of it flows into our technology sector.

“The total number of FIRB approvals from China was 30,611. By comparison. The United States had 481 approvals.”

Foreign investment across all countries into real estate as a whole was the largest sector for foreign investment approval at $112 billion, accounting for around 50% of all FIRB approvals by value and 97% by count across all sectors – agriculture, forestry, manufacturing, tourism – you name it in 2015-16.

In fact it doesn’t seem that hard to get FIRB approval in Australia, for really anything at all. Of the 41,450 applications by foreigners to buy something in 2015-16, five were rejected. In the year before, out of 37,953 applications zero were rejected. Out of the 116,234 applications from 2012 to 2016, a total of eight were rejected.

According to Credit Suisse, foreigners are acquiring 25 per cent of newly completed housing supply in NSW, worth a total of $39 billion.

In some circumstances, the numbers however could be much higher. Lend Lease, the Australian construction goliath with over $15 billion in revenue in 2016, stated in that year’s annual report that over 40% of Lend Lease’s apartment sales were to foreigners.

“I wouldn’t have a problem with this if it weren’t for the fact that this is all a byproduct of central bank madness, not true supply and demand, and people vital for running the economy can’t afford to live here any more.”

What is also remarkable about all of this is that technically, the Chinese are not allowed to send large sums of money overseas. Citizens of China can normally only convert US$50,000 a year in foreign currency and have long been barred from buying property overseas, but those rules have not been enforced. They’ve only started cracking down on this now.

Despite this, up until now, Australian property developers and the Australian Government have been more than happy to accommodate Chinese money laundering.

After the crackdown in capital controls, Lend Lease says there has been a big upswing with between 30 to 40% of foreign purchases now being cash settled. Other developers are reporting that some Chinese buyers are paying 100% cash. The laundering of Chinese cash into property isn’t unique to Australia, it’s just that Transparency International names Australia, in their March 2017 report as the worst money laundering property market in the world.

Australia is not alone, Chinese “hot money” is blowing gigantic property bubbles in many other safe havens around the world.

“But combined with our lack of future proof industries and exports, our economy is completely stuffed. And it’s only going to get worse unless we make a major transformation of the Australian economy.”

Instead of relying on a property bubble as pretense that our economy is strong, we need serious structural change to the composition of GDP that’s substantially more sophisticated in terms of the industries that contribute to it.

Australia’s GDP of $1.6 trillion is 69 per cent services. Our “economic miracle” of GDP growth comes from digging rocks out of the ground, shipping the by-products of dead fossils, and stuff we grow. Mining, which used to be 19 per cent, is now 7 per cent and falling. Combined, the three industries now contribute just 12 per cent of GDP thanks to the global collapse in commodities prices.

If you look at businesses as a whole, Company tax hasn’t moved from $68 billion in the last three years – our companies are not making more profits. This country is sick.

Indeed if you look at the budget, about the only thing going up in terms of revenue for the federal government are taxes on you having a good time – taxes on beer, wine, spirits, luxury cars, cigarettes and the like. It would probably shock the average person on the street to discover that the government collects more tax from cigarettes ($9.8 billion) than it collects from tax on superannuation ($6.8 billion), over double what it collects from Fringe Benefits Tax ($4.4 billion) and over thirteen times more tax than it does from our oil fields ($741 million).

But instead of thinking of intelligent ways to grow the economy, the focus is purely on finding more ways to tax you.

Here’s a crazy idea: the dominant government revenue line is income tax. Income tax is generated from wages. Education has always been the lubricant of upward mobility, so perhaps if we find ways to encourage our citizens to study in the right areas – for example science & engineering – then maybe they might get better jobs or create better jobs and ultimately earn higher wages and pay more tax.

Instead the government proposed the biggest cuts to university funding in 20 years with a new “efficiency dividend” cutting funding by $1.2 billion, increasing student fees by 7.5 percent and slashing the HECS repayment threshold from $55,874 to $42,000. These changes would make one year of postgraduate study in Electrical Engineering at the University of New South Wales cost about $34,000.

We should be encouraging more people into engineering, not discouraging them by making their degrees ridiculously expensive. In my books, the expected net present value of future income tax receipts alone from that person pursuing a career in technology would far outweigh the short sighted sugar hit from making such a degree more costly – let alone the expected net present value of wealth creation if that person decides to start a company. The technology industry is inherently entrepreneurial, because technology companies create new products and services.

Speaking of companies, how about as a country we start having a good think about what sorts of industries we want to have a meaningful contribution to GDP in the coming decades?

For a start, we need to elaborately transform the commodities we produce into higher end, higher margin products. Manufacturing contributes 5 per cent to GDP. In the last 10 years, we have lost 100,000 jobs in manufacturing. Part of the problem is that the manufacturing we do has largely become commoditised while our labour force remains one of the most expensive in the world. This cost is further exacerbated by our trade unions – in the case of the car industry, the government had to subsidise the cost of union work practices, which ultimately failed to keep the industry alive. So if our people are going to cost a lot, we better be manufacturing high end products or using advanced manufacturing techniques otherwise other countries will do it cheaper and naturally it’s all going to leave.

Last year, for example, 30.3 per cent of all manufacturing jobs in the textile, leather, clothing & footwear industries were lost in this country. Yes, a third. People still need clothes, but you don’t need expensive Australians to make them, you can make them anywhere.

“That’s why we need to seriously talk about technology, because technology is the great wealth and productivity multiplier. However the thinking at the top of government is all wrong.”

The largest four companies by market capitalisation globally as of the end of Q2 2017 globally were Apple, Alphabet, Microsoft and Amazon. Facebook is eight. Together, these five companies generate over half a trillion dollars in revenue per annum. That’s equivalent to about half of Australia’s entire GDP. And many of these companies are still growing revenue at rates of 30 per cent or more per annum.

These are exactly the sorts of companies that we need to be building.

With our population of 24 million and labour force of 12 million, there’s no other industry that can deliver long term productivity and wealth multipliers like technology.

“Today Australia’s economy is in the stone age. Literally. “By comparison, Australia’s top 10 companies are a bank, a bank, a bank, a mine, a bank, a biotechnology company (yay!), a conglomerate of mines and supermarkets, a monopoly telephone company, a supermarket and a bank.”

We live in a monumental time in history where technology is remapping and reshaping industry after industry – as Marc Andreessen said “Software is eating the world!” – many people would be well aware we are in a technology gold rush.

And they would be also well aware that Australia is completely missing out.

Most worrying to me, the number of students studying information technology in Australia has fallen by between 40 and 60 per cent in the last decade depending on whose numbers you look at. Likewise, enrollments in other hard sciences and STEM subjects such as maths, physics and chemistry are falling too. Enrolments in engineering have been rising, but way too slowly.

This is all while we have had a 40 per cent increase in new undergraduate students as a whole.

Women once made up 25 percent of students commencing a technology degree, they are now closer to 10 percent.

All this in the middle of a historic boom in technology. This situation is an absolute crisis. If there is one thing, and one thing only that you do to fix this industry, it’s get more people into it. To me, the most important thing Australia absolutely has to do is build a world class science & technology curriculum in our K-12 system so that more kids go on to do engineering.

In terms of maths & science, the secondary school system has declined so far now that the top 10% of 15-year olds are on par with the 40-50% band of of students in Singapore, South Korea and Taiwan.

For technology, we lump a couple of horrendous subjects about technology in with woodwork and home economics. In 2017, I am not sure why teaching kids to make a wooden photo frame or bake a cake are considered by the department of education as being on par with software engineering. Yes there is a little bit of change coming, but it’s mostly lip service.

Meanwhile, in Estonia, 100% of publicly educated students will learn how to code starting at age 7 or 8 in first grade, and continue all the way to age 16 in their final year of school.

At my company, Freelancer.com, we’ll hire as many good software developers as we can get. We’re lucky to get one good applicant per day. On the contrary, when I put up a job for an Office Manager, I received 350 applicants in 2 days.

But unfortunately the curriculum in high school continues to slide, and it pays lip service to technology and while kids would love to design mobile apps, build self-driving cars or design the next Facebook, they come out of high school not knowing that you can actually do this as a career.

I’ve come to the conclusion that it’s actually all too hard to fix – and I came to this conclusion a while ago as I was writing some suggestions for the incoming Prime Minister on technology policy. I had a good think about why we are fundamentally held back in Australia from major structural change to our economy to drive innovation.

I kept coming back to the same points.

The problems we face in terraforming Australia to be innovative are systemic, and there is something seriously wrong with how we govern this country. There are problems throughout the system, from how we choose the Prime Minister, how we govern ourselves, how we make decisions, all the way through.

For a start, we are chronically over governed in this country. This country has 24 million people. It is not a lot. By comparison my website has about 26 million registered users. However this country of 24 million people is governed at the State and Federal level by 17 parliaments with 840 members of parliament. My company has a board of three and a management team of a dozen.

Half of those parliaments are supposed to be representatives directly elected by the people. Frankly, you could probably replace them all with an iPhone app. If you really wanted to know what the people thought about an issue, technology allows you to poll everyone, everywhere, instantly. You’d also get the results basically for free. I’ve always said that if Mark Zuckerberg put a vote button inside Facebook, he’d win a Nobel Peace Prize. Instead we waste a colossal $122 million on a non-binding plebiscite to ask a yes/no question on same sex marriage that shouldn’t need to be asked in the first place, because those that it affects would almost certainly want it, and those that it doesn’t affect should really butt out and let others live their lives as they want to.

Instead these 840 MPs spend all day jeering at each other and thinking up new legislation to churn out. Last year the Commonwealth parliament alone spewed out 6,482 pages of legislation, adding to over 100,000 pages already enacted. That’s not even looking at State Governments.

“What about trying to attract more senior people to Sydney? I’ll tell you what my experience was like trying to attract senior technology talent from Silicon Valley.”

I called the top recruiter for engineering in Silicon Valley not so long ago for Vice President role. We are talking a top role, very highly paid. The recruiter that placed the role would earn a hefty six figure commission. This recruiter had placed VPs at Twitter, Uber, Pinterest.

The call with their principal lasted less than a minute “Look, as much as I would like to help you, the answer is no. We just turned down [another billion dollar Australian technology company] for a similar role. We tried placing a split role, half time in Australia and half time in the US. Nobody wanted that. We’ve tried in the past looking, nobody from Silicon Valley wants to come to Australia for any role. We used to think maybe someone would move for a lifestyle thing, but they don’t want to do that anymore.

“It’s not just that they are being paid well, it’s that it’s a backwater and they consider it as two moves they have to move once to get over there but more importantly when they finish they have to move back and it’s hard from them to break back in being out of the action.

“I’m really sorry but we won’t even look at taking a placement for Australia”.

We have serious problems in this country. And I think they are about to become very serious. We are on the wrong trajectory.

I’ll leave you now with one final thought.

Harvard University created something called the Economic Complexity Index. This measure ranks countries based upon their economic diversity- how many different products a country can produce – and economic ubiquity – how many countries are able to make those products.

Where does Australia rank on the global scale?

Worse than Mauritius, Macedonia, Oman, Moldova, Vietnam, Egypt and Botswana.

Worse than Georgia, Kuwait, Colombia, Saudi Arabia, Lebanon and El Salvador.

Sitting embarrassingly and awkwardly between Kazakhstan and Jamaica, and worse than the Dominican Republic at 74 and Guatemala at 75.

“Australia ranks off the deep end of the scale at 77th place. 77th and falling. After Tajikistan, Australia had the fourth highest loss in Economic Complexity over the last decade, falling 18 places.”

Thirty years ago, a time when our Economic Complexity ranked substantially higher, these words rocked the nation:

“We took the view in the 1970s it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through In the 1970s we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems Then you are gone. You are a banana republic.”

Looks like Paul Keating was right.

The national conversation needs to change, now.

(This is an edited version of Matt Barrie’s “House of Cards” opinion feature and was co-authored with Craig Tindale)