How collective intelligence can change your world, right now

21 09 2019

Published by INSURGE INTELLIGENCE, and written by my favourite journalist Nafeez Ahmed, a crowdfunded investigative journalism project for people and planet. Please support them to keep digging where others fear to tread.

INSURGE INTELLIGENCE is the only newsfeed I actually pay for, so hopefully they won’t get upset with me republishing this outstanding article…

So you want to change the world. Then grab a drink, sit down, and buckle up for a deep dive into the dynamics of system transformation. The system out there that you’re fighting is inside you. We cannot defeat it in the world until we rewire ourselves from the ground up. It’s not easy. It’s the hardest thing we’ve ever done, because it cuts across all dimensions of our life, and to the deepest recesses of our being. Because we are products of the system, until we choose not to be. But that choice, that red pill, is a lot more difficult to swallow than we might assume. It requires becoming more than what we think we are; and empowering others to do the same. The trajectory of this document is not an easy journey, not least because it’s one I’m still on. It’s dense, demanding and disciplining. Think of it as a collection of field notes attempting to distill some of the most important tools I’ve stumbled upon. The concepts, ideas and narrative that unfold below develop the foundations of a knowledge framework, a way of being, and a practice that draws on everything I’ve learned and developed as a journalist, an academic, a systems theorist, a social entrepreneur, an organisational strategist, a communications executive, a change activist, a husband, a dad, a brother, a son, a friend, an enemy, and a human being who along with some successes makes many mistakes and fails numerous times, but endeavours to learn from my mistakes and failings. This is still merely a preliminary work, which of course draws widely on and integrates the pioneering works of others. There are also gaps, and so it goes without saying that any errors, mistakes or oversights are mine and mine alone. I hope that it can help you in your own journey as a fellow traveller on spaceship earth, even if only in some small way.


We face a convergence of escalating, interlinked crises. Every day, as these crises accelerate, the capacity to address them meaningfully seems to diminish. Not only are our institutions largely incapable of understanding how these crises fit together as symptoms of a deeper overarching systemic crisis, they are increasingly overwhelmed by their impacts.

We find ourselves at the threshold of a civilisational crisis – an evolutionary crisis – the likes of which we have never experienced before, one which potentially threatens the very survival of the human species. Even without that, the mounting pressures in the form of environmental destruction, the prevalence of war, the risks of nuclear annihilation, escalating inequalities, rising xenophobia, increasing authoritarianism, dangers to supply chains, volatile markets, epidemics of mental illness, gun violence, violence against women, all represent at once flaws in our current paradigm, and opportunities to move beyond it.

These crises escalate and deepen at all scales – global, regional, national, local. They impact on us through myriad ways, on our governments, our intergovernmental organisations, our nations, our societies, our communities, our cultures, our businesses, our companies, our nonprofits, our social enterprises, our selves, our bodies, our minds, our hearts, our spirits.

And so we face an evolutionary moment: we either succumb to the converging catastrophes of civilisational decline, or we grasp an opportunity to transcend them by adapting new capacities and behaviours, that allow us to become more than what we were.

In order to respond effectively, we need an entirely different approach. This document offers a systems approach derived from my own work and experiences to articulate a way of approaching these crises through the lens of ‘collective intelligence’. It sets out a fresh way of seeing things, and an accompanying set of processes and practices, which can be adopted by any person or group, whether an individual, a family, company or organisation. It is an applied toolkit, written as a foundational resource and roadmap for anyone who is truly serious about wanting to work for a better world. If you’re not into that, this document is not for you.

Many of the themes explored here could be explained and elaborated further – and I’ll be doing exactly that in future. Many of them can be implemented in different ways – through innovative approaches to digital platforms, through journalism, through entrepreneurship, through charity and philanthropy, through organisational strategy, through mindfulness, self-development and beyond. But the upshot is that they revolve around human practice – at root, this is something that at core you have to do in your own life.

I begin by mapping out a broad systems paradigm for how we can make sense of the world around us anew in a way that captures the complexity of what is happening. I will then move into how this systems paradigm provides useful insights into the nature of intelligence and wisdom, and how those insights can be distilled into a new way of cultivating intelligence and translating that intelligence into concrete transformative actions.

1. Who we are

We are systems. To be more precise, we are complex adaptive systems.

system exists whenever multiple things exist in some sort of interrelationship with the others.

complex system exists when the relations between these things lead the system as a whole to display patterns of behaviour that are qualitatively beyond and can’t be reduced to the properties of its component parts.

complex adaptive system exists when the system as a whole is able to restructure, change – adapt – by changing the behaviour of its component parts, in order to survive.

A biological organism is a complex adaptive system. Millions of years of evolution have taken place because complex living systems were able to adapt to their environment. One of the ways they did this is by processing information from their environment and translating it through genetic mutations. The organisms that did this successfully had the greatest chance of adapting to their environment and surviving. The survival and evolution of the human species — of human civilisation — is, of course, more than just a case of generating the right set of genetic mutations. That’s because we make choices about how we organise our societies.

When a complex adaptive system is particularly challenged by its environmental conditions, it enters a stage of crisis. The crisis challenges the existing structures, the existing relationships, and patterns of behavior in a system.

If the crisis intensifies, it can reach a threshold that can undermine the integrity of the whole system. Eventually, either the system adapts by restructuring, leading to a ‘phase-shift’ into a new system, a new stable equilibrium — or it regresses.

One of the important things we do as living organisms is extract energy from our environment, which is then processed to fuel our activity. An important distinction we have with most other biological organisms is that due to our intelligence, we are capable of engaging with our environment in a quite unique way. This involves manipulating things in our environment to develop new tools which provide more efficient ways of extracting and harnessing energy to develop various structures and activities that serve our needs and wants.

An important feature of human civilisation is that its growth has been enabled by this capacity to extract increasing quantities of surplus energy – energy that is not needed to extract energy itself, but which can therefore be used for other services.

We are biological organisms which, simultaneously, are coextensive with psychological, social and spiritual experiences – that is, carrying mental lives, thoughts and memories in a social context where we make decisions and judgements based on our interpretation of the ‘values’ of ‘right’ and ‘wrong’, ‘good’ and ‘bad’.

We are also integrally interconnected with each other and other species through a complex web of life that comprises, in its entirety, the Earth System – or, drawing on chemist James Lovelock, Gaia, an amazing self-regulatory natural system which is finely-tuned for the support of life as we know it.

Going further, we also now know that on the level of fundamental particles, we and the entire universe are (meta?)physically interconnected across spacetime through quantum entanglement in a way that we still do not fully understand; and that the act of observation by measurement plays a fundamental role in the manifestation of what is real. In short, there has already been a paradigm shift in our scientific understanding of the world but relatively few are aware of it, let alone have explored its ramifications.

Evolutionary biology and the life-cycles of multiple human civilisations through history teach us that at the core of the capacity to survive is a fundamental capability: the capability to evolve on the basis of accurate sensing-making toward the environment.

While we have many disagreements about the behavioural component of moral values, we generally are incapable of operating without reference to them in some way. We tend to make decisions based on what we consider to be ‘right’ or ‘good’.

It is now clear, however, that dominant moral behavioural categories associated with the prevailing paradigm of social organisation are dysfunctional. They are in fact reflective of behavioural patterns which are contributing directly not just to the destabilisation and destruction of civilisation, along with the extinction of multiple species, but potentially to the very annihilation of the human species itself.

If we take a moral or ethical value to be indicative of a particular mode or pattern of behaviour, we can conclude from our current civilisational predicament that the predominant value-system premised on self-maximisation through endless material accumulation is fundamentally flawed, out of sync with reality, and objectively counterproductive. Conversely, values we might associate with more collaborative and cooperative behaviours appearing to recognise living beings as interconnected, such as love, generosity and compassion (entailing behavioural patterns in which self-maximisation and concern for the whole are seen as complementary rather than conflictual), would appear to have an objective evolutionary function for the human species.

This gives us a clue as to how more optimal behavioural patterns would appear to align with ethical values. More specifically, though, the key to evolutionary adaptation through new more ethical behavioural patterns is accessing information about our environment with direct ramifications for our behaviour.

Evolutionary adaptations occur on the basis of new behaviours and capacities that emerge from new genetic mutations. Genetic mutations are carriers of highly complex new information. But they can only produce the most useful information for adaptations if they reflect and adapt to challenges that emerge in the natural environment.

An organism that fails to coherently translate complex information about its environment into appropriate physical adaptations cannot evolve to meet circumstances, and will therefore be unable to survive as pressure escalates.

The first insight we can take away from this is that successful evolution cannot occur without processing accurate information from and about one’s relationship with the natural environment.

This has particularly profound implications when applied to human beings.

The human species is the only one on the planet capable of consciously adopting entirely different modes and patterns of behaviour based on our understanding of ourselves and the natural world. This conscious capability, which we might see as a core feature of human intelligence, has allowed human beings to develop a wide array of tools which extract and apply surplus energy to rapidly exert increasing dominion over the natural world over centuries, culminating in the civilisational system that exists today.

This in turn leads to the following insight: the goal of behavioural adaptation requires us to remain open to relevant new information – information that is relevant to our evolution, which can aid in our adaptations and help us avoid catastrophes that hinder our evolution.

Just as each human being is a complex adaptive system on a micro scale, different collectives of the human species whether groups, institutions and organisations are wider complex adaptive systems, all of which function as sub-systems of the macro complex adaptive system that is global human civilisation as a whole.

There is therefore an indelible interconnection between each human being and the wider global system of which they are part. Macro structures in the global civilisational system emerge from the patterns of behaviour that occur at sub-systemic (regional and national) and micro (individual) scales. In turn, those macro structures constrain and configure those patterns.

In a very real sense, then, what happens in the world ‘out there’ is not entirely separate and distinct from what happens ‘in here’ within the individual. To some extent, what is going on ‘out there’ no matter how seemingly distant or abhorrent is likely to be reflective of processes that individuals experience in themselves and in their own lives – and vice versa. Incoherencies at the global level are likely to find counterparts at regional, national and individual levels.

When we see incoherence in the world, it may well reflect or refract in some way our own incoherencies – no matter how much we might ostensibly dislike or be opposed to them.

2. Intelligence and decision-making

In order to survive and thrive, human beings need to be able to adapt to environmental change. In today’s complex global civilisation, adapting to environmental change entails adapting a wide range of social, economic, political and cultural processes, all of which are embedded in a deeper context of energy and environmental systems.

This, further, requires that we develop analytical and empathic capabilities to process information in such a way that we can separate out inaccurate, useless, dysfunctional and maladaptive information, from accurate, useful, functional and adaptive information.

In short, making sound, healthy decisions is impossible without being able to process information relevant to those decisions.

The key lesson is that full, accurate and holistic information is critical for any individual, organisation or society in order to adapt to its changing environment, survive, and thrive. The function of intelligence here is clear: wisdom – to engage with one’s environment in all its stunning complexity; to enable decision-making that underpins behavioural adaptations to that environment.

2.1 The prevalent cognitive-behavioural model: closed loops

In the twenty-first century context of modern industrial civilisation, the volume of data being produced and shared has dramatically increased, but little of this is translated into meaningful knowledge about the world that is useful and actionable.

The inability to process this avalanche of complex information into insights about the world with clear implications for action is potentially fatal, as it means the ability to adapt to real-world conditions is greatly diminished.

In the twentieth century, information flows were far more centralised, largely dominated by media and publishing conglomerates. Information flows were primarily top-down and hierarchical. While quality standards were often more stringent, well-defined and consistently applied, information was often biased by being indelibly configured by dominant structures of power.

In the twenty-first century model that has emerged in the era of Big Data and social platforms, the information playing field has transformed. While centralised fulcrums of information production still exist, they are weakening in their reach. Simultaneously, new decentralised mechanisms for the production and dissemination of information have become ubiquitous. Although decentralised in their reach, these platforms are also still subject to tightly networked concentric circles of power.

Overwhelmed by cognitive biases, humans tend to gravitate toward information flows which confirm their existing beliefs and practices. Consequently, information flows have become increasingly polarised as communities form around disparate bubbles of self-reinforcing ideological opinion, and there is no mechanism to integrate the insights across these different ideology sub-sets.

This has created festering bubbles of polarised ideology, undermining any capacity for collective intelligence. Often we like to think that we are beyond such limitations, but this is a delusion. Avoiding the constraints of ideological bias is a practice that requires constant vigilance and a strategic approach to information.

It is becoming more widely recognised that the prevailing model of information perpetuates closed loops of information that are often mutually-exclusive. This actually inhibits the capacity to receive new information.

Large incoming volumes of new information end up being processed through pre-existing closed loops, thus reinforcing the same longstanding biases and preconceptions. With no new information coming in, the ability to understand the real complexity of the world as a whole system largely evaporates.

Most media outlets do not really understand the world because they see it through a specific set of lenses, biases, or perspectives. As such the information they produce is either fragmented, confusing and overwhelming; or it is sifted through the slant of an ideological framework which consistently prefigures the outlook into the same suite of beliefs and values.

There is, consequently, a diminished capacity to grasp how particular events or incidents can have indelible impacts on other issues; on how they emerge from deeper forces and trends; and on how they are likely to impact in terms of new forces and trends.

In the end, rather than empowering people, organisations, companies or governments to take productive action in the world, the prevailing information model tends to swamp them with a sense of only two cognitive states: complete disorientation or ideological bias.

Often, the cognitive state will switch between these modes, back and forth, in a self-reinforcing fashion. Disorientation is met with a reliance on old, comfortable ideological attachments tied to familiar behavioural responses. When those fail, disorientation sets in again, until those attachments can be brought to the surface or reconstructed in a repackaged way.

News consumers often have little choice but to react in the short-term to news stimuli framed by narrow ideology or opinion. This leaves policy makers, business leaders, citizens and change activists on the perpetual back-foot, always reacting, always struggling to catch up, always behind the curve.

Reading this, you might be tempted to focus on seeing how these negative dynamics play out in organisations, consultative agencies, political parties, governments, nonprofits and companies that you believe are problematic. But while important, that’s easy. More immediately impactful, and essential before doing the former, is to discern how these dynamics play out in organisations, networks and groups that you support, or with which you’re affiliated.

If you do this properly, you will begin to see how not only those you support, but you yourself, engage in practices and behavioural patterns which reinforce closed information loops.

In turn, you will be able to see that it is such closed information loops that are responsible for negative and self-defeating cycles of behaviour which do not change, and are incapable of change.

These closed loops of information and fixed behavioural patterns are part of the same matrix of dysfunction – whether in your own mind, family, community, business or society.

3. The evolutionary model: open nodes of engagement

Those of us who retain some commitment to being the best that we can be, to the human species, and all species on earth surviving and thriving together, are required to explore different approaches.

Those approaches, to succeed, will need to involve the following features.

3.1 Discerning the known

We require from the outset a rigorous sense-making system designed to discern fact from falsehood. This requires grounding all our sense-making efforts quite consciously in an axiomatic logic system. This doesn’t have to be an explicit, visible process, though that might help – but it does need to be systematic.

An axiomatic logic system entails applying a logico-deductive method to test our own assumptions and beliefs against our experiences of the world. That requires establishing a clear sense of what our incoming data-points are, both internally and externally, to set out the factual basis and assumptions that underlie our beliefs. Behind every argument or position we hold, are the assumptions we make. By bringing them to the surface, we demand of ourselves that we do our best to validate these assumptions in real data, so that our assumptions are either irrefutably true in a logical sense or empirically-validated; and if we can’t validate them, then we become empowered to acknowledge this and respond accordingly. Ideally, we want to get to a point where our core assumptions about the world are irrefutably true from a logical point of view or empirically-validated.

In the past, we have found it helpful to refer to these data-points as ‘axioms’ (drawing on the work of early Greek mathematicians); to refer to the new information that emerges from analysis of these axioms as ‘insights’; and to then draw on these insights to scope out the possibilities for ‘actions’.

This tripartite structure in short seeks to identify what we really know, separate it out from what we don’t know or realise to be false; leverage this knowledge across the whole ‘system of systems’ to develop new insights into the system; and leverage these new insights – new knowledge – to develop a new framework to support sound decisions for adaptive action in the world.

In the same vein, we want to ensure that we develop new information about the world on the basis of systemic and holistic analysis of these axioms. That requires an approach that seeks to avoid common cognitive errors, such as making generalisations, false inferences, unjustified analogies, and other fallacies often associated with cognitive bias. As much as possible, we will want to ensure that our new insights about the world are framed so that they fit as closely as possible the axiomatic data-points that we are collecting.

Does a theory or inference have real backing in empirical data?

Does the data specifically and wholly back the inference or only partially?

Is there added speculation and assumption in deriving the inference, assumption that is not fully grounded in the available data?

Is the inference genuinely coherent, or does it contain contradictions and tensions?

How does it cohere with other areas of knowledge?

When our beliefs can no longer be directly derived from our axioms, then they have ceased to be insights at all and instead have become ideology. In that case, we need to ask ourselves where exactly these ideas are coming from, and why we insist on believing them.

3.2 An ecosystem of shared knowledge

The next thing we require from the outset is a new framework of looking at reality – whatever that reality is from our perspective – through a complex systems framework explicitly designed to engage with the reality of the world as a ‘system of systems’.

An axiomatic logic system will be of little use if applied in a closed information context – in that case it would not even be open to new information, genuinely new data outside the circumference of one’s own knowledge-loop, and even if that data came in, it would simply self-selected out of relevance. An open node of information requires, by its very nature, a multidisciplinary lens that can navigate information outside of the comfort zone of one’s own ‘expertise’ or disciplinary focus.

So our first goal is to develop our cognitive capacities to begin to sense the world as a complex system of open, interconnected systems. This framework unearths the inherent systemic interconnections between and across multiple social, economic, political, psychological, cultural, energy, ecological, technological, industrial, and other domains; as well as between key problems/challenges and relevant stakeholders.

This requires an upgrading effort to build our cognitive capacities in our own contexts. First and foremost, that means training ourselves as individuals. Secondarily, that means looking at how this can be achieved in the organisational context of the institutions we work and play in.

Developing the multidisciplinary lens to see the world as a ‘system of systems’ will have inevitable limitations on an individual level, and therefore requires constant engagement with cross-sector disciplinary expertise. It also requires holistic frameworks that are capable of actually doing cross-sector engagement in a way that works, by being grounded in an empirically-validated understanding of real world systems.

The next goal is to do the very opposite of what we do within closed loops of information. Closed loops of information are reinforced by active behaviours of individuals to self-select information according to their preconceived biases. This tends to reinforce polarised narratives. It also reinforces closed internal information loops that uphold favoured and familiar beliefs and values; blocks the capacity to accept and process new insights about the world; and locks one into a cycle of dysfunctional behavioural patterns which cannot be escaped.

The opposite approach would be to leverage and integrate multiple, dissonant perspectives as the core mechanism by which to explore disparate and often confusing streams of information about particular issues. Instead of avoiding, opposing, vilifying and excommunicating contradictory points of view, this approach requires engaging those points of view to leverage their respective insights.

This approach is premised on a fundamental axiom: that our point of view, no matter how ‘right’ we think it to be, is ultimately fallible, limited and derived from a limited data-set. No matter how much we do to correct for this, our perspective will always be limited. This means that at any time, our perspective will always be exactly that: a perspective on the world, not a true, full and accurate picture. Correcting for this requires an ongoing strategic approach to information that engages with multiple contradictory perspectives on a perpetual basis.

Therefore, we need to build in a process – whether as individuals or organisations – to navigate the dissonance between opposing points of view. Real insights can only be developed by applying an axiomatic logic system to discern fact from fakery in a way that has to be consistent across all perspectives.

In today’s model, it has become a prevailing trend for people who situate themselves within particular closed loops of information whether ‘left’, ‘right’, ‘centre’ or whatever to only call out falsehood among other closed loops of information that oppose their own. In this case, it is often even seen as disloyal to call out falsehood or lack of integrity among information producers that one is attached to. This is a symptom of deep civilisational decline in our collective capacity for information integrity.

This approach guarantees that failures and flaws within one’s own ideological framework will be systematically ignored and underplayed. Apart from anything else, this is a strategy for internal cognitive collapse whose inevitable result will be an increasing dislocation from the complex system of systems that is the real world. It will, simultaneously, represent a moral decline of the highest order, in which obsessing over the wrongs of the ‘Other’ becomes a convenient substitute for holding one’s own cognitive practices and biases to account by scrutinising the integrity of one’s own closed information loop.

The alternative approach, and the only one which can sustain the possibility of adaptive evolution while averting cognitive and moral collapse, is an open node of information engagement that specifically cultivates an authentic openness to other sense-making information loops, including those with which it fundamentally disagrees. This openness is not unconditional. It can only retain epistemological authenticity by exercising an axiomatic logic system which permits access to valid insights from other loops of information while rejecting their flaws, failures and incoherencies. Equally, this openness has to be capable of leveraging external insights to excise flaws, failures and incoherencies within its own framework.

So instead of closed, polarised and mutually-exclusive loops of information which service self-reinforcing pre-existing biases, we cultivate open, intersecting nodes of humble, critical, self-reflective engagement in which new information is able to come in from multiple perspectives, to every perspective.

3.3 Finding your power in the here and now

This enables deep, context-rich engagement across multiple disciplinary domains, across multiple issues, connecting dots. This endeavour seeks to navigate, using an axiomatic approach, the whole landscape of available data and experience to develop a whole systems body of insights that can be understood in their wider systemic context, rather than simply as disparate or haphazard issues or incidents.

The resulting body of insights is, then, held across multiple perspectives, with different insights being generated by different open nodes of information and sense-making. This total body of insights across multiple nodes and perspectives can then be leveraged to support the development of whole systems collective intelligence, underpinning the capacity for healthy decision-making and coherent action in the world that drives adaptive, evolutionary behaviours.

The imperative is to identify focal points where meaningful action can actually be taken – to work on those areas where we do retain power, rather than lamenting areas where we lack power. By leveraging insights to create change here and now, in our own bodies, minds, contexts and communities, we find our true power.

4. The ethical and spiritual dynamics of collective intelligence

Examining these contrasting approaches to closed loops and open nodes of cognition-behaviour unearths a number of critical insights. Noting that ethical values are ultimately signifiers of favourable and unfavourable behavioural patterns, and that these would reflect our ‘spiritual’ orientation, we can abstract some key ethical insights.

4.1 Inner and outer

Firstly, we remind ourselves that incoherencies at the macro scale are ultimately emergent from incoherencies at the micro scale. This means that when we see and are outraged at evil in the world – forms of deep incoherence which cause extensive suffering to other beings – these incoherencies are not simply monstrosities out there.

A major cognitive flaw is to see those incoherencies as fundamentally separate to ourselves. While they are to some extent, they also represent tendencies and traits deep within our own behaviours. While confronting and attempting to change those incoherencies out there in the world is important, doing so without simultaneously addressing our own personal parallel incoherencies, which we may well manifest in our own lives in quite different interpersonal and social contexts, would ultimately fail to produce real change.

4.2 Power in humility

The second insight we take on regards the necessity of humility. By recognising that we are deeply fallible human beings with fundamental cognitive limitations we accept and embrace the reality that we are always situated from a particular vantage point on reality that however ‘right’ in its own right, is never ‘the truth’. We are required then to resist the pull of arrogance in wanting to uphold our own certainty. Arrogance and certitude reinforce closed loops of information on the assumption that we are now acquainted with ‘the whole truth’ and no longer need to seek or engage with sources of information we are unfamiliar with.

By adopting this radical humility we become open to engaging with the unfamiliar, and seek out that which might even make us uncomfortable.

Rather than insulating ourselves in a cocoon of familiar and comfortable ideas, we seek to constantly challenge ourselves, to test our assumptions and frameworks.

Rather than simply seeking to test and refute others, our priority is to learn from others’ insights and shed the skin of our own fallacies.

If we do not adopt this radical humility, we are not really interested in what is real. We are committed, instead, to ‘being right’. This is, in fact, a form of insecure egoism. It guarantees being ultimately disconnected from what is real.

4.3 The greater struggle

A third insight is that the closed loops of information we see metastasising around the world closely parallel the internal neurophysiology of the individual. These closed loops are ultimately collective extensions of our own group thinking, communication and behavioural patterns. As such, to a large extent we can find them rooted in internal cognitive processes we often take for granted and rarely subject to scrutiny (no matter how capable we are at scrutinising the incoherencies of powerful structures in the world).

The most direct parallel is the internal endless thought stream of the inner voice that we identify with, the ‘I’. Yes, that inner voice which you call ‘me’ that never stops talking, commenting, feeling, judging, reacting and so on.

Exert a modicum of mindfulness for a few moments, watch and listen to that internal voice for a while, and you’ll notice that the endless thought stream runs like a ceaseless machine, a mental ‘Duracell bunny’ on steroids. It doesn’t stop or shut up. When you try to make it so, to focus, to direct it, it usually slithers around the obstacle and finds a way to resurface with its own internal momentum.

Welcome to your own internal closed loop of information.

The thought/emotion stream, which we usually identify with, is not ‘you’ – it’s of course a part of you but the fact that you can be conscious of it in a way that allows some degree of distance and control illustrates that you, your consciousness and sense-making capacity, are more than just the sum of your thoughts and feelings.

In any case, this internal closed loop of information essentially consists of neurophysiological output from a combination of inputs: your genetic inheritance, your mother’s experiences while you were in her womb, your social and environmental stimuli since birth, your upbringing as a child, your interactions with parents, siblings and family, and later with teachers and friends, your various life-experiences throughout these processes.

Much of how we behave and respond to relationships in the world as adults comes from learned behavioural patterns which we develop in this way. They become engrained habits. These behavioural patterns in turn are rooted in engrained patterns of thought and emotion that become established based on early responses to the specific environmental and social stimuli we experience. And so, how we related to our parents and siblings can develop deep-seated unconscious frameworks of belief and emotion about ourselves and the world, which go on to frame our behaviour for years to come, if not the rest of our lives.

Anxieties and insecurities from a young age end up determining how we behave at work, or with our partners, or in social situations, decades on – something someone says today is unconsciously interpreted in our head through the lens of a child who has experienced some form of trauma or negativity. Despite the situation being completely different, we end up bringing all that trauma and negativity from the past, into our present.

In short, we spend much of our lives living in closed loops of information, emotion and action that are dysfunctional, from which we are unable to escape. That’s often because we are rarely conscious of how our reactions are not necessarily rational, but are triggered in the context of being driven by old closed loops of thought and behaviour.

(One of the features of external closed information loops we saw previously was the tendency to see flaws in other information loops than our own really easily, while conveniently refusing to subject our own closed loops of information to similar scrutiny. We do this in our own lives routinely.)

This bundle of mental activity, which I sometimes call ‘thought-trains’, tend to function with their own unceasing volition. Propelled by their own logic, they shoot forward without stopping, driving on and on. When we identify with these ‘thought-trains’, we are no longer in control. Instead we become slaves to our own neurophysiologies, puppets of our own history, automatons whose actions unfold the same patterns and loops of behaviour time and time again. In effect, we are like zombies trapped in a familiar sequence of actions and reactions.

4.4 Becoming the Driver

The bundle of ‘thought-trains’ is widely studied across religious and spiritual traditions as well as psychological and psychoanalytic theories. It is sometimes identified as a complex structure – Freud saw it as a tripartite entity made up of the id (unconscious drives), the superego (moral consciousness) and the ego which mediates in between and which we identify with.

Those concepts are in some ways valid, but a more useful approach would be to recognise that the bundle of thought-trains represents the intersection of the ego, the consciousness we identify as ‘I’, with the internal voice that manifests a continually running train of thoughts bundled with emotions. We are conscious of the thought-trains and we usually identify with them and take them for granted as representing the ‘I’, usually without recognising their deeper drivers.

Freud’s great insight in that respect was that we have little conscious input into the making of our thought-trains – they simply keep driving, responding to external stimuli on the basis of programming that is hard-coded into us over years of genetic, social and environmental stimuli.

It is only when we begin bringing some of that programming to the focus of our consciousness, when we allow ourselves to see how our thought-trains are being unconsciously driven, that we develop the capability to be free from the old closed loops of information and behaviour, and to choose truly novel courses of action undetermined by the suffocating learned behaviours, fears, negative thought cycles and cognitive dysfunctions wired into us from our past.

For Freud, the moral consciousness of the superego simply comprised learned concepts from socialisation. The ego, he thought, ends up as the inflection point and battle ground between unconscious drives (the id) propelling an intersecting bundle of thought-trains (the ego) and the moral imperatives of society (refracted through the super ego).

4.5 Conscience and the intuitive cognition of the Real

But Freud was somewhat incorrect. While interpretations of moral precepts and categories are certainly open to socialisation, the categories themselves – of rightness and wrongness, of justice, of compassion, of generosity, and so on, are universally recognised by all human beings, throughout recorded human history, across all cultures, faiths and non-faith.

We are faced with overwhelming empirical evidence that moral consciousness — and the values of cooperation, love, compassion, kindness and so on it encompasses — reflect collaborative, synchronistic patterns of behaviour which entail a paradigm of human unity and stewardship toward the earth that is in direct contradiction to the prevailing paradigm.

The latter consists of behavioural patterns, associated political, economic and cultural structures, and a coextensive value-system and ideological assumptions which edify individualistic self-maximisation through endless material accumulation and gratification. While the ultimate business-as-usual trajectory of the latter is civilisational collapse and extinction, the former represents the only way to avert the latter.

This indicates that ethical action does indeed have an objective evolutionary function coextensive with the survival of the human species. Ethical values therefore are not merely products of socialisation.

Ethical values are reflections of a deeper ontological structure that encompasses the relationship between human beings and the natural order.

What Freud called the super ego is in fact the deeper self of the human spirit, which is inherently and intuitively cognisant of her or his direct relationship with the earth, all life, life itself and the cosmos, a cognisance partially intuited through that latent function of consciousness known as the conscience, a faculty for the apprehension of ethical value.

By allowing oneself to see one’s thought-trains for what they truly are, one sees their true drivers. The act of seeing that ‘programming’ of learned behaviour, thoughts, emotions, reactions and counter-reactions is the precondition to becoming free of that programming.

This in turn allows the self to become aware of the deeper self, whose latent conscience is aligned with the earth, life and the cosmos, and to embark on truly free action through ethical self-actualisation that is in alignment with the earth, life and the cosmos.

This of course requires more than just internal seeing, but external openness – by letting go of the old dysfunctional beliefs and habits, one is now open to a regenerative engagement with what is real: and to engage with what is real, requires a renewed, vigorous attention to what is real, that includes recognition of the individual’s deep physical and metaphysical interconnection with the earth, life and the cosmos.

The failure to see these thought-trains for what they are, conversely, leads to internal crisis and collapse.

Thought-trains are often incapable of reacting meaningfully to the real world because they respond not to the world as it is but to limited constructs and perceptions and emotions about the world rooted in past experiences. The result is that they entail behavioural patterns that do not engage with what is real, and are thus destructive and dysfunctional.

This can lead to breakdowns of all kinds – internal psychological issues, depression, other mental health challenges, as well as breakdowns in relationships, whether at home or work, with partners, parents, siblings of children.

5. No social liberation without self-liberation

You can’t free the world when your spirit, mind and body are in chains woven by your own delusions. What happens at the scale of the microcosm of the individual extends to the scale of the macrocosm of society.

When we look at the dominant apparatus of mass communications today within the human species, we can see very clearly how it operates essentially as an extension of our internal dysfunctions at the ego-level.

The closed loops of self-referential information sharing on social media are extensions of the closed, insular vortex of self-reinforcing thought-trains that comprise the ego.

Just as internally, closed information loops tend to involve repeat cycles of dysfunction, often involving crisis and collapse, externally they have similar correlates. In societies and communities, in organisations and institutions, closed loops tend to involve self-reinforcing ideological assumptions. This in turn leads to fixed patterns of behaviour in organisations and groups; and dysfunctional dynamics that tend to exclude ideas and behaviours that challenge or undermine the legitimacy of those fixed patterns and the limited frames of thought they are based on.

Closed loops offer limited opportunities for real organisational learning as anything outside what is already assumed to be ‘known’ is largely excluded. This sets up the organisation for failure when it comes up against new challenges in the real world, as it is then incapable of adapting – there is no capacity to adapt to change when the organisation lacks the fundamental cognitive openness required to understand the nature of that change and its dynamics.

Closed loops thus have a cancerous quality. They tend to lead to institutional fossilisation and stagnation. When change comes, it can lead to institutional crisis and collapse, and can also trigger the resort to familiar but limited and flawed mental and behavioural models which may well be integrally related to the causes of the crisis, but are pursued anyway. The outcome of that might be kicking the can down the road – if the real issues of deep adaptation are not addressed, this guarantees a resurgence of crisis.

An open nodal approach, in contrast, entails organisational self-awareness – a critical introspection capable of seeing the structures, interests, processes and assumptions driving status quo organisational behaviours, seeing them for what they are.

The act of seeing that structural ‘programming’ of learned organisational behaviour, thoughts, emotions, reactions, unconscious bias, unconscious trauma, and counter-reactions is the precondition to key agents in the organisation becoming free of that structural programming, and thus enabling the organisation as a collection of those agents becoming free to choose a truly new, regenerative path.

It’s not enough to simply see introspectively in this way. It’s also critical to engage with the wider environment and to truly see it and understand it, beyond the stale broken paradigm of the old organisational ideology, but now for what it is. That requires an axiomatic approach that intentionally adapts to what is real – the earth, life and the cosmos – by engaging with multiple perspectives, disciplines, lenses, paradigms, in order to see what is real as a whole system, a system of systems.

On this basis, a new regenerative capability emerges: this capability involves a renewed capacity for understanding what is real that is continually improving on the basis of disciplined and compassionate self-critique and critical external engagement; an understanding that underpins the development of new adaptive values and behaviours designed for greater alignment with what is real.

This in turn allows the organisation to become aware of its potential to manifest a deeper constitution as an expression of collective intelligence, whose latent conscience is aligned with the earth, life and the cosmos, and to thereby embark on truly free action through ethical self-actualisation that is in alignment with the earth, life and the cosmos.

5.1 A new paradigm

Adaptive responses require making new, radical commitments in thought and deed, and following through with them. This is the foundational bedrock of human integrity.

In the old closed loop paradigm, we might have all sorts of conscious commitments and intentions, but these are frequently foiled due to the runaway momentum of learned thought patterns and behavioural cycles. These can surface unexpectedly and drive our actual behaviour in ways we are not always fully aware of, even when we make conscious decisions to the contrary. Unless we become aware of those internal drivers, we cannot become free to see how we are impacted by them, and cannot then become free of them.

When we subject them to the light of awareness, we become free to rise above them. But truly rising above them is only possible by creating adaptive new thought pathways and new behavioural patterns which are aligned with what is real. This requires making new commitments to what is real. By following through with those commitments we create new conceptual pathways which reflect reality, and new behavioural patterns or habits which adapt to reality.

The precondition for this is becoming awake to the closed loop of thought-trains driving behaviour. That involves seeing and letting go of one’s delusions by recognising the commitments we have really (often unconsciously) made through our behavioural patterns and their consequences in our and other lives.

We may find that the ideals we like to believe we are committed to are part of a mask we present to others and even ourselves, a shield for internal insecurities developed from a host of past traumas. Our actual behavioural commitments might well be to simply being ‘right’; or to being powerful; to being ‘smart’ or ‘cool’; to being ‘liked’ and ‘accepted’; to being ‘safe’; or to the very opposite of these, depending on how our pasts have wired our neurophysiological make-up.

When we realise that these subliminal commitments tied to our closed loops of thought and action are in fact causing us and others destruction in numerous ways, we are empowered to let them go.

It is critical to see these for what they are and in that process to let them go. On that foundation we can be ready to freely take up genuinely new, adaptive commitments.

For organisations, the process is much the same – organisational strategy and vision needs to be recalibrated and redefined on the basis of a renewed set of goals, commitments and values which define a new mission. That mission in turn has to be grounded in a whole systems assessment that goes beyond traditional abstract SWOT (strength, weakness, opportunity, threat) analysis into an approach that canvasses multidisciplinary data to make such an analysis systemic and holistic.

The foundation of integrity points to how adaptive responses require a transcending and transformation of egoism.

The ego is not abolished, but transformed into a vehicle to birth a higher and better self more attuned to that which is beyond it, and in which it is embedded.

We move from reductionism to holism, from self-absorption to mutual interconnection, from the affliction of separation and alienation to the abundance of synchronicity and cooperation, from fragmented discordant and conflictual information warfare to inclusive, synergistic and co-creative communication. We move from degenerative dynamics of chaotic collapse into complex flows of regenerative revitalisation.

The action pathways opened up through this process will need to translate a transformation in value orientation into deep structural changes.

The practice of extracting and accumulating energy to concentrate material wealth and power in the hands of a few is bound to destroy us all before century is out.

So these metabolic changes will need to reorient us from an exploitative, predatory relationship with our environment and each other, to one based on parity; from overaccumulation and centralisation of wealth and power, toward a set of clean, mutualistic, regenerative and distributive forms of resource consumption, production, ownership, and labour which move us into human-earth system energy flows that are sustainable, and which enrich all constituents.

Fundamentally, meaningful system change is about transforming our deep collective metabolic relationship with the earth, the way we extract and mobilise energy for all areas of our life through our economic, social, political, and cultural structures. If we are not talking that language, we are merely tinkering.

6. System change strategies

When systems experience a crisis due to the failure to adapt to environmental change, the crisis is existential. The system either evolves through adaptation requiring accurate environmental sense-making which mobilises behavioural adaptations; or it regresses and eventually collapses.

This stage of indeterminacy involves a phase-shift into what could become a new system, but one that either evolves or regresses. Evolution in this case consists of individual, organisational or civilisational renewal; the alternative is a form of individual, organisational or civilisational regression that comprises a step toward protracted collapse.

We are currently in the midst of a global phase-shift signalling that the prevailing order, paradigm and value-system are outmoded and unsustainable. The breakdown of the global system has led to a heightened state and speed of indeterminacy across political, economic, cultural and ideological structures and sub-systems. We experience this in the increasing confusion across all these systems, particularly expressed in the ‘post-truth’ dislocation of our prevailing information systems.

An adaptive response requires as many components of the global system as possible to embrace our evolutionary mission as individuals, families, organisations, communities, societies, nations, international institutions, and as a civilisation and species.

That entails the necessity of a multi-pronged approach involving the coordination of actors at different scales – both external ‘resistance’ pressure from below combined with high-level engagement action, calibrated with the specific goals of moving key agents toward whole systems awareness. That also entails targeting specific structures as well as aiming to shift the cognitive orientation of people whose thoughts and behaviours are the microcosmic foundations of those structures.

When a particular organisation or structure reaches a tipping point in terms of the cognitive shifting of the people that comprise it, only at that point will the wider organisational structure become vulnerable to authentic change.

A few further insights emerge here.

Firstly, the tightly coupled nature of social structures, the interconnected nature of systems, entails that the power of individual action is far more significant than often assumed.

Of course, on the one hand it’s important to adopt a pragmatic approach that accepts the limitations of one’s own power. A single individual cannot singlehandedly change the entire system. However, a single individual can act in a way that contributes to and catalyses system change, whether in the near term or, most likely, the longer term.

The interconnected nature of systems means that the consequences of one’s decisions in a social context will have a ramifying ripple of consequences with the inherent potential to impact a whole system.

How significant this impact will be depends on a number of factors:

To what extent does the action form part of a new paradigm from a systemic perspective?

To what extent does it enlist and mobilise other components of the system and nudge them into paradigm-breaking and new-paradigm modalities – and not just piecemeal actions, but wholesale transformation in conscious intent, envisioning, and behavioural pattern?

To what extent do those new, emerging patterns of thought and behaviour contribute to the emergence of new structures – new collective patterns of thought and behaviour oriented around life, the earth and the cosmos?

Having exercised the processes described so far, the task is to choose — based on the wide systemic and holistic assessment of oneself, one’s socio-organisational context, and the wider whole systems (political, cultural, economic, etc) context — the path of adaptive, transformative action.

The direction of action one chooses will be different for different people and will be entirely contingent on who one is, and the full context of environmental, social, political, cultural, economic, family and other relationships in which one is embedded.

Based on that assessment, variable paths and opportunities for action will become clear. The path chosen should be designed to mobilise the best of your skills, experiences, available resources and networks to transform (to the extent possible) your self and to then leverage that internal movement in your specific context to pursue ways to create (to the extent possible) paradigm-shifting intentions and behavioural patterns that can lay the foundation for the emergence of new-paradigm structures and systems in your particular context.

The preceding discussion illustrates a certain logic to this process, however. The groundwork requires an action pathway in pursuit of the transformation of sense-making and harnessing of information in your targeted social context as the first step. This naturally requires moving beyond abstract generalisations and focusing concretely on your existing, actual situation in a place-based context.

The next step is to leverage this to create a generative dialogue across multiple perspectives within your social, organisational or institutional context to generate an authentic awakening of whole systems awareness relevant to that place-based context.

The final step is to cast this awareness on the existing system-structure and its failures in that specific context, with a view to unearth pressure-points and opportunities for transformative action through scenario analysis:

What would a new system, a new structure, a new way of living and working and relating that is in parity with life, the earth and the cosmos look like in this locality, for this family or this community?

How do we take concrete steps to get there, to build that new paradigm through the construction and enactment of new forms of intention, reflection and behaviour?

What would happen if we fail to adopt these steps?

Among the insights that emerge from this is that system change is not possible through disengaging from said system. While applying pressure to the system can sometimes work, this too can often be counterproductive and produce unintended results in which powerful agents who benefit from the system simply react by attempting to squeeze out and neutralise the power of these ‘resistance’ efforts. Often, by triggering such militarised responses, traditional ‘resistance’ approaches alone end up in a self-defeating cycle in which they cannot win – given that ‘resistance’ can never match the overwhelming power of the militarised responses they invariably invoke.

This does not mean traditional ‘resistance’ is not without value, but it does show that as a sole strategy for change, it is likely to fail.

System change requires a full range of strategic approaches at multiple levels. Applying ‘resistance’ pressure may be one useful and appropriate lever at certain times. More broadly, also required are strategies of critical engagement. This entails moving into the structures and systems one wishes to change and applying the new patterns of intention and action within them; finding opportunities to apply our multi-staged process of sense-making, information-gathering, communicating and dialoguing, waking up (to the recognition of the need for transformation); and finally embarking on the pathway of paradigm-shifting action to move that system into a new adaptive configuration.

System change efforts need to be undertaken by people and organisations in explicit recognition that we are currently experiencing a global phase-shift, wherein exists an unprecedented opportunity to engage in the act of planting microcosmic seeds for macrocosmic change.

The goal of these efforts should be to pursue activities that reach threshold tipping point levels of impact that can push key sections in the system over into a new stable state.

That requires the likeminded to forge new levels of coordination across the system between multiple groups, organisations, institutions, classes – to plant the seeds of a new network cutting across societies and communities through which new channels of communication, sharing and learning can be developed to transmit revitalised cognitive awareness based on whole systems sense-making. On that foundation, emergent adaptive structures, institutions, practices and behavioural patterns can be shared, explored and prototyped in multiple place-based contexts.

Every single individual, group and organisation that is committed to a better world needs to build in a process for this adaptive, evolutionary practice into its internal constitution. If this is not a priority at some level, you’re committed to something else (unconsciously or otherwise) and need to do some work to find out what and why.

Needless to say, systems and structures which insist on resisting such change efforts will ultimately break-down during the phase-shift.

Another fundamental insight that emerges here is that it is utterly pointless to embark on an effort to change the world, the system, or any other social context external to you, without having begun with yourself.

This is a continual process, a constant discipline. Because the microcosm and the macrocosm are ultimately reflections of each other. The world without is a construct and projection of the worlds within.

More concretely, if you have not even begun the process of comprehending how your own self, thoughts, behavioural patterns and neurophysiology are wired by the wider system, in order to become truly free to manifest the self of your own true choosing, you will never be equipped to engage in a meaningful effort to change the system.

Instead your battle to change externalities will become a projection-field for your internal dysfunctions and instead of contributing to system change, you will unwittingly bring regressive egoic tendencies into the reinforcement of entrenched prevailing system dynamics in the name of ‘resistance’. Having unconsciously internalised the external regressive system values and dynamics you resent, you will end up promoting those very same dynamics in your ‘activism’.

Efforts to call out power are meaningless if you have not toppled the tyrant within. This requires intensive and ongoing self-training, alongside continued external engagement in your socio-organisational context.

Relinquish the closed loops to become an open node. Embrace your ontological interconnection with all life, the earth and the cosmos and discover your self as a conscious expression of them; and in that discovery, take on your existential responsibility to life, the earth and the cosmos, thereby becoming who you truly are. Hold yourself accountable. Grow up and show up in your own life and context. Accept your responsibility for the broken relationships around you, acknowledge the breakdowns in integrity in your commitments, make amends and resolve new authentic commitments. And bring that emerging integrity, humility and clear-sightedness into a renewed effort to build paradigm-shifting visions and practices within the context that you can actually reach. And you will plant a seed whose only destiny will be to inexorably blossom.

Perhaps the most immediate challenge ahead is to face up to the inevitable demise of the old paradigm, internally and externally, and to accept what that means. At first, this may appear to be something that induces tremendous grief. And indeed, the demise of the old will inevitably bring immense devastation and suffering— the dangers of this recognition are that it leads to either of two extreme emotional reactions, optimistic denialism or fatalistic pessimism. Neither is useful, nor justified by the available data, and both reinforce apathy. They are devoid of life. When properly grounded in life itself, acceptance of the demise of the old paradigm is the precondition for moving into a new life, a new way of working, playing and being that is attuned to life, the earth and the cosmos; it is the precondition for finding the power to begin co-creating new paradigms.

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Dr. Nafeez Ahmed is the founding editor of INSURGE intelligence. Nafeez is a 17-year investigative journalist, formerly of The Guardian where he reported on the geopolitics of social, economic and environmental crises. Nafeez reports on ‘global system change’ for VICE’s Motherboard. He has bylines in The Independent on Sunday, The Independent, The Scotsman, Sydney Morning Herald, The Age, Foreign Policy, The Atlantic, Quartz, New York Observer, The New Statesman, Prospect, Le Monde diplomatique, among other places. He has twice won the Project Censored Award for his investigative reporting; twice been featured in the Evening Standard’s top 1,000 list of most influential Londoners; and won the Naples Prize, Italy’s most prestigious literary award created by the President of the Republic. Nafeez is also a widely-published and cited interdisciplinary academic applying complex systems analysis to ecological and political violence. He is a Research Fellow at the Schumacher Institute.





Italy and energy: a case study

22 10 2018

Since discovering Jean Marc Jancovici a couple of months ago, I have been following his work, which is mostly in French; but now and again he publishes something in English, so you guys can benefit from reading this while I prepare to drive my wife’s Suzuki Alto with a full load to Tasmania……  yes I am going to get my life back and get to enjoy sharing the fruits of my labour after a three year wait…..

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Italy is in trouble. Or more precisely, the country has been “abandonned by growth”. It is one of the few OECD countries that is unable to recover from the “2008 crisis”: its GDP is still lagging below 2007 levels. Would it be the simple result of the unability of the successive governments to make the “appropriate reforms”? It might well be that the explanation lies in something much more different, but much more unpleasant: physics.

First, statistics are unequivocal on the fact that growth has vanished, so far.

Year on year change of the GDP in Italy (or “annual growth rate”) since 1961 (blue curve), average per decade (red curve), and trend on the growth rate (green dotted line). It is easy to see that each decade has been less “successful” than the previous one since the beginning of this series, and that the decade that started in 2010 has an average growth rate which is… negative. Italy has therefore been in recession, “on average”, for the last 7 years.

Primary data from World Bank.

As the two are generally linked in Western countries, the debt on GDP ratio has risen to heights, botbh for public and private debt.

Debt on GDP ratio in Italy since 1995. Primary data from Eurostat.

Households debt on GDP ratio since 1960. Data from Bank for International Settlements.

Credit to the non financial sector on GDP ratio (corporates and households) for Italy. Data from Bank for International Settlements.

All this would not be so annoying – well, from an economic point of view – if growth were to resume, because then the money to repay all this extra debt would be available. But why doesn’t growth come back? Some say that this is due to the lack of reforms. This is due to the lack of reforms, but not the same (reforms), say others.

But what if the true reason is… the lack of energy? In Italy, as elsewhere, the machines that surround us everywhere (rolling mills, chemical plants, trains, fridges, elevators, trucks, cars, planes, stamping presses, drawers, extruders, tractors, pumps, cranes…) have 500 to 1000 times the power of the muscles of the population.

It’s these machines that produce, not men. Today, homes, cars, shirts, vacuum cleaners, fridges, chairs, glasses, cups, scissors, shampoo, books, frozen dishes, and all the other tens of thousands of products that you benefit from are produced by machines. If these machines lack energy, they operate less, production decreases, and so does the monetary counterpart of this production, that is the GDP. And it is probably what happened in our southern neighbor.

First of all, energy is definitely less abundant in Italy today than it was 10 years ago.

Primary energy used in Italy (sometimes called “primary energy consumption”; “primary” refers to the fact that it is the energy extracted from the environment in its raw form – raw coal, crude oil, crude gas, etc, not processed fuels or electricity that come out of the energy industries: refined fuels, electricity, processed gas, etc) since 1965. There was a maximum in 2005, i.e. 3 years before the fall of Lehman Brothers. It is impossible to attribute the decline in consumption to a crisis caused by the bankers’ negligence!

It is interesting to note that maximum of the energy consumption in Italy corresponds to the maximum gas production of Algeria (2005), Italy’s second largest gas supplier after Russia.

Oil and gas production in Algeria since 1965 (oil) and 1970 (gas). Oil production peaked in 2008, and gas production in 2003 so far (monthly data from the Energy Information Agency suggest that the gas production in Algeria is anew on the decline). Primary data from BP Statistical Review.

Italy is a major consumer of gas, because its electricity production relies on it for half of the domestic generation. This maximum (of energy consumption in Italy) also corresponds to the beginning of the stabilization of world oil production that took place between 2005 and 2010, which also led to a decrease in Italy’s import capacity in this precious liquid.

Monthly production of liquids (crude oil and condensates) worldwide. Data from the Energy Information Agency. We can clearly see the “plateau” that runs from 2005 to 2010, before the rise of the American shale oil, which has rekindled global growth and allowed the subsequent economic “rebound”.

Combined together, oil and gas accounted for 85% of Italian energy in 2005 (and accounted for 65% of its electricity production): less oil available on the world market (because a constant production must be shared with a growing importation from the emerging countries), and less gas available in Europe and Algeria led to a decline in supply beforethe beginning of the financial crisis.

In fact, when looking at trends over long periods, we can see that, in Italy as in all industrialized countries, i. e. with machines that produce instead of men, GDP is driven by available energy.

Rate of change (3 year running average) of the energy consumption in Italy (green curve) and rate of change (also 3 year running average) of the Italian GDP. It is noteworthy that the trend is the same for both. Where’s the hen, where’s the egg? For what follows, we just need one valid rule: less energy means less running machines and thus less GDP. And we see that when the energy growth slower, so does the GDP, one to two years later, which supports the idea that when it is energy that is constrained, GDP is forced to be constrained as well.

Data from BP Statistical Review for energy and World Bank for GDP

This “precedence” of energy over GDP will show up in another presentation of the same data.

Energy used in Italy (horizontal axis) vs. Italian GDP (in constant billions dollars) for the period 1965 to 2017. The curve start in 1965, at the bottom left, and then follows the chronological order upwards to the right

We note that the curve makes a series of “turns to the left” in 1974, 1979, and especially from 2005 onwards. The “turn on the left” means that it is first the energy that decreases, and then the GDP, excluding in fact a sequence that would explain the decrease in the energy consumed by the crisis alone (then the curve should “turn right”).

One can also notice that after the decline in GDP from 2006 to 2014, the line goes back to “normal”, that is going from “bottom left” to “top right”, which reflects a GDP that grows again because of an energy supply that does the same.

Author’s calculation based on BP Statistical Review & World Bank data

And then?

Well, for the moment energy supply is going downwards, but will it continue to do so in the future? For the first 3 components of the energy supply in Italy, things look pretty settled. For coal, all is imported. This fuel is a nightmare regarding logistics: a 1 GW power plant requires between 4000 and 10000 tonnes of coal per day, and this explains why when a country is not a coal producer its coal imports are never massive. Add on top that coal is clearly the first “climate ennemy” to shoot: calling massively on imported coal to compensate for the decline of the rest seems very unprobable.

Consumption (dotted lines) and production (solid line, actually zero all the time!) of coal in Italy. Data from BP Statistical Review.

Then comes oil. Italy imports almost all it uses, and when world production stopped growing in 2005, Italian consumption fell in a forced way – as in all OECD countries – because the emerging countries took an increasing share.

Consumption (dotted lines) and production (solid line) of oil in Italy. Data from BP Statistical Review.

Eventually comes gas. Here too, Italy had to reduce its consumption in a compulsory way after 2005, when Algerian production – which provides about a third of Italian consumption – peaked.

Consumption (dotted lines) and production (solid line) of gas in Italy. Data from BP Statistical Review.

Italy gave up nuclear power after Chernobyl, and so no “relief” can come from this technology. Hydroelectricity has been at its peak for decades, with all or most of the equippable sites having been equipped. In addition, the drying up of the Mediterranean basin due to climate change should also reduce rather than increase this production.

Hydroelectric production in Italy since 1965, in TWh (billion kWh) electricity. Data from BP Statistical Review.

Then remain the “new renewable”, mostly solar, biomass and wind energy, that now represent about the equivalent of hydropower. But solar and wind require a lot of capital to be deployed, and thus the irony is that if the economy “suffers” because of a decline in the supply of fossil fuels, there is fewer money to invest in this supply! Biomass requires a lot of land to become significant because of the biomass that has to be grown.

Non-fossil electricity production in Italy since 1965. We see that the “new renewable” (biomass, wind, solar) do a little more than hydroelectricity, i.e. 20% of the total production (of electricity only, of course). Data from BP Statistical Review.

As these means cannot quickly supply large extra quantities of electricity, and will quickly be limited by storage issues, the energy used in Italy remains massively fossil, and will do so in the short term.

Share of each energy in Italian consumption. Data from BP Statistical Review.

It is therefore likely that Italy will remain massively dependent on fossils fuels in the next 10 to 20 years, and since the supply of these fuels is likely to continue to decrease on average, which means that Italy will have to manage its destiny without a return to growth, or even with a structural recession.

It is to this conclusion that a “physical” reading of the economy leads. And what is happening to our neighbours to the south is, most probably, the “normal” way in which an industrialized country reacts to the beginning of an unexpected energy contraction (and then populists follow, because of promises that coldn’t be fulfiled). As other European countries do not anticipate any better their upcoming energy contraction (that will happen anyway because oil, gas and coal are not renewable), let us look carefully at what is happening in this country. Something similar is likely to happen in France (and in Europe, and in the OECD) too if we do not seriously address the issue of fossil fuels, or more precisely if we do not seriously begin to organise society with less and less fossil fuels, including if it means less and less GDP.





How Donald Trump saved Civilization (and lost the planet)

22 10 2018

Just found this….  wow…….

 
The controversy swirling around murdered Saudi journalist Jamal Khashoggi has been moving Congress towards sending to the White House an Act* imposing broad sanctions on Saudi Arabia, effectively scrapping billions in pending arms sales.

Representative Adam B. Schiff of California, the senior Democrat on the House Intelligence Committee, said, “The kingdom and all involved in this brutal murder must be held accountable, and if the Trump administration will not take the lead, Congress must.”

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In internal discussions, Mr. Kushner has urged the president and his aides not to abandon Prince Mohammed. But as Turkish officials leaked details of the grisly killing of Mr. Khashoggi and of the dismemberment of his body, the White House has become increasingly isolated in its defense of Saudi Arabia.

Take a moment and picture this scenario.
Caving to his image-advisors and pollsters who fret about a Blue Tide surging into key states, POTUS inks the sanctions.
As its mercantile supply line begins to dry up, Saudi Arabia does not blink. It does precisely what it said it would do. It retaliates by hitting the world where it hurts most: the oil supply.
For decades Saudi Arabia has been OPEC’s swing vote, able to turn up or down the light sweet crude flowing to international markets. No other producers have either the reserves or production to control the volume and thereby the price of petroleum.
Suppose they tightened the spigot. It would not be enough to merely reduce the flow. If they have learned anything in their years of military alliance with the Great Satan, it is the tactic of Shock and Awe. They close the valves. All of them. Call it the Third Middle East Oil Shock.
In spite of a record production year for the cartel of 32.78 million b/d, US sanctions on Iranian oil and deteriorating output from Venezuela have already begun pushing prices towards $100/barrel. Demand might be marginally slowing in climate-minded Europe or in economically stressed Turkey, Brazil, and Argentina, but in North America and Asia, oil consumption is still on an exponential trajectory. Despite the US’s shale oil production having increased at a spectacular annualized rate of over 5 million b/d (estimated), the hole created by Saudi Arabia’s withdrawal, accompanied by withdrawal of like supplies from its Middle Eastern OPEC neighbors out of enforced loyalty, would dwarf anything POTUS might have thought he held as a hole card.
Economic ripples became waves. Waves became a tsunami. The price of oil shoots to $400/b virtually overnight. It would take some weeks for that price to pass through refineries and reach retailers but already gas stations around the US jack up the price at the pump.
Then the Seventh Fleet sails into the Straits of Hormuz, but it is too little too late. The supertankers are empty. Short of landing the Marines to take the giant oil fields and recruiting an army of production engineers to run them, military options are few, and costly. Saudi Arabia, after all, is armed with state-of-the-art US weaponry, and with its honor at stake, is entirely capable of self-inflicting scorched earth if push comes to shove.
Meanwhile, back at home, everything descends to chaos. Markets crash. The most-energy-dependent sectors scramble to come up with downscaling plans that could keep the doors open, but within weeks — a month at the most — giants like WalMart and Amazon are shuttering million-square-foot warehouses. Freighters turn back to Shenzhen with full cargoes. Bankers are unwilling to extend lines of credit.
Economic contraction would spread like a pandemic across the face of Europe. It would reach into Russia and China, who had imagined themselves immune, but were already weakened by US economic sanctions. China’s giant economy demands 9 million barrels of refined oil each and every day.
Russia, now importing only 30,000 b/d, is likely to be the least harmed by a global energy supply drop, but is helpless to fend off the knock-on effects of global economic downturn, especially when its Chinese trading partner goes belly up. It could extend credit for gas purchases both Eastward and Westward but any expectation that it would be repaid would eventually be dashed. The world economy would be as a boxer who has been struck a knockout blow, still standing, but bound for the canvas.
In Scandinavia and Germany, breadlines form. In Spain and Italy, fascist movements take to the streets and find broad support. We’ve seen all this before, but this is a different beast. The event will be enormous, and it will be fast.
Central Banks and the Fed can meet in emergency sessions but the tools they used in earlier crises are gone, spent in 2008 and the lingering QE programs. In any case, this situation is not something that can be remedied by rejiggering debt. Energy is not money.
The televised bobbleheads we see wringing their hands over the Khashoggi affair, urging POTUS to stick up for “American values” would be mute. Their communications channels would be shutting down in any event. They might busy themselves thinking how they can feed their families as grocery store shelves go empty.
Of course, the other possibility would be that Donald Trump simply refuses to sign the sanctions bill and thereby saves Civilization. That is, until rising temperatures and rising seas erase it from memory.
Donald Trump has a chance here to do the right thing. He can kill Civilization and save the Earth. He just has to stick it to Saudi Arabia.

______

* Before Congress can take action of this kind, it is required to first invoke the Global Magnitsky Human Rights Accountability Act and give the President 120 days to investigate and recommend sanctions. Lawmakers did that on October 18.





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.





I’m not the only one who’s worked it out….

7 11 2017

Following up on the post where I ‘claimed’ to have worked it out, along comes this article from a website I recently discovered that all my readers should also follow. Dr Tim Morgan who runs the WordPress blog Surplus Energy Economics, published the following, called Anticipating the next crash. While he doesn’t exactly mention printing one’s own community money, every single argument he makes proves my point as far as I am concerned…… the loss of trust in money in particular really caught my attention…..

Enjoy….

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THIS TIME IT COULD BE MONEY – NOT BANKS

tim morganBecause the global financial crisis (GFC) was caused by a collapse of trust in banks, it can be all too easy to assume that the next crash, if there is one, must take the same form.

In fact, it’s more likely to be different. Whilst the idiocy-of choice before 2008 had been irresponsible lending, by far the most dangerous recklessness today is monetary adventurism.

So it’s faith in money, rather than in banks, that could trigger the next crisis.

Introduction – mistaken confidence

Whenever we live through a traumatic event, such as the GFC of 2008, the authorities ‘close the stable door after the horse has bolted’. They put in place measures that might have countered the previous crisis, if only they had they known its nature in advance.

The reason why such measures so often fail to prevent another crash is simple – the next crisis is never the same as the last one.

That’s where we are now. We might be slightly better-placed to combat a GFC-style event today than we were back in 2008, though even that is doubtful. But we are dangerously ill-prepared for what is actually likely to happen.

Put at its simplest, the GFC resulted from the reckless accumulation of debt over the previous 8-10 years. Debt creation has continued – indeed, accelerated – since 2008, but the new form of recklessness has been monetary adventurism.

So it’s likely to be money, not debt, which brings the house down this time. Where 2008 was triggered by a collapse of faith in banks, a loss of faith in currencies could be the trigger for the next crisis.

And, judging by their actions, the authorities seem not to have spotted this risk at all.

Unfinished business?

Where the likelihood of a sequel to 2008 is concerned, opinion divides into two camps.

Some of us are convinced that the GFC is unfinished business – and that another crisis has been made more likely by the responses adopted back then. That we’re in a minority shouldn’t worry us because, after all, change happens when the majority (‘consensus’) view turns out to be wrong.

Others, probably the majority, believe that normality has now been restored.

But this view, frankly, is illogical. To believe that what we have now is “normality”, you would have to accept each of these propositions as true.

1. Current monetary conditions, with interest rates that are negative (lower than inflation), are “normal”

2. It is “normal” for people to be punished for saving, but rewarded for borrowing

3. It is also “normal” for debt to be growing even more rapidly now than it did before 2008

4. Buying $1 of “growth” with $3 or more of borrowing is “normal”

5. QE – the creation of vast sums of new money out of thin air – is also “normal”

6. Vastly inflated asset values, and extremely depressed incomes, are “normal”

7. Policies which hand money to the already-wealthy, at the expense of everyone else, are another aspect of “normal”

8. It is quite “normal” for us to have destroyed the ability to save for pensions, or for any other purpose.

To be sure, Lewis Carroll’s White Queen famously managed to believe “six impossible things before breakfast”, but even she would have struggled to swallow this lot with her croissants and coffee.

When we consider, also, the continued stumbling global economy – which, nearly a decade after the crisis, remains nowhere near “escape velocity” – the case for expecting a second crash becomes pretty compelling.

But this does not mean that we should expect a re-run of 2008 in the same form.

Rather, everything suggests that the sequel to 2008 will be a different kind of crisis. The markets won’t be frightened by something familiar, but will be panicked by something new.

This means that we should expect a form of crisis that hasn’t been anticipated, and hasn’t been prepared for.

2008 – a loss of trust in banks

We need to be clear that the GFC had two real causes, both traceable in the last analysis to reckless deregulation.

First, debt had escalated to unsustainable levels.

Second, risk had proliferated, and been allowed to disperse in ways that were not well understood.

Of these, it was the risk factor which really triggered the crash, because nobody knew which banks and other financial institutions were safe, and which weren’t. This put the financial system into the lock-down known as “the credit crunch”, which was the immediate precursor to the crash.

Ultimately, this was all about a loss of trust. Even a perfectly sound bank can collapse, if trust is lost. Because banks are in the business of borrowing short and lending long, there is no way that they can call in loans if depositors are panicked into pulling their money out.

This also means – and please be in no doubt about this – that there is no amount of reserves which can prevent a bank collapse.

So – and despite claims to the contrary – a 2008-style banking crisis certainly could take place again, even though reserve ratios have been strengthened. This time, though, banks are likely to be in the second wave of a crash, not in the front line.

Coming next – a loss of trust in money?

The broader lesson to be learned from the financial crisis is that absolute dependency on faith is by no means unique to banks.

Trust is a defining characteristic of the entire financial system – and is particularly true of currencies.

Modern money, not backed by gold or other tangible assets, is particularly vulnerable to any loss of trust. The value of fiat money depends entirely on the “full faith and credit” of its sponsoring government. If that faith and creditworthiness are ever called into serious question, the ensuing panic can literally destroy the value of the currency. It’s happened very often in the past, and can certainly happen again.

Loss of faith in a currency can happen in many ways. It can happen if the state, or its economy, become perceived as non-viable. In fact, though, this isn’t the most common reason for currency collapse. Rather, any state can imperil the trustworthiness of its currency if it behaves irresponsibly.

Again, we can’t afford to be vague about this. Currency collapse, resulting from a haemorrhaging of faith, is always a consequence of reckless monetary policy. Wherever there is policy irresponsibility, a currency can be expected to collapse.

In instances such as Weimar Germany and modern-day Zimbabwe, the creation of too much money was “route one” to the destruction of the trust. But this isn’t the only way in which faith in a currency can be destroyed. Another trust-destroying practice is the monetizing of debt, which means creating money to “pay” government deficits.

So the general point is that the viability of a currency can be jeopardized by any form of monetary irresponsibility. The scale of risk is in direct proportion to the extent of that irresponsibility.

The disturbing and inescapable reality today is that the authorities, over an extended period, have engaged in unprecedented monetary adventurism. As well as slashing interest rates to levels that are literally without precedent, they have engaged in money creation on a scale that would have frightened earlier generations of central bankers out of their wits.

Let’s be crystal clear about something else, too. Anyone who asserts that this adventurism isn’t attended by an escalation in risk is living in a fantasy world of “this time it’s different”.

Here is a common factor linking 2008 and 2017. In the years before the GFC, reckless deregulation created dangerous debt excesses. Since then, recklessness has extended from regulation into monetary policy itself. Now, as then, irresponsible behaviour has been the common factor.

A big difference between then and now, though, lies in the scope for recovery. In 2008, the banks could be rescued, because trust in money remained. This meant that governments could rescue banks by pumping in money. There exist few, if any, conceivable responses that could counter a haemorrhage of faith in money.

Obviously, you can’t rescue a discredited currency by creating more of it. [ED. hence the need to create local currency]

If a single currency loses trust, another country or bloc might just bail it out. But even this is pretty unlikely, because of both sheer scale, and contagion risk.

So there is no possible escape route from a systemic loss of trust in fiat money. In that situation, the only response would be to introduce wholly new currencies which start out with a clean bill of health.

An exercise in folly

To understand the current risk, we need to know how we got here. Essentially, we are where we are because of how the authorities responded to the GFC.

In 2008, the immediate threat facing the financial system wasn’t the sheer impossibility of ever repaying the debt mountain created in previous years. Most debt doesn’t have to be repaid immediately, and can often be replaced or rolled-over.

Rather, the “clear and present danger” back then was an inability to keep up interest payments on that debt. Because the spending of borrowed money had given an artificial boost to apparent economic activity, there was widespread complacency about how much debt we could actually afford to service. When the crash unmasked the weakness of borrowers, it became glaringly apparent that the debt mountain simply couldn’t be serviced at a ‘normal’ rate of interest (with ‘normal’, for our purposes, meaning rates in the range 4-6%).

The obvious response was to circumvent this debt service problem by slashing rates. Cutting policy rates was a relatively straightforward, administrative exercise for central bankers. But prevailing rates aren’t determined by policy alone, because markets have a very big say in rate-setting. This, ultimately, was why QE (quantitative easing) was implemented. QE enabled central banks to drive down bond yields, by using gigantic buying power to push up the prices of bonds.

Beyond the mistaken assurance that QE wasn’t the same as “printing money” – so wouldn’t drive inflation up – little or no thought seems to have been devoted to the medium- or longer-term consequences of monetary adventurism.

In essence, ZIRP (zero interest rate policy) was a medicine employed to rescue a patient in immediate danger. Even when responding to a crisis, however, the wise physician is cognisant of two drug risks – side-effects, and addiction.

The financial physicians considered neither of these risks in their panic response to 2008. The result is that today we have addiction to cheap money, and we are suffering some economic side-effects that are very nasty indeed.

The inflation delusion

Even the assurance about inflation was misleading, because increasing the quantity of money without simultaneously increasing the supply of goods and services must create inflation. This is a mathematical certainty.

Rather, the only question is where the inflation is going to turn up.

As has been well explained elsewhere, handing new money to everyone would drive up general inflation. Giving all of it to little girls, on the other hand, would drive up the price of Barbie dolls. Since QE handed money to capital markets, its effect was to drive up the price of assets.

That much was predictable. Unfortunately, though, when policymakers think about inflation, they usually think only in terms of high street prices. When, for example, the Bank of England was given a degree of independence in 1997, its remit was framed wholly in CPI terms, as though the concept of asset inflation hadn’t occurred to anyone.

This is a dangerous blind-spot. The reality is that asset inflation is every bit as ‘real’ as high street inflation – and can be every bit as harmful.

Massive damage

In itself, though, inflation (asset or otherwise) is neither the only nor the worst consequence of extreme monetary recklessness. Taken overall, shifting the basis of the entire economy onto ultra-cheap money must be one of the most damaging policies ever adopted.

Indeed, it is harmful enough to make Soviet collectivism look almost rational.

The essence of cheap money is policy to transform the relationship between assets and incomes through the brute force of monetary manipulation.

Like communism before it, this manipulation seeks to over-rule market forces which, in a sane world, would be allowed to determine this relationship.

By manipulating interest rates, and thereby unavoidably distorting all returns on capital, this policy has all but destroyed rational investment.

Take pensions as an example. Historically, a saver needing $10,000 in twenty-five years’ time could achieve this by investing about $2,400 today. Now, though, he would need to invest around $6,500 to attain the same result.

In effect, manipulating rates of return has crippled the ability to save, raising the cost of pension provision by a factor of about 2.7x.

Therefore, if (say) saving an affordable 10% of income represented adequate provision in the past, the equivalent savings rate required now is 27%. This is completely unaffordable for the vast majority.  In effect, then – and for all but the very richest – policymakers have destroyed the ability to save for retirement.

Small wonder that, for eight countries alone, a recent study calculated pension shortfalls at $67 trillion, a number projected to rise to $428 trillion (at 2015 values) by 2050.

What this amounts to is cannibalizing the economy. This is a good way to think about what happens when we subsidise current consumption by destroying the ability to provide for the future.

Savings, of course, are a flip-side of investment, so the destruction of the ability to save simultaneously cripples the capability to invest efficiently as well. The transmission mechanism is the ultra-low rate of return that can now be earned on capital.

A further adverse effect of monetary adventurism has been to stop the necessary process of “creative destruction” in its tracks. In a healthy economy, it is vital that weak competitors go under, freeing up capital and market share for new, more dynamic entrants. Very often, the victims of this process are brought down by an inability to service their debts. So, by keeping these “zombies” afloat, cheap money makes it difficult for new companies to compete.

Obviously, we also have a problem with inflated asset values in classes such as stocks, bonds and property. These elevated values build in crash potential, and steer investors towards ever greater risk in pursuit of yield. Inflated property prices are damaging in many ways. They tend towards complacency about credit. They impair labour mobility, and discriminate against the young.

More broadly, the combination of inflated asset values and depressed incomes provides adverse incentives, favouring speculation over innovation. And this is where some of the world’s more incompetent governments have stepped in to make things even worse.

In any economic situation, there’s nothing that can’t be made worse if government really works at it. The problems created by “zombie” companies are worsened where government fails to enforce competition by breaking up market domination. Though the EU is quite proactive over promoting competition, the governments of America and Britain repeatedly demonstrate their frail grasp of market economics when they fail to do the same.

Worse still, the US and the UK [and AUSTRALIA…] actually increase the shift of incentives towards speculation and away from innovation. Having failed to tax the gains handed gratuitously to investors by QE, these countries follow policies designed to favour speculation. Capital gains are often taxed at rates less than income, and these gains are sheltered by allowances vastly larger than are available on income.

The United Kingdom has even backstopped property markets using cheap credit, apparently under the delusional belief that inflated house prices are somehow “good” for the economy.

How will it happen?

As we’ve seen, monetary recklessness – forced on central bankers by the GFC, but now extended for far too long – has weakened economic performance as well as intensifying risk. In some instances, fiscal policy has made a bad problem worse.

In short, the years since the crash have been characterised by some of the most idiotic policies ever contemplated.

All that remains to consider is how the crash happens. The prediction made here is that, this time around, it will be currencies, rather than banks, which will be first suffer the crisis-inducing loss of trust (though this crisis seems certain to engulf the banks as well, and pretty quickly).

The big question is whether the collapse of faith in currencies will begin in a localized way, or will happen systemically.

The former seems likelier. Although Japan has now monetized its debt to a dangerous scale (with the Bank of Japan now owning very nearly half of all Japanese government bonds), by far the most at-risk major currency is the British pound.

In an earlier article, we examined the case for a sterling crash, so this need not be revisited here. In short, it’s hard to find any reason at all for owning sterling, given the state of the economy. On top of this, there are at least two potential pitfalls.  One of these is “Brexit”, and the other is the very real possibility than an exasperated public might elect a far-left government.

Given a major common factor – the fatuity of the “Anglo-American economic model” – it is tempting to think that the dollar might be the next currency at risk. There are, pretty obviously, significant weaknesses in the American economy. But the dollar enjoys one crucial advantage over sterling, and that is the “petro-prop”. Because oil (and other commodities) are priced in dollars, anyone wanting to purchase them has to buy dollars first. This provides support for the dollar, despite America’s economic weaknesses (which include cheap money, and a failure to break up market-dominating players across a series of important sectors).

[ED. More and more countries, not least China, are now buying oil without US$]

Conclusion

Once the loss of trust in currencies gets under way, many different weaknesses are likely to be exposed.

The single most likely sequence starts with a sterling crash. By elevating the local value of debt denominated in foreign currencies, this could raise the spectre of default, which could in turn have devastating effects on faith in the balance sheets of other countries. Moreover, a collapse in Britain would, in itself, inflict grave damage on the world economy.

Of course, how the next crisis happens is unknowable, and is largely a secondary question. Right now, there are two points which need to be taken on board.

First, the sheer abnormality of current conditions makes a new financial crisis highly likely.

Second, rather than assume that banks will again be in the eye of the storm, we should be looking instead at the most vulnerable currencies.

Losing faith in banks, as happened in 2007-08, was bad enough.

But a loss of faith in money would be very, very much worse.





Transportation: How long can we adapt before we fall off the Net Energy Cliff?

24 08 2017

This is an older post (2014) from Alice Friedemann’s blog, which somehow flew under the radar……. There is one bullet point in this that stunned me:

  1. America is likely to be outbid by China, India, etc., for oil exports.  At China’s current growth rate, China alone would consume ALL exported oil by 2020.

IF you have been following this humble blog long enough, you might know that I’ve been ‘forecasting’ that Australia will be totally out of oil by around 2020, and will therefore need to import 100% of our liquid fuel needs…….  what happens then?

When I asked Alice for more details, she replied “I suspect when I wrote this it was common knowledge, they’re rising empires as other nation fade. But now with China’s housing and other bubbles, and the corruption in both China and India, and ecological destruction, it’s probably not true now. I’ve met Australians who fear a China invasion someday but don’t know how realistic that is.”

Furthermore, as China’s spectacular growth rates have somewhat shrunk, we may get a few more years relief…. but how long will it last? Here’s Alice’s post, very interesting as usual….

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alice_friedemannThe problem we face is a liquid fuel crisis.  Absolutely essential vehicles, such as agricultural tractors and combines, railroads, and trucks run on diesel fuel, ships on bunker fuel.  They can never be battery or fuel-cell operated or electrified, nor do we have the decades it would take to build a new fleet even if there were a solution.

In 2011, the United States burned 29021 trillion BTU’s of mainly petroleum for transportation to move 13 billion tons of freight, worth $11.8 trillion, for 3.5 trillion ton-miles:

  • Trucks: 69%  1.4 trillion miles  9.0 billion tons
  • Trains: 15%   1.3 trillion miles  1.9 billion tons
  • Ships:   3%

Non-essential Transportation Fuel can be given to Trucks & Trains (see Table 1 below)

1) Cars (28%) and light trucks (26%) use 55% of transportation fuel.  All of that 55% could be shifted to essential vehicles.  Implication: That would force anyone who wasn’t 100% self-sufficient to move to a town or city because country gas stations will be closed (though rural freeway stations would remain open for essential long-distance trucks).  Also, petroleum will mainly be refined into diesel (this is already happening actually), which gasoline cars can’t burn.

2) Let’s give most of this fuel to essential vehicles: 7% air travel, 1% recreational water boats, 3% Construction and Mining, 1% recreational vehicles (snowmobiles, etc).  That’s another 11% shifted to essential vehicles (leaving 1% for the above, mainly to maintain and fix infrastructure).

3) Essential vehicles: 20% Medium (class 3-6) and Heavy trucks (class 7-8), 4% ships, 2% rail freight, 3% pipelines, 2% agricultural.  A lot of this freight isn’t essential, so about half of this, 15%, can be saved by not shipping non-essential cargo and shipping essential goods shorter distances.

Essential transportation has been given 81% of diesel from other non-essential sources (55% + 11% + 15%).

Meanwhile, production of oil will be dropping off rapidly, because:

  1. Global peak oil production was reached in 2005
  2. Oil producing countries will export less because they’re using more oil themselves (ELM model)
  3. America is likely to be outbid by China, India, etc., for oil exports.  At China’s current growth rate, China alone would consume ALL exported oil by 2020.
  4. The net energy cliff and the decline in the RATE of what we can get out of the ground now that petroleum is gunky and in remote places.
  5. The financial system can interfere with oil production —  when credit dries up after the next financial crash, the money to drill won’t be available.

Optimistic scenario: 20 years before we hit the wall 

The likely decline rate is expected to accelerate. We’ve been on a plateau since 2005, but once production heads downhill, here’s a guess at what the decline rate might be per year: 4%, 5%, 6%, 7%, 8%, 9%, and 10% from then on.

But not to worry, we’ve got some wiggle room. Remember, of the grand total of 29021 trillion BTU’s of petroleum burned in America (Table 1 below), 81% was reassigned from non-essential vehicles and cargo to essential agriculture, railroads, trucks, industrial infrastructure equipment, and miscellaneous important vehicles (ambulances, police cars, military, etc).

The other 19% — 5,541 trillion BTU — is the rock-bottom amount we need to  keep society going.

With a 4/5/6/7/8/9/10/10 /10/….. decline rate scenario, we’ll dip below the essential transportation fuel needed 16 years from now.

Of course, we can import/export less cargo, grow food locally, stop immigration, encourage 1-child families, ship goods shorter distances, and many other oil-reducing strategies as well.  This is when techno-optimists have a chance to shine, and Postcarbon, Bay Localize, Transition Towns, and many other groups help governments and communities adapt.  If all goes well, panic is avoided, and diesel fuel can be stretched out even further, that could delay collapse another 4 years.

Pessimistic scenario: 1-12 years before we hit the wall

What if states that produce energy and/or have refineries stop sharing diesel and gasoline with other states at some point? In that case, Alaska, California, Texas, Louisiana, etc., might last longer than 20 years and other states would hit the wall sooner.

Also, there are many black swans.  Here’s some wild guesses about how soon collapse might come if one of them strikes:

1 year if there’s a small nuclear war, China or some other nation takes down America’s electric grid(s) in a cyberwar, or a world war erupts.

2-5 years if there’s a major disaster, because that will probably bring down the financial system and also drive up prices of oil, natural gas, electricity, wood, cement, steel, and other resources needed to recover with.

3-8 years if the financial system collapses and several other events are triggered, such as social chaos, no credit left for new oil wells to be drilled, and other knock-on effects.

5 years if nations go back to negotiating deals between producing and non-producing nations and bypass the international oil market. That could suddenly cut off America’s oil imports. We’re already seeing this with the historic deal Russia and China just cut for natural gas. China, India, and other countries can afford to pay more than the United States for oil. Other nations are far closer to Russia and OPEC nations, where 83% of world reserves lie.

8-10 years if America decides to go back to the Middle east to keep other nations from getting the 2/3 of oil reserves there. Our military can’t fight without oil, so that means a lot less for everyone else

Okay. I’m going to stop guessing.  I have no idea how much sooner collapse would occur given various events, or what the actual decline rates will be.  But here are a few more black swans to think about:

  • Oil shocks make investors “Peak Oil Aware” and world-wide stock markets crash
  • Decline rates even higher than posited above due to a combination of the Export Land Model and middle eastern countries having lied about how much oil reserves they had.
  • Oil choke-points are blocked by terrorists or nearby nations
  • War breaks out in the Middle East
  • Peak coal, peak natural gas, peak uranium, peak sand, peak water, peak topsoil, peak phosphorous, etc
  • Electric grid outages increasingly common
  • Our infrastructure is falling apart, many bridges are beyond their life-span or dangerously in need of repair, ports, energy pipelines, water treatment, sewage treatment, and other essential infrastructure has a life-span less than 50 years. The steel is rusting and the concrete is falling apart.

So, what do you think?





Crisis? Which crisis are we actually talking about…?

16 03 2017

Since writing about the perceived ‘crisis’ in Australia’s gas supplies, the amount of bullshit coming out of the media, not least social media, is bewildering…… Some of it is downright amusing, and most of it would be really funny, were it not so tragic.

There is so much disinformation out there, it’s hard to even know where to start. The Lock the Gate Alliance fell right into the fossil fuel industry trap with this ridiculous youtube video….

The last thing you need to do if you want to stop the fracking fiasco is to tell everyone there is a shortage of gas… because how do you deal with a shortage? You frack for more..! Especially when there is no shortage and Australia is swimming in gas.

There are no winners in this. The gas companies are forced to sell gas cheaply to Japan and South Korea, neither of which have any energy resources of their own. Australia is the second largest gas exporter after Qatar, and will overtake it within a few years. We export to the nations with the highest demand too. Japan alone, which imports 34% of the world’s gas, so desperate are they for the stuff, could take all our gas, were it not for the fact other arrangements are already in place. Ironically, we sell our gas there so cheaply, it beggars belief. Worse…Qatar raises three times as much in royalties as Australia for selling  the same amount of gas. You can blame John Howard for this….. he didn’t believe in peak energy all those years ago when the contracts were signed, and literally forced the hands of the companies to agree to stupid prices which they are now unable to get out of. Unless the government steps in again.

It borders on the ridiculous that Japanese gas customers buy Australian gas more cheaply than Australians, especially as the gas is drilled in the Bass Strait, piped to Queensland, turned into liquid and shipped 6,700 kilometres to Japan … but the Japanese still pay less than Victorians. And I’m reliably informed that piping the gas from Victoria to Queensland costs ten times as much as moving oil…… imagine the ERoEI of doing this..?

Notwithstanding Alan Kohler announcing on ABC news the other night that the era of cheap energy was over (yes, he actually said this… nearly fell of my chair…), energy is not dear. Remember this video? If people were paid for their labour energy at the same rate as fossil fuels, they would be paid SIX CENTS AN HOUR…… that sounds so dreadfully expensive….

While AGL was earnestly talking up gas shortages in 2014, BHP Petroleum chief Mike Yeager told journalists:

We want to make sure that the market knows that the Bass Strait field still has a large amount of gas that’s undeveloped … We have a lot of gas in eastern Australia that’s available. It’s more important to let the citizens of Victoria and New South Wales, and to some degree, you know, even Queensland … there’s plenty of gas to supply those provinces for – you know, indefinitely.

AGL later quietly issued a release to the ASX conceding it had plenty of gas supply. So there you go, it has nothing to do with those greenies locking their gates up after all….

Even the Guardian is at it…..:

Gas prices have doubled and in some cases tripled because gas suppliers are now capable of exporting our gas to high paying customers in Asia.

Like whom exactly…?

And…

Complicating matters is that gas suppliers rushed in to sign export contracts and then subsequently found they didn’t have enough gas to fulfill them. This has left the Australian domestic market very short of gas.

For pity’s sake, where do these people get their information from…?

Australia swimming in gas

Now, keeping all our gas to ourselves gets complicated here, and I hope I get this right, as this whole issue is really starting to make my head spin. It turns out, much of the money invested in the gas export system was actually borrowed from Japan. Ever heard of the yen carry trade? It is when investors borrow yen at a low interest rate, then exchange it for U.S. dollars or any other currency in a country that pays a higher interest rate on its bonds. Like Australia does. So if we decide to tell the Japanese to get stuffed, their banks may well want their money back, at which stage the brown stuff hits the fan…… Does our merchant banker PM know this I wonder……?

Luckily for us, last September, Japan’s energy minister informed the world that imports of LNG would continue falling. They fell by 4.7% in 2015 and another 2% in 2016 amid a rising commitment to renewables and the rebooting of nuclear reactors that were shut down after the Fukushima disaster……

Meanwhile, they are all panicking here in Australia trying to keep our ‘energy security’ intact by building batteries and a new gas powered station in SA, and pumped hydro energy storage in NSW at a cost of some three billion dollars. All made with fossil fuels of course, because there’s nothing like them… Most of the benefits will be swamped by population growth within less than a decade……

Because dear reader, the crisis is not a gas crisis, it’s a growth crisis, and it’s all coming to a head. But you already knew that, and we all know nobody will do a thing about it.