Rob’s comments are in italicsDerek’s comments are in normal font

Our topic today then is "stock" and "flow".

Right, this is a fundamental point. I sometimes worry whether I'm labouring the point in our broadcast series by stating the obvious. This concept will provide clarity to every aspect of what you examine once you're clear on it.

A stock is the measurement of any quantity. We think immediately of stocks in retail terms - your stocks are the goods you've got on hand ready to sell. For manufacturers, stocks are the raw materials available to start manufacturing.

In the broader sense, it's any static measurable quantity. Your stock of money is the total cash lying around plus the contents of your various bank accounts. With a large water system, it's the number of gallons or litres in the tank.

The flow is the rate at which that stock increases or decreases. Taking that water tank example, the flow measures litres per minute, second or week being extracted or filled up. Both activities might happen simultaneously.

For retailers, stock means the total items available for resale. For manufacturers, it's the total raw materials ready for production.

I want to examine this more broadly. We could discuss the stock of money you own - the total of your cash, bank accounts, savings systems.

We've talked about this before on a macro level when we were talking about the profit and loss accounts and the balance sheet, for example.

Exactly. Consider a water tank - it's the number of gallons or litres of water inside. The flow measures the rate of increase or decrease in that stock.

Water might be drawn from the tank at specific litres per second while simultaneously being refilled. The net flow represents the difference between these rates.

The same applies elsewhere. With shop goods, you monitor corn flakes packets sold daily versus deliveries. The difference affects stock levels.

Regarding cash flow, expenditure represents money spent per day, week or month. The inflow comparison determines whether stock levels rise or fall.

This becomes particularly relevant when examining economic health through gross domestic product or gross national product. These flow measurements don't reflect total country wealth.

Sounds like that's eerily relevant to today's world.

Though simple, this idea deserves consideration whenever statistics appear. Question whether it's a stock or flow. Consider what we wish to optimise as a reasonable proxy for measuring well-being.

I was thinking of Carol Dweck's book, The Growth Mindset. She argues your mindset on any issue is either fixed, as in I am good at finances or bad at finances. Or it's a growth mindset where you might be bad at finances, but on an upward trajectory.

Right.

Maybe that's the same thing, maybe that's stock and flow of skills for instance or knowledge or something else.

Okay, so a brief, brief episode this week, but I think as I say, that's an important point to take on board and to really internalise.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

Rob’s comments are in italicsDerek’s comments are in normal font

Initial Comments on the US Election

The American election results on November 8th produced a Trump landslide. Many people tried to convince themselves it was neck and neck.

Not to anyone paying attention - I had it fairly nailed on that it was quite likely.

The significance for our discussion lies in the effect this outcome has had on various share prices. The most obvious impact will emerge over the next few months regarding pharmaceutical companies. Robert Kennedy's suggested appointment as Trump's Minister for Health, combined with his declared war on regulatory agencies, their industry capture, the harm from vaccines - this could puncture an enormous bubble.

That was the main one that came to mind. Bitcoin prices notably rose quite a lot after the election results. Bitcoiners were fairly bullish about the outcome. We'll see what comes next now. Judge them by what they do, not what they say.

Kennedy's presence in the government will make things interesting. The media's huge onslaught against him seems inevitable.

Very interesting.

It will be intriguing to see whether they can sustain that opposition, particularly if he gains wider credibility or makes progress with his stated aims. Simply bringing these issues into open public debate marks a huge step forward compared with the manipulated, suppressed public narrative. This manipulation has existed since the invention of newspapers to some degree.

In the past, more independent voices existed across different publications. Now they've been amalgamated into monopolistic conglomerates. They've continued what worked well for them, unable to think differently. We're experiencing some kind of era change. The next five to ten years will prove astonishingly interesting.

Let's go back to the issue of share prices then…

The Original Purpose of Share Ownership

Share ownership's original purpose emerged during the Industrial Revolution. Starting an enterprise then - perhaps a cotton spinning factory, steam engine production, railway line, coal mine or steelworks - required substantial capital. This meant literal capital: equipment, land, buildings, rolling stock, rails - everything needed for operation. The concept addressed two issues: these ventures typically exceeded individual funding capacity, people wanted opportunities without risking total ruin if the venture failed. Their liability remained limited to their shareholding investment.

The expectation was that profitable businesses would share their profits. Historically, as previously discussed regarding government bonds, the baseline interest for a very safe investment yielded two and a half percent. People were satisfied if £10,000 yielded £250 annually without concern. This represented substantial income in the early 19th century, providing a comfortable living.

Investing in an enterprise with returns from profits involved less certainty. Successful ventures typically yielded higher returns on investments, perhaps double the safe government bond rate. A dividend of roughly 5% of the investment seemed normal. Another general benchmark suggested that whatever the operational setup cost - land, factory, machinery, initial stock - should yield a 10% return. This meant 5% distribution to shareholders, leaving 5% for capital maintenance, machinery replacement, or operational expansion.

Present-day stock exchange shares differ, as the initial shareholding money's use for company infrastructure lies in the past. Investors tap into income streams derived from enterprise properties and profits. Many stock exchange shares yield significantly less than 5% dividend. Investors seek share price rises for returns. These expectations have been well fulfilled over the past 70 years, raising questions about sustainability and real value regarding money's purchasing power.

Looking at Apple’s Early Years

Apple Computer's early years provide an excellent illustration. Their Apple II, the first successful desktop computer, surpassed several rival machines. Once established beyond technological enthusiasts, VisiCalc spreadsheet software transformed it into a useful business tool.

VisiCalc represented the spreadsheet prototype, preceding Microsoft Excel. Despite Excel's sophistication running on vastly more powerful computers, VisiCalc satisfied perhaps 80% of current Excel uses. This basic spreadsheet managed rows, columns, numbers, labels, and formulae. It supported management tasks, stock lists, small business accounts, and future business projections.

Apple maintained solid gross profit margins on component costs against sales prices. They reinvested profits into manufacturing, marketing, and distribution expansion. This strategy yielded approximately 700% annual growth for several years, with turnover doubling quarterly. Six-month periods saw fourfold increases, reaching eightfold annual growth.

Richard Koch would describe that as a 'Star Business'.

That would be a star business by any standards!

Two Principle Statistics

In a business like this, early investors would not seek immediate profit distribution as dividends. Their interests were better served through profit reinvestment into business expansion. Tech firms typically avoid declaring dividends for many years, reinvesting profits into business growth with shareholder approval.

Two principal statistics help evaluate shares: dividend yield and price-to-earnings ratio. For dividend income seekers, yield proves significant. The simpler business models historically suggested avoiding yields below 5%, whilst higher yields indicated good investments, barring warning signs.

Long-term shareholders focused on growth potential examine the price-to-earnings ratio. This represents total profits, accounting for interest payments and tax obligations. Available profits amounting to one-tenth of share price yearly equals 10% investment earnings. These earnings might be fully distributed to shareholders or completely reinvested for expansion.

Nineteenth-century investors considered shares reasonably priced at ten times current earnings. Modern stock markets show higher price-to-earnings ratios. This historical figure compares last reported profits against current share prices. Apple Computer's scenario, projecting eightfold profit increases, rationally justified paying up to ten times anticipated earnings - an 80 price-to-earnings ratio betting on future performance.

Yes, because you're betting on the future really.

Contemporary tech stocks, particularly on American exchanges, dominate Western economic activity. Similar principles apply to the British Stock Exchange. Half-dozen tech firms' enormous nominal capital governs aggregated performance. Their faltering would significantly impact overall market performance.

Amazon, Meta, Microsoft maintain 25-35 price-to-earnings ratios, suggesting doubled or tripled profit projections. Nvidia, producing graphics cards and high-end mathematical computing hardware, demonstrates enormous sales growth, maintaining a 65 price-to-earnings ratio - approaching early Apple Computer growth levels.

Scale differences matter. Companies previously growing from £10 million to £100 million revenue yearly eventually plateau. Modern corporations worth trillions, like Apple's £3 trillion paper value, raise questions about sales justifying 60 times earnings share prices.

Early Apple expanded profits through increased machine sales, peripheral additions, and software sales - genuine growth opportunities. Modern profit expansion often relies on price gouging and planned obsolescence, forcing upgrades as previous models become unusable.

Workforce pressures intensify, demanding increased output from fewer personnel under harsher conditions. Companies often relocate to regions with lenient labour protection laws, offering minimal benefits.

Fiat currencies' declining purchasing power continues, likely to accelerate. Paper nominal gains in share prices partially offset currency inflation. Examining high-tech companies' extreme price-to-earnings ratios against real growth potential for new business activity raises questions about future revaluation.

Additionally, crowd dynamics significantly influence rising stock markets through herd behaviour and fear of missing out.

There's a feedback loop in play there.

Yes indeed, a positive feedback loop exists between rising prices and increased willingness to pay more, regardless of underlying rationality. This overview helps evaluate potential direct or indirect investments sceptically.

Comparing to Google Ads Click Prices

It feels like some prices reflect adding two plus two plus two to reach 222. This continues for years, creating shifting baseline syndrome where it becomes the new normal. We both encountered this working with Google ads. Google ads remain their primary revenue source. Share price movements seemingly influence click pricing adjustments.

Going back to the early 2000s, the price per click seemed fair or underpriced. Now it appears overpriced, particularly challenging for small businesses. Share price concerns likely drive this trend.

Precisely. Share buybacks significantly affect prices. Google recently demonstrated this after reporting enormous profits. They laid off numerous technical staff - concerning for a tech company - using profits for share buybacks rather than staff retention or company expansion. This practice, historically illegal in Britain, now represents accepted business practice.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

Key: Rob’s comments are in italics, Derek’s are in normal font.

So we're going to talk about doughnut economics today. And you mentioned before the call that there's a topical item for us to talk about too. So what is that topical item?

Developments in the BRICS Alliance…

Well, the topical item is that already it must be a year since the last time this was happening because they've just had a conference or they're in the process of having a conference of the so-called BRICS nations. BRICS acronym for Brazil, Russia, India, China and South Africa. Of course, that alliance group is getting expanded more or less on a weekly basis and now seems to encompass, I'm wondering whether it's actually a majority of the sovereign nations of the world.

Seems to be getting bigger.

So it's a pretty significant power block and it was quite interesting to see that Vladimir Putin was there, naturally enough, and addressed the leaders of all the other nations that had come to this conference and listened to attentively. It's very interesting that that contrasts with the situation in the West where we don't get to be addressed by Putin at all and nothing he says directly is seen to be reported in our media except to put some specific spin on it.

When one of our journalists, Tucker Carlson, went over to Moscow and interviewed him, he was roundly condemned for doing so. You would have thought that in a strange world, any leader of a large, prosperous, resourceful country would be of interest to the population at large and any journalist would be congratulated for having talked to them. And at least we would get to evaluate him on the merits of what we make of what he says. Anyway, the point being that it's yet again come back to the top of the agenda that these people are trying to set up a mechanism for trading between themselves that doesn't involve the dollar financing and the American banking settlement system. That is going to very seriously change the landscape of the financial structure of the world, if and when it happens. So watch this space really.

Anyway, let's get back to the topic of doughnut economics…

What is Doughnut Economics?

I mean, it's a funny name. It's the title of a book by a woman called Kate Raworth who studied economics at Oxford and was thoroughly disillusioned with it in terms of its relevance to the current world. That slightly odd title, Doughnut Economics, is a metaphor for her view of how we should be looking at economic activity.

And the image is that you have, if you like, a ring doughnut. And on the inside of the edge of the ring, you've got what she calls the social foundation of various aspects of human wellbeing, water, food, health, education and so forth and what we consider to be a satisfactory level of that. And on the outer edge of the doughnut you've got the ecological ceiling. It's quite interesting because virtually everything that she's highlighted - and the idea is the little ring because if you like there are segments of that inner boundary that cover different aspects as I indicated, you know, water, food, health, education and so on. And then there are segments around the outside of the ecological limitations.

And with one exception, all of the ecological aspects that she was enumerating were all aspects of what we might broadly call pollution. Whereas the way I would look at it personally is that pollution and all the different aspects of pollution are part of the ecological limitations. But other parts of the ecological limitations are things like resources, resources of raw materials, resources of energy, resources of food and agricultural land and so forth.

Yeah, having good quality topsoil and things like that.

And she has a number of images covering different aspects of what is covered in economic thinking. The seven ways to think, as outlined in the book, are:

* Change the Goal: Move beyond GDP growth as the sole objective and adopt a doughnut framework that sets a minimum threshold for human well-being (social foundation) and caps it by available ecological resources (ecological ceiling).

* Think in Systems: Recognize that economies are part of larger systems, including natural and social systems, and consider the interconnections and feedback loops between them.

* Design for Distribution: Prioritize distribution and equity, ensuring that economic benefits are shared fairly and that no one is left behind.

* Measure What Matters: Move beyond narrow economic indicators like GDP and focus on metrics that capture human well-being, such as life expectancy, education, and social connections.

* Regenerate the Economy: Emphasize regeneration and restoration of natural systems, rather than just exploiting them for growth.

* Decentralize and Democratize: Encourage decentralized decision-making and democratic participation, allowing diverse voices to shape economic policies and outcomes.

* Explore and Experiment: Foster a culture of experimentation and learning, recognizing that economic systems are complex and evolving, and that we need to continually adapt and improve our approaches.

Questioning Indefinite Economic Growth

She has a bunch of images about the way that this was seen in 20th century economics and the way it should be seen in what she calls 21st century economics. I think these are all well worth looking at and of course the goal in 20th century economics and the goal that all of our politicians, economists, and business people are talking about is that economic growth cannot be questioned. More economic growth is better and anything that inhibits it is bad!

I have a big problem with assumptions, can't be questioned. This runs across the board. If you can't question it, it's got something to hide.

There are several things about this. Whether we like it or not, we live in a finite world and growth of anything doesn't go on indefinitely. So that whole way of framing the discussion is absurd on its own grounds. And also, we've discussed previously that what they mean by economic growth is not the growth of more wealth or more prosperity, it's the growth of the rate of transactions.

It's extraordinary to me that that even gets off the ground as an idea.

Could you just define that, sorry, the growth of the rate of transactions?

Economic growth is defined as growth of gross domestic product. When you're talking about an individual country and if you're talking about the world as a whole, you're talking about the total of gross domestic product. And gross domestic product is within a year or some other period. It’s the total volume of economic transactions that have been made, the total volume of sales if you like.

You could have the situation that we have at the moment, for example, where over the course of our lifetime, we buy numerous washing machines, for example, and we have to replace them every few years. Now that obviously creates more transactions, which creates greater economic growth. But I'm no wealthier when my old washing machine wears out and I'm forced to buy a new one than I would had that been made to be more long-lasting and I still had the original one.

It's the opposite, you're poorer!

Yes, quite so. And so she suggests changing the goal to be living within this doughnut, the doughnut constrained on its inner ring by satisfactory social living conditions for every human being on the planet and on its outer ring by living within the constraints of our environment. As I say, she's mainly focusing on the negative aspects.

The Self-Contained Market No Longer Applies

She contrasts the 20th century economics as being the self-contained market. As most of these are from most of the 20th century images she has of the market are from Paul Samuelson's seminal work on economics written in about 1946 or 48, which is the basis of most economic courses at universities.

Samuelson’s big picture was the self-contained market where you've got businesses and households and the transactions are going round between the two. Rawson’s image for the 20th century is what she calls the ‘embedded economy’, which is interesting because it's got energy coming in from the sun and energy going out into space and in between the two of them it carries out all the transactions on the earth, which is an image that we've had before.

The third one was the question of human nature and it's a core concept in economics as I'm sure you'll remember from when you studied it somewhat that the idea is that we're all self-motivated individuals who are aware of the situation and act to optimize our own situation.

And apparently we have infinite wants and desires.

Yes, of course that homo economicus is a complete myth. It's an abstraction that bears no resemblance to reality. Everybody's knowledge of the marketplace or anything else is finite and limited and constrained. And mercifully, most people are not 100% self-interested and self-directed.

This was famously summed up by Margaret Thatcher saying there's no such thing as society. Whereas that is the attitude that taken to the logical extreme has created all the unworkability of the world.

So the contrasting image for 21st century economics is socially adaptable humans. This is what we have to be moving toward if we are ever going to create a functional workable world. And it's got to be one which is based on empathy and based on collaboration.

Dynamic Complexity Instead of Market Equilibrium

The image of systems in the 20th century was an attempt to be rather like physics and to be seeking equilibrium. One example of this is the crossover between supply and demand, which produces a certain equilibrium rate of production of goods and a certain equilibrium price. And once again, beyond the textbooks, it doesn't actually happen in real life!

The image for the 21st century is dynamic complexity, which we've discussed when we were discussing, for instance, the systems dynamics model of the limits to growth, the way that you have positive feedback loops of every variable in the system being affected by various things which tend to make it expand. Then there are negative feedback loops which tend to stabilize things and reduce the excesses and these all interact together and that is obviously a much better fit for the real world.

These feedback loops are everywhere as well.

Of course. The question of designing to distribute in 21st century, the idea was that growth would be the way that we spread prosperity to those who are not prosperous at the moment. And once again, we've had certainly economic growth as defined by them over the past 70 years and you have to question whether that has in fact brought prosperity to the least well-off parts of the world. I think you'd have to say that on every scale and in every country that economic growth hasn't actually benefited most of us and certainly not the poorest of the poor.

The trickle-down effect doesn't actually exist really.

Exactly. The poorest people have got poorer. Some people might dispute that. There's certainly a lot of people well below an acceptable level of basic physiological needs being met. So the concept that Raworth wants to see is the construction of a system which is distributive by design.

Moving on to the sixth one, create to regenerate. Once again, we're seeing, for instance, despoilation of agricultural land to take one obvious example. The traditional economists will say, well, the trouble is we can't really quite afford that. So what we need to do is generate more wealth so that we can afford it and then we can apply ourselves to it. Whereas the alternative that Rarworth puts forward is that we make our systems regenerative by design.

So an example of that might be that you're getting lower yields from your fields because the quality of soil is going down and eroding and you need every increasing amounts of fertilizer. So the traditional approach would be to say, okay, let's find a way to have every expanding amounts of fertilizer. Maybe there's a new approach of farming in a completely different way to actually regenerate the soil.

Exactly, that is precisely the kind of thing. And finally, the seventh one really in a way links back to the first, but rather than being growth addictive, we're agnostic about whether growth is a good thing or a bad one.

I would say that growth in the actual wealth that we have in the broader sense of food, living accommodation, health, is evidently desirable, but that doesn't have to be growth in terms of increasing numbers of financial transactions. And it could well be that for a given population size, there's a certain amount of transactions which are optimal. So I think that's a worthwhile overall picture. It's certainly a much more rounded approach and it's certainly one that stimulated a lot of discussion. If you're a reader, this is definitely a book that's worth putting on your reading list and seeing it and taking that on as part of your overall outlook on the world.

It sounds like the institutions and the root metaphors that we organize our society by are a barrier to moving to those more regenerative models.

They certainly have been. But I mean the heartening thing is the enormous increase in interest in these issues that we've seen, I would say, very much in the last decade. It's obviously an accelerating process. So let's watch this space.

A Breakdown Will Happen Before Regeneration

Perhaps some models of how we do things might have to break down first before you create something new.

Yeah, well they could well be breaking down before our very eyes.

I think that's quite clear. I was thinking as you were talking about the work of Eric Erickson, who is a psychologist who wrote a book about how we develop our self-understanding. You start off by inheriting a self-understanding from your parents and teachers and the people around you. Then as you go through life, you experience a series of breakdowns while you then generate more of you. That's why you go around in these cycles. But in order to have this kind of transformation, you have to have the breakdown first. That's why people have breakdowns, they actually do serve a function. I think that maybe extends to society as well.

That's a very interesting point. And of course, in a way, what you've alluded to there is what Hegel described as the dialectical process. And Marx took that idea over as well. The idea that in any system of human creation, you start off with what you call the synthesis, which is the accepted approach. And being a human construct, it has imperfections. As time passes, the imperfections become more intolerable until eventually there's a reaction that system has thrown out.

One which is in large respect an opposite to it, which is called the antithesis, is put in its place. But the antithesis is also imperfect and over time you get the same thing. But when that breaks down, it's time to create an amalgam of that antithesis with the original synthesis, which becomes the new reality.

When Marx took that idea over, he was specifically thinking that the synthesis in the time he was writing was the capitalist system and that the alternative would be that the antithesis from that would be revolution. And that when the results of revolution worked themselves out, you’d be left with a synthesis between that and the original one, which would be a satisfactory life on Earth. Of course, as we know, any attempts to do this in reality that we've had so far haven't worked out all that well.

I think that you could apply that thinking, for example, to the traditional political divides in that there used to be a fairly clear-cut pair of alternatives of conservative and liberal. Now those terms have become highly confused, sort of almost interchangeable and constantly morphing between one another. Similarly, the terms left-wing and right-wing have been done to death so that they no longer seem to be particularly meaningful. So we're having, if you like, a breakdown of the whole conceptual basis of politics apart from the practical consequences.

Yeah, because people get the same outcome no matter who they vote for.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

Key: Rob’s comments are in italics. Derek’s comments are normal font.

As the world is rapidly changing around us, I thought we could maybe comment on some current affairs items on this episode...

Terrorism Under The “Anti-Terrorism” Act

Yeah, it's been quite a week. One bit of news that really struck me is that a journalist in London had their house raided by 10 metropolitan police officers from the anti-terrorist group, who arrested him and confiscated all his computers and phones and so forth. I don't know whether he's actually been charged yet, but he's been accused of offences under Section 7 of the Anti-Terrorism Act, which covers providing information in support of terrorist groups. I think what struck me is that we're rapidly moving into a surreal world that was depicted in the book 1984 by George Orwell.

They got very dystopian quite quickly, haven't they? Or have they always been like that and it's maybe just not been as obvious maybe?

Well, that was a point I was going to come along to later. It's a real case of truth is lies, lies are truth. Good is evil. Evil is good. He was reporting about the atrocities that have been carried out by the Israeli assaults on Hamas and Hezbollah and various aspects of those, which he's been doing fairly consistently. But there you have it. I don't want to say too much because I don't want to get raided by the anti-terrorist squad. But you have to ask who are the terrorists in this exchange.

Who are the bad guys? I'm hearing big echoes of the Julian Assange situation as well. Obviously, look how that played out.

This brings to at least five the number of journalists in the UK who've been arrested or harassed or accused under anti-terrorist legislation, including ones who were agitating for the release of Julian Assange a year ago. This is something that even five years ago, if you'd said Britain is going to be clamping down on freedom of speech in an draconian way, you'd go, no, no, that kind of thing was not going to happen here. I remember back in the 1960s, there were left-wing activists, friends of mine saying, well, there'll be a fascist state established in this country.

But there's certainly a case to be made that this is exactly what's unfolding at the moment. Now, your point about it always having been going on and we don't know about it, that more or less leads into the next observation I was going to make. One thing is that even though I've been highly skeptical about the government all my adult life, and I've been highly skeptical about the mainstream media my entire adult life, in the last three or four years, I have discovered things that never in my wildest dreams would I have. Just recently, I'm reading a book called Trading with the Enemy.

It's specifically about the major American corporations, various banking groups, particularly Chase Manhattan and JP Morgan, the Ford Motor Company, IT&T and most of all the Rockefeller's Standard Oil Group of companies. All of these were trading with the Nazis, not just in the run-up to the war, but also right through it. They were supplying products without which Hitler would not have been able to wage the Second World War. These were fuelling the bombers, providing the ammunition, providing industrial components, providing motors, providing trucks, providing communication systems, all of which were directly involved in killing their fellow countrymen and the countrymen of our allies.

It's really extraordinary that that happened. There were various people trying to reveal this. All of the people who were trying to reveal it were marginalised, discredited and ruined. Except that it's not working today in the same way. Some people have got a pessimistic view of the way it's going to work out. But the powers that be are almost openly bemoaning the fact that they've lost control of the narrative, as though that's something that we should sympathise with!

If you go back, this has been going on at least since the 1930s. And actually, if you go on prior to that, and you look into the origins of the First World War, the First World War was actually instigated, not by the way that it was told in the history books, but it was planned. Whether or not the assassination of Archduke Ferdinand really tipped it off, or whether that was just a convenient excuse, much like we've had various large-scale justifications for things that the plans had already been long laid in resonance.

So, interesting times indeed.

Pushback on mRNA Vaccines

One other thing that's hit the news in the last day or two, there's significant pushback against the latest generation of mRNA vaccines. They've been introduced in Japan and it's not the people who are in line for this are people who are having their eighth boosters.

After I (Derek) had my first two - for reasons of convenience rather than conviction that they were beneficial - I very firmly said, well, I don't seem to have been damaged by that, but absolutely no more without question of doubt! And apparently in Japan at least, they're up to eight. I've had numerous invitations to go back for more and the last one I think said “come in and get your flu vaccine and COVID vaccine in the same visit”, which strikes me as not a good idea anyway, even if they were effective and even if they were conventional technology vaccines.

Even when you look at conventional vaccines, what has transpired in recent years is that these things have not gone through the rigorous testing that any other drug would be required to do. They don't have to do long-term placebo controlled trials. Sometimes they're measuring looking for adverse effects for a matter of weeks. That's another thing that's transpired.

Well anyway, the point is that the latest ones are not even the same technology as the previous seven. They're what they call amplified or enhanced. Not only do they hijack your own cells for manufacturing the spike protein, which is supposed to prompt an immune response, but they actually stimulate your cell biology to produce more copies of the mRNA messenger strand itself. And this strikes me as utterly reckless. I mean, if there had been 10 years of testing I would still have misgivings about it, as there hasn't been time to do any of that, it's beyond belief.

Anyway, the interesting thing is it's being introduced in Japan first, and Japan has a famously obedient and compliant population. There have been several businesses have actually put notices on the door turning customers away saying, “if you've had this latest untested shot, please don't come in here!” That's a new level of protest, how effective it will be or how widespread it will be I don’t know. But the mere fact that people are saying things like that in public is, I think, something that hit me. Has anything in the news truck you?

Just coming back to journalists, I think we do need good independent journalists now more than ever.

It's even being admitted by part of the mainstream that it was very easy for them to control the narrative. It was very easy to control the narrative when there were a whole bunch of newspapers which have always operated within the Overton window of acceptable conversation, and a handful of broadcasters. And then bemoaning the fact that now there are all these other channels.

All these pesky podcasters and substacks and whatnot!

Substack and Rumble continue to provide a platform for free speech. And, you know, I don't think there's a single person that I regard as 100% reliable to the point that I would uncritically take as gospel everything they say. I'm prepared to listen to anybody, even to people that I might well have been inclined to write off as nutcases a few years ago. I've got confidence in my own critical judgment and my own ability to triangulate between different sources of information, and come to my own conclusion.

That's important and I think within the freedom movement there's a lot of accusations of so-and-so being controlled opposition, just because you don't agree with him or her on certain things, or they've said certain things in the past. It’s not helpful.

Escalating Financial Pressure

There's another observation that occurred to me this morning, which is the amount of sheer pressure that people are under for their time and money. One of the things that prompted it is that Gina went to collect somebody from the station car park and the strict regulation is that you can park there for 20 minutes to deliver or collect people from the train. She overstayed the 20 minutes either because she arrived a bit earlier than she'd intended or because the train was a bit late, which does happen.

Then she got a penalty notice for £85, reduced to £50 if you pay it within 14 days, which is pretty draconian. I mean, that would be a fairly stiff penalty if you'd parked the car there all day and not bothered to get the ticket! Anyway, she never got a prompt saying the 14 days have expired and you now owe £85, but this was the end of August, so that's been September, so coming up to well over a month and a half. Anyway, she got a letter yesterday from a debt collector saying there was also a £70 charge, so it's now £155.

Whether or not this is legally valid or not, we're looking into it at the moment. I've got a friendly lawyer. It's full of threatening rhetoric, and it's difficult to know whether this is a bluff.

Sometimes they need to prove that they own the land, and often they can't.

I think in this case since it was a railway car park the railway certainly do own the land so I don't think that is...

But yeah, a lot of these privately owned car parks actually can't enforce the fees they issue.

We'll see. I mean, worse comes to worst, we should have to pay. What I have been advised so far is that it's unlikely they could justify the £70 administration charge unless it's been through court and involved them in extra outlays to do that. Anyway, we will see.

This prompted me to think about the fact that the whole car parking thing has been a typical example of the boiling-a-frog analogy. The point being that if you throw a frog into a pan of boiling water, it will reflexively jump straight out of it. Whereas if you put a frog into a pan of cool water and very slowly, gradually heat it up, it will acclimatise to the temperature change to the point that suddenly it's dead.

Whether that's literally true or not, it's certainly a very sound analogy for a great many confiscations by stealth that we've had over the course of the past 50 years. If you go back to the time when I started to drive, which I know to a lot of people will be ancient history, most municipal car parks were free. It was a service provided by the council to bring people into town and patronise the shops and businesses there. Street parking was entirely free. Then they brought in parking meters, originally designed to prevent people from parking all day and soaking up the available parking spaces so that people who came in to do their shopping had got nowhere to park. It was to impose a two-hour rationing on the limit that you could park for.

You had to pay six pence, that's two and a half pence in today's money to park for two hours. Then after they'd been in charge for a while, they gradually reduced the amount of time in some places. So instead of being two hours, it became one hour and then half an hour, then a quarter of an hour. And I think in some places it was even five minutes.

And at that point, they scrapped the parking meters and put in tickets that you had to buy to stick in your windscreen. When they were originally introduced and it was sixpence for two hours, there was actually an offence of meter feeding - anybody who had their car parked and was caught putting an extra sixpence in when their two hours expired, that was an offence in its own right and you'd get the same six-pound parking ticket.

If you didn't pay the parking fine, you were given a summons to go to the magistrates court. At that time, people usually paid it before they did and they had a surcharge for it because it had been a court charge. Anyway, at one point I had 50 parking tickets, which I hadn't paid.

Eventually, I got a summons specifying one of them. And I thought, well, 50 tickets at six quid is £300. You don't even get fined that much for running someone over and killing them! So they can't possibly hit me for that. And I don't know whether you know, there's a thing called asking for other offences to be taken into consideration.

And I always thought, well, why would people do that? But it's so that it wipes the record clean and they don't have to go through all the bureaucracy of charging you for every single offence you've done. I went along to the court and they were pretty astonished to see me, and they were astonished when I said I plead guilty. They looked surprised because almost invariably if you want to plead guilty you do it by post and then they send you a fine and costs. People usually only turn up if they're pleading not guilty. So they said, all right, is there anything you want to say? And I said, yes, I've got dozens of these things!

And one of the magistrates suppressed a giggle and got glowered at by the chairman of the bench. They went out to deliberate, and they came back, and they said, well, we're increasing the fine to £8 and charging you £4 costs. They never mentioned the other tickets, I never heard any more about them.

Of course, all that whole process has been automated now and I don't think you stand the option of going to court. Of course, there's a more draconian penalty they've got in the pipeline in that they can lodge it as an unpaid debt and then it appears as a black mark on your credit record and you might not be able to get a mortgage and buy anything on hire purchase or any number of things - get a new credit card, bank overdraft, any number of inconveniences. Once that's happened you can't argue against it.

Coming back to the point, once the principle had been established in people's minds that, yes, you have to pay to park, it's been extended more and more widely. I mean, the last time I saw a municipal car park that didn't have a charge on it was about five years ago and it was in a run down former mining village.

It varies by council, there's a few around here.

Yeah, yeah. There would be. I mean, the whole place was so poverty-stricken that if they put a charge on the car park, nobody would have been able to afford to go to it. And the last time I saw a free car park in the south of England, I should think, was probably more than 30 years ago. And almost everywhere except anywhere that isn't parking restricted on the street in a city is going to be charged for. And the charges are now astronomical. In any of the London airports, just to drop somebody off for 30 seconds, you've got to pay five pounds. In fact, you'd have to pay five pounds if you drove into the airport and out again without stopping. So it's become absurd.

And I was thinking about this, that people are just under an amount of pressure which is unbelievable compared with many years ago.

It's not even cars, if you compare the price of a train journey in, say, 1955 to today, even accounting for inflation and so on.

Yeah, so-called inflation. I was trying to figure out...to live as one would be able to live on an income of let's say £3,000 a year in 1970, you'd have to be earning at least £100,000 a year now. And it could even be closer to £200,000. And there were certainly a lot more people earning £3,000 a year in 1970 than are earning £100,000 now in this country. And somebody living on minimum wage working 50 hours a week could support a family without any debt. They didn't have the opportunity to get into debt even if they wanted to as a rule. Whereas somebody working on minimum wage working 80 hours a week now, there's no chance of being able to support a family. You'd need two people doing that.

So the general population is under a lot more pressure. And a typical white collar working week would have been 35 hours, 30 in some cases, but I don't think anybody works a 35-hour week now. It's a deliberate attempt to prevent people from having enough time to stop and think and reflect on things.

Next Time: Doughnut Economics

We'll talk next time about doughnut economics. I'll just say a little bit now about the strange name. The idea is that we're constrained in two different directions. We're constrained on the outside of the ring by ecological limits on the planet, limits of resources, limits of energy, limits of pollution that we can generate. And we're constrained on the inside by limitations of what we aspire to as a satisfactory standard of human wellbeing.

There's a ring between, and there are different dimensions of this both on the inside and on the outside. And there's a ring between them, which is if you like the safe zone which we're in. And in almost all of those segments around the circle, we've either exceeded the acceptable limits or are very close to them. So that provides a framework for evaluating what's going on and for planning what is a reasonable aspiration for the future. So we'll go into that in more detail next week. I hope everybody's enjoyed this rather rambling conversation!

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

Key: Rob’s comments are in italics. Derek’s comments are normal font.

Our topic today is energy, which on the face of it may not seem to relate that obviously to sovereign finance, but we think it does. So where do we need to start?

Why We Need Energy

Let's start first off with why we actually need energy. We need energy first and foremost for staying alive in the form of food. We need energy for moving around and we need energy for moving things around and we need energy for manufacturing anything.

It's important to realise that until the Industrial Revolution, the sources of energy we had consisted of human muscle power, animal muscle power, and a little bit of energy from windmills and water mills, and the burning of wood.

If you think about it, all of that derives directly or indirectly from the sun. The energy from the sun is turned into organic matter by the action of photosynthesis in plants and algae. That is either directly consumed by animals or human beings, or else it's eaten by other things which in turn are eaten by animals or human beings. The wind power derives from the sun warming the atmosphere and creating currents of air as some parts of it rise and air moves from other places to move into it. The water flowing down a stream derives from the sun evaporating the seawater and lakes, going into the atmosphere, condensing as rain and falling, running into the water courses and eventually into a river where it drives a watermill. So the entire thing is from current sunlight.

Even tidal energy would come from the moon?

Well, no, that is actually an exception to it. The tidal energy really is tapping the angular momentum of the Earth and the Moon. The water is, if you like, lifted in a hump towards the Moon and to a lesser extent towards the Sun. As the Earth rotates underneath it, that hump in the water creates a high tide and as it passes it creates a low tide. So tidal energy comes from that angular momentum of the Earth and consequently, if you like, slowing the Earth down and slowing the orbit of the Moon very slightly. In fact, that is happening whether or not we put a Tide Mill somewhere and extract some of it in the form of useful energy.

The laws of thermodynamics

I just want to say briefly a few words about the two laws relating to conversion of energy. These are called the laws of thermodynamics, which makes it sound obscure and complicated. But in everyday terms, we'd say the laws of heat and movement. And in fact, it's slightly wider than that.

It was given that name because the initial interest was in relation to improving the efficiency of steam engines. The first law says that energy is neither created nor destroyed. Since Einstein discovered the principle of relativity and the equivalence of energy and mass, strictly speaking, we should say that the total amount of energy and mass is neither created nor destroyed. I'll come back to that in a minute when we talk briefly about nuclear power. But for all intents and purposes, the traditional law of conservation of energy is the first law. The second law has got various forms.

One way is that heat cannot of itself run from a cold body to a hotter one. Another way is to say that entropy always increases. Entropy is, although I think science courses never discuss this until you get to university level, in fact, something that we're all familiar with. We're all aware that if you watch a movie, it's usually pretty obvious whether the movie is running forwards or running backwards because things look ridiculous if the movie is running backwards. If you have a glass falling from a table to the floor and shattering, the energy at the end of that process is the same as at the beginning. But because there's a certain amount of energy by the fact that the glass is higher up in the gravitational field to start with, as it falls it gets faster and faster. That changes into the energy of movement. When it hits the floor it breaks into pieces, the pieces scatter around and they stop moving. The energy is now being transferred into a small amount of heat because all the molecules in the bits of broken glass are moving a bit faster on average than they were before it happened. But there's no way that energy is going to organise itself so that they all spontaneously move back together, stick together and jump up in the air and go onto the table.

Yeah, just like you can't un-bake a cake.

You can't unbake a cake, can't unscramble an omelette. These are all, if you like, equivalent ways of stating that second law in everyday terms. It also explains the processes of rot and corrosion and decay and erosion by wind and other natural processes. On the face of it, it seems that the phenomenon of life is a contradiction to that, which is why in the past there were various theories about the vital force and so forth. But it isn't actually an exception because whenever you get order happening, and probably the simplest example of this is if you've got a super concentrated solution of salt and something precipitates it's starting to crystallise. Obviously the crystals have got much more order than the solution because there's a structure there, there's a defined position subject to a little bit of vibration of all the atoms in the crystal, whereas in the liquid all the molecules could move around.

But there is heat released when something crystallises, when anything solidifies. Similarly, you have to put heat in in order to melt something. That actually balances it out because low grade heat, heat which is not significantly different from its surroundings is a higher entropy state than heat which is at a much higher temperature than its surroundings. The same thing happens with human beings. We need to take in something like 2000 kilocalories a day of chemical energy in the form of food. That is for the most part dissipated by the heat that we lose from our bodies to the surrounding environment. The heat that we lose from our bodies offsets the maintenance of the structure and the organisation of our bodies and it also offsets anything that we do, whether it's writing a poem or building a house. That obviously is creating order and it's offset by the disorder that we create by the heat that we radiate.

The entire phenomena of life on Earth and everything that living things do is because of that flow of energy from the sun. You've got the surface of the sun at around about 5,000 degrees centigrade. That arrives at the Earth every day and a similar amount of heat is radiated from the Earth on the dark side during the night time into deep space, which has got a temperature of approximately minus 270 degrees centigrade, three degrees absolute. So it's that flow of energy. Of course, the fossil fuels, that also is energy which came from sunlight. But the difference is it came from the sunlight three or four hundred million years ago, over a long period of time, many millions of years. We have burned through the overwhelming majority of that which is available to us from those sources in the last 300 years.

Of the easy pickings. Yeah.

Using Energy to Get Energy

It's not just a question of difficulty. It's also the question that it takes a certain amount of energy to extract those fossil fuels to transport them from wherever they are to wherever we're going to use them. Whereas 300 years ago, there were lots of coal fields where all you had to do was scrape the surface topsoil off them and dig the coal straight out of the ground. That's why they're called coal pits, even though, of course, before long, it was no longer a pit in the sense of a surface hole like a gravel pit or a chalk pit where you could just dig it up and cart it straight away but the veins were hundreds of feet under the ground. You needed to sink a deep mine shaft and send the miners down in a lift and bring the coal back up in the same haulage arrangement.

Similarly with oil, a hundred years ago you could dig through 20 or 30 feet of rock and the oil would be there under pressure, it would spurt out of the ground and you'd simply have to put a pipe and a valve on the top and run it from there into barrels. Whereas now of course we have to drill down thousands of feet under the ground, often in very inaccessible places on the bed of the sea. All that takes energy.

So you have what we call energy return on energy invested. Once we reach the point where the energy that it takes to get a kilowatt hour of energy worth of oil, once it takes as much energy to get to it as you're going to get back, you're no longer getting a net result. I think we must actually be very close to that because already, as you may well be aware, when you buy a tank full of petrol, 10% of that petrol is actually ethanol, ethyl alcohol.

That comes from the fermentation of cornstarch and then the distillation of that. All of those are pretty energy intensive processes, although the energy going into the cornstarch which you then get into the alcohol, is available to us. It's come from the sun. It's been captured by the leaves of the corn plant stored in the corn cobs. These need to be harvested, mashed, fermented. Heat needs to be put into it to distill the alcohol off. It's difficult for me to believe that that is actually a net energy gain.

The only reason for it is that the economics of it subsidise the cost of the crude oil and the processing of that. Anyway, what we're going to see is not a sudden running out but increasingly increasing difficulties and supply shortages and that and we've had little hints of that already, haven't we?

You've talked in the past about there being various inflection points in human history and the industrial revolution being the last major one of those. And these changes in energy consumption from things like water mills and so on, to fossil fuels. But we're still very much in that. And we're now saying that we're now living through another inflection point in human history. So there is going to be another change in how we harness energy, surely.

The Sun Provides More Than Enough Energy

Yeah, yeah. And one of the ways that I differ from a lot of the commentators on this is that I think that there is a potentially bright future for us. It is possible that we could have a comfortable standard of living for the entire human population using the energy flows from the sun.

We would be doing things massively differently from the way that we are at the moment. And one of the things I would say is that there's, it seems like there's sort of almost frenetic rush to get through these last remaining reserves of fossil fuel as quickly as possible.

Is that not just because that's the way the industry set up so the industry is self-preserving somehow?

It's very difficult to know. I think both politics and commerce and finance all operate on very short time horizons. And no individual has the capability to buck that trend, I would say. That's the best explanation. I mean, as we were talking last week when we discussed the limits of growth, the feeling that I had, and literally many millions of other people had, 50 years ago in the 1970s, was that it was so obvious that we were needing to change course, that we should get on and do that as quickly as possible so that we could have a smooth transition.

But that just did not happen. And we totally underestimated the, you could say, the inertia, the momentum of the existing processes. There were various attempts. I mean, when Jimmy Carter was president of the United States, he famously installed solar panels on the roof of the White House, which is quite a sensible thing to do, and it was also a very good example to everybody. And the first thing that Ronald Reagan did when he became president subsequently, was he ordered the solar panels to be stripped off, which was another symbolic gesture.

It shows that how you do one thing is how you do everything.

Yes, exactly. You know, and there were 55 mile an hour speed limits. So you had these ridiculous big powerful American cars chugging along the freeways very slowly in an attempt to slow the rate of fuel consumption. And once again, that was repealed. And there was a little bit of a phase for more economical vehicles, but this is offset by a very big trend towards absurdly oversized four by fours everywhere you look around. But one of the things that I've been reflecting on recently, amidst all this madness, is the most extreme example of it has got to be warfare and the preparation for warfare.

The Impact of War

I've just done a few back of an envelope calculations on this. And it's obviously particularly relevant now that we've got two major conflicts going on. There's the incessant bombardment of Gaza, which it seems there's no end to until the entire area has been obliterated. And there's the war in Ukraine. Now, quite apart from the perilousness of and the recklessness of these enterprises and the sheer callous inhumanity and the suffering, if we look at it from an energy point of view, it really becomes quite extraordinary. Every ton of high explosive is equivalent to 120 kilowatt hours of energy. And to put that in perspective, that's the energy usage of a typical British household in a week. Now there have been... I just had a quick look to get some statistics. The bombardment of Gaza, the figure I found was from June. I think you could probably increase this by 30% to bring it up to date anyway. But as of June, it was estimated that there have been 70,000 tons of ordnance dropped on Gaza.

That is incidentally, that's about five times the total amount of bombs that were dropped on London during the Second World War. So it's quite an astonishing amount. The energy in that high explosive has got to come from somewhere. The manufacture of trinitrotoluene, TNT, or nitroglycerin is obviously an industrial chemical process. It has to start with chemicals that have got energy into them and the entire process requires more energy. So there must have been energy which is going to have come from oil or coal or natural gas originally to put into that energy in the form of the explosive content. And because we were saying about the second law, I'll just go back and point out to another thing.

That second law, as well as the general sort of dissolution of structure that it implies, also means that it's the reason why there could never be such a thing as a perpetual motion machine. I remember when I was, I don't know, suppose, an eight or ten year old, I used to think about these things. I thought, why couldn't you have a perpetual motion machine. Suppose you had an electric motor and you coupled it to an electric generator and you use the output of the electric generator to drive the motor. Wouldn't that go on forever? Well, there's a couple of things about it. Of course, even if it did, as soon as you actually try and do anything useful with it, like couple it to a machine to lift material up in a hoist or run a lathe to manufacture something, you'd be taking energy out of that and that would run it down. But even if you didn't do anything at all, it wouldn't go on forever for the very simple reason that however good your wires are, there is some resistance in them. So the wires would heat up and energy would get dissipated away. However good your bearings are, there's going to be some friction in the bearings. You've got air resistance as well. So that is basically the reason why there can't be perpetual motion.

Bearing in mind that you've got that 120 kilowatts in each ton of high explosive, it must have taken a lot more than 120 kilowatt hours worth of energy because of the inefficiencies of every stage of the process. And of course, that's just the explosive content. There's also the steel or whatever the casing is made of, the control mechanisms, the fusing, all of those take energy to manufacture and the thing has got to be transported from wherever it's made to wherever it's eventually exploded.

And all of this increases GDP and therefore is a good thing.

Exactly. That appears to be as far as the thinking goes in a lot of circles.

And of course, when it explodes, it destroys something. I mean, if you take something like a house, for instance, there's something like a couple of man-years of work involved in constructing that house. To actually build it these days, I think it probably takes typically four people working on it at any one time, not necessarily the same for initially there'd be bricklayers and hod carriers and then they're going to be carpenters and plumbers and plasterers and so forth. Typically I think you can get a house built in about three months. There'd be four people working on it any given time. So that adds up to a man year of work. And at a rough guess, I'd say probably another man year in all the various factories to make the bricks and pipes and planks and so forth.

So there's a reduction, if you like, of energy locally in the construction of that house, as there is a local reduction of entropy whenever anything is manufactured. And what you do when you apply that ton of high explosive and destroy that house is you've actually, far from doing anything constructive with it, you've actually hastened the process of energy by destroying something that has been created. And I mean, this obviously pales into insignificance compared with the suffering and the anguish of the people who are caught up in the war.

It's a big opportunity though if you plan to then rebuild that area.

Of course, yeah, exactly so. So anyway, that's just an overview and it is kind of food for thought about how we go about organising ourselves differently over the next couple of decades if we're not going to revert to the feudal ages or the Stone Age.

I'm sure that from a technical standpoint and from an energy flow standpoint, there is no reason why every human being on this planet could not have a satisfactory, comfortable life of health and freedom and self-expression. But we shall see.

There's plenty of energy. So there is plenty of energy coming from the sun every day.

There is several hundred times the amount of energy that we're currently using from all our sources flowing through the Earth from the Sun in total. So we only need to tap a relatively small amount of it. But in so far as thought is being given to that, a lot of the solutions from an engineering standpoint and from a resources standpoint are entirely fanciful.

It's noticeable to me at the moment that there's a lot of, for instance, using agricultural lands to fill it full of solar panels, which clearly doesn't make sense to me. I've seen different applications where people have put solar panels on the top of a car park. That kind of makes sense to me because it's not been used to grow anything or create anything.

Yeah, it makes no sense whatsoever.

And there's plenty of deserts all over the world. I mean, obviously you've got to then, if you're relying on that, you need to transmit the electricity from the desert to where it's going to be used. But that is a solvable problem.

Yeah, and the solar panels have some inputs as well, don't they, in oils and what not, go into them.

Well, the solar panels require very sophisticated manufacturing. So I don't see the African and Asian poverty stricken villages having access to the resources to buy solar panels, for one thing. And for another thing, solar panels use a lot of very rare elements in them.

And I'm not sure what the total availability of those is, it seems like, again, based on a quick back of an envelope calculation, replacing the entire current energy generation capacity is improbable using solar panels, particularly if you then add into that an assumption that we're going to have a similar kind of transport infrastructure with everybody using individual cars, except that they're going to be electric rather than gasoline or diesel.

It doesn't, it obviously doesn't add up just based on the resources needed to make the batteries.

Local Rather Than Centralised Distribution

We need some much bigger blue sky thinking and you know perhaps we can have another whole episode going into speculating about that in more detail.

We're not going to get there by chopping down more forests, putting up more wind farms, putting solar panels in fields, all of that. Which to my eyes is largely what's happening at the moment.

Yeah, well, a lot of this, of course, is still thinking in terms of the centralised distribution method rather than distributed generation. I think the future is definitely going to have a lot more energy capture on the level of individual household and of a village or a community or a district rather than you know the present capacities of multi-thousand megawatt power stations. They will have a place in the overall picture but it will only be part of it.

Even in places like Egypt where they've built huge hydroelectric dams, like it still has huge knock-on effects because it's basically stopped the Nile from running. So then, you don't get the fertile land and it has knock-on, it has these knock-on effects. The same in South America, in Brazil and Paraguay with the Itaipu Dam. Yeah.

Yeah, absolutely.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

Key: Rob’s comments are in italics, Derek’s comments in normal font.

We've argued on this show several times that the human species has been through a number of inflection points throughout history. It's fairly clear to anyone alive today that we are living through one of those inflection points. Like a wide range of, on the face of it, crazy things happening. We thought we might dedicate an episode to comment on some of these events.

Yes as I've said in the past, we're certainly running into the wall on various things. We'll run out of fossil fuels in the next few years or decade or two. It won't be a sudden thing. It will just get harder and harder to extract, more and more expensive. As that happens, the wider population will likely be at the back of the queue.

I think that also means they just put energy bills up and up?

We've already seen that happening. Anyway, that's one thing. The main topic of this podcast series is finance and in particular, we're seeing the world hovering on the edge of hyperinflation. It'll be very interesting to see how that unfolds.

Escalating Conflicts…

As people grow more frustrated with the situation, there's activation on a number of fronts, much of it unhelpful. Right now, one unavoidable issue is the two major conflicts in the world: the Ukraine versus Russia war and Israel versus an increasing number of surrounding states. This past week, the three biggest events were the beginnings of Israel's sneak attack with many booby-trapped pages, which, apart from targeting Hezbollah personnel, caused significant collateral damage to people nearby, followed by missile strikes into Lebanon on an extraordinary scale.

Then came retaliation from Iran. It seems this is yet another situation where provocation was ramped up until they acted, and then they blamed those who retaliated, which is exactly what we're seeing in the media. To clarify my position, I don't support violence on either side, but it seems particularly—

You've got to pay attention to the narrative and to the things that just are nonsensical.

Indeed. We've heard much about the Iron Dome of anti-missile defences. I heard someone describe it as a toilet paper dome. Obviously, this worked fine against 30-year-old Soviet missiles and homemade rockets.

But when faced with modern missiles that Iran clearly has, despite heavy censorship, we've seen plenty of footage where streams of missiles obviously got through. There are reports of very few casualties for the size of explosions we've seen. I'm unsure how well-targeted the missiles were. Apparently, they aimed at several air bases and the Mossad headquarters. Once again, we've heard complaints that this was in the middle of a civilian area. Of course, when the other side suffers massive civilian losses, we're told it's because Hamas or Hezbollah were hiding in civilian areas. Israel has obviously put their Mossad headquarters in the middle of a city somewhere.

It's bang in the middle of Tel Aviv, isn't it?

This is clearly, once again, a regime backed by the United States. Sooner or later, this will bring the United States into a confrontation with Russia, even if the Ukrainian conflict doesn't set that off first. It's a situation that only a few years ago would have seemed inconceivable. For decades, we've been told that the policy of mutual assured destruction, or MAD as it's quite appropriately abbreviated, was what prevented major conflict between world powers. Yet it seems that the sheer recklessness with which these military objectives are being pursued would give lie to that.

I've heard several commentators say that obviously with mutual destruction, that's effectively a stalemate. And if a stalemate is the best you'll get in a losing situation, then maybe that's why the people instigating these things are pursuing that tactic.

These events are at the forefront because they've been in the news within the last seven days, so I didn't think we could run an episode ignoring them.

I guess the question then is, what are the likely knock-on effects? Is this just something to monitor and be aware of?

It's a surreal situation because it's difficult to believe this is happening on the same planet where we're sitting here in relative peace and prosperity, even if it's been more constrained than a few years ago. I can't really imagine what it would be like living in Beirut or Gaza, seeing increasing waves of destruction day after day, losing everything I own, and witnessing people indiscriminately murdered all around me. It's also extraordinary how numb people seem to be in the face of it.

I think when it happens in other parts of the world, it's just a distant thing that's easy to ignore or say you're not political and therefore it doesn't apply to you or I don't know.

But it does apply to us. I think it's critical to the long-term survival and prosperity of the human species.

Indeed. For instance, during Vietnam, there was enormous pushback against it. There was a massive protest movement against the war in all kinds of ways.

It's more active involvement than the US though, isn't it? In terms of troops on the ground. Do you think?

As there weren't British troops on the ground, it didn't explain the strength of the opposition here. It did seem that amongst the people who weren't against the Vietnam War, at least they were prepared to enter the debate and trot out the arguments. Even if, particularly with the hindsight of viewing it from this historical perspective, the arguments seem a bit lame. Well, you know, otherwise the communists will get in and subjugate the population, then communism will spread all over Southeast Asia and that's really evil so we have to deploy it. At least people were saying that, whereas I don't get the impression that, apart from media outlets, there's really any great public debate on either side about what's happening with these things.

It certainly seems to be accelerating us towards some kind of crunch point, and people seem oblivious to the very real threat that it could tip over into a nuclear exchange. That would probably mean a life of deprivation and misery for those of us left alive at the end of it, even if there is anybody left alive, which is not a foregone conclusion.

It's certainly contributing to the inflationary pressures and to think it's towards hyperinflation on the fact that there seems to be unlimited money available to send to Israel or Ukraine or whatever. And yet we can't pay pensioners a fuel allowance over the winter. Like that tells you where the priorities are.

Exactly. So anyway, those are just the thoughts closest to the surface, given that this is the week we've just lived through.

Comments on the Climate Change Debate

Yeah, in terms of current events, I wanted to ask you about the climate change debate as well. You know, we've, this is obviously something that crops up a lot. We've got an episode coming out about energy. My stance personally is that I am pro-environment. I think we are living under a capitalist system, which is chewing up our natural ecosystem in the pursuit of short-term profits or zero long-term thinking. I don't think you can argue against things like deforestation or species collapse, particularly looking at insect populations. I also think that the climate change debate has been completely hijacked by carbon as a single issue. I don't actually think the amount of carbon in the atmosphere is that big of a deal. I think historically it's been much higher. So...

I'm mostly interested in it from a narrative perspective of like, where has the narrative been hijacked? What powerful interests are doing that?

I agree. I'll come back to what I said that regardless of the amount of pollution in the form of carbon dioxide, it's only one of many forms and it's possibly not the most extreme form. Having said that, the carbon which has been locked up underground in the form of coal and oil and natural gas suddenly being consumed and turned into carbon dioxide over the course of a couple of hundred years is obviously an unbalancing act. It's undoubtedly the case that the concentrations have gone up and that the concentrations of carbon dioxide in the atmosphere do raise the average temperature. It's beyond doubt that fairly small temperature ranges can have a disproportionate effect on weather systems. So all those are true. It's also true that increased concentrations in the air cause an increase in concentrations in seawater and therefore—

Yeah, because the ocean is the biggest sink of carbon, isn't it? And it trails temperatures, like the temperature has to change and then there's a reaction in the atmospheric contents of carbon about 800 years later or so.

Yeah, whatever the effect is on the climate, there is also the direct effect it's having in killing off coral reefs at a great rate, which has a knock-on effect because that's an important part of the entire marine ecosystem.

It's a complex ecosystem. And when you destroy complex ecosystems, you can't just regenerate them. It's like when you chop down a forest.

The concentration is going up. It's undoubtedly the case that the combustion of fossil fuels is putting a greater amount of carbon dioxide into the atmosphere. We've had a very significant proportion of the world's forests felled over the last few decades, which is also pushing the situation out of equilibrium in that way. Now, having said that, it's very interesting that in the past week or so, it's come out that John Kerry, who was the minister in the US government for dealing with climate change, was revealed to have had a family private jet. I don't know whether you've seen the cross-examination of him on some Senate subcommittee where he first flatly denied ever having a private plane, and then when pushed on the point said, yes, well, my wife did have a private plane.

I would buy into it a lot more if these people were cycling to work on a push bike or something. But okay, I will do it if they do it. But until then, I think I've been strung along.

Exactly. Plainly they're not taking it seriously if nearly all of these so-called leaders think it's appropriate to fly in a private jet. And the private jet uses more in a single flight than your car does in an entire year. The same goes for every single military aeroplane. The biggest contributions to consumption are military expenditure. Every time a bomb goes off, it probably produces more carbon, not to mention the other destruction, chaos, mayhem and suffering it causes. But purely in terms of immediate waste of fossil fuel energy, it uses more than your car does in an entire year. So the population at large being lectured on the fact that they're doing all this doesn't really hold up. It's very interesting that one of the solutions was supposedly this carbon tax or carbon credits, which is ridiculous. It's like somebody cheating on their wife and then saying, well, I paid somebody else to stay celibate to make up for it.

It's nonsense. But at the same time, all that has produced is another whole lot of financial transactions without doing anything to affect the real world, which people have profited from handsomely.

Yeah, and the contentious issue in London is the ultra-low emissions scheme as well, where for the princely sum of 12 pounds per day, you can cause as much emissions as you like, because you've paid your 12 pounds to the authorities, so therefore it's okay.

Not to mention if you've got an old banger it will be classified as the one that needs to pay a surplus if you go into the low emission zone, but if you've got a new Ferrari you don't have to. It makes no sense whatsoever. Anyway, that's where we go, but as I say, I think the far bigger issue over the fossil fuel crisis is not the amount of carbon it's emitting, although as we've just indicated in this conversation, that's something we should be paying some attention to. It's the fact that we're so totally dependent on these things for the way our agricultural system works and the way our food distribution system works. If there was no diesel fuel available, there'd be no delivery to the supermarkets and they'd be out of stock in two or three days. These are the things we should be paying attention to. If we start having serious power outages on the electrical grid, many people will have no means of keeping their dwellings at a comfortable temperature, no means of cooking. So, interesting times.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

The Limits to Growth has come under attack in certain quarters, the accusation being that the report is ‘anti-human’ and ‘Malthusian’. On this episode we explore these accusations, and conclude that the principles discussed in the report are as relevant today as they were in 1972.

Have a listen and make your mind up for yourself! This conversation underscores the importance of going back to original sources. We strongly recommend the ‘30 Year Update’ (published in 2004): https://www.amazon.co.uk/Limits-Growth-30-Year-Donella-Meadows/dp/193149858X/.

Any comments, questions and disagreements are welcome! An automated transcript of this conversation is available if you prefer to read.

Key: Rob’s comments are in italics, Derek’s comments in normal font.

Introduction to Economics

Our topic today is economics and an introduction to some of the key people throughout history that have helped develop economics and economic theory, because we think that understanding these people and their thinking helps to understand the world as it is today. So, I think, firstly, let's maybe just start by defining what is economics?

Okay, so I think if you asked 20 economists, you'd probably get 20 definitions. But, I mean, broadly, it's the theory about how resources are allocated between actors in society in response to financial signals. And perhaps it also touches on... how policies can be formulated to produce any specific outcome.

And from a sovereign finance lens, for us at individual level, this matters because it's the pool that we're swimming in, I guess?

It's the pool that we're swimming in, and we're constantly assailed by a confidently asserted statements and assertions from government and from spokesmen and pundits on the TV about what's happening in economic terms and what the reasons for this are and what there is to be done about it. And of course, there are enormous areas of controversy between followers of different prominent economic figures. I mean, probably in the 20th and 21st century, the tussle has been with the so-called Keynesians who feel that economic conditions for the population at large can be ameliorated by government intervention and the monetarists, people like Ludwig von Mises and Milton Friedman, who insists that the problems are caused by the government monkeying with the money supply and that the solution to it is sound money. And then, of course, there is the perennial argument between the free market and some kind of market controls.

The free market is suggesting that government should stay out of things entirely and leave it to the magic of the marketplace to produce the best result. And opponents to that view suggesting that free marketing just ends up with a small elite monopolizing the assets of society as a whole and everybody else being exploited to that end.

So if you're in that small elite, you probably want the narrative of the free markets to be the popularly accepted doctrine.

Economics as a ‘Science’

Exactly. Anyway, so I'm just going to give an outline of the main figures. I've mentioned Keynes and von Mises and Friedman. And I think the... The background to this is economics wanting to regard itself as a science, or rather economists wanting their subject matter to be regarded as a science.

So in a science you have various theories and by a mixture of experimentation and demonstration and rational discussion between scientists, you eventually decide that one theory is the best approximation to reality and others are discarded as being obsolete attempts to understand that area of reality. And so an idea that...

The arguments should be settled by concluding the one theory is right and the other one's wrong. Whereas what I'm going to suggest in the course of this talk is that, in fact... The theories put forward by one person were to address the most pressing problems of their time. And on the face of it, those of them were dealing with the problems that in their time, in their experience, were the most pressing ones. So let's go back and...

If I can just jump in, the reality of the world is very complicated. It's a complex system. So any theory you create on it is at best only going to be partially true, a true reflection of what's going on.

Well, this of course applies even to the hardest of the hard sciences. What you have is a model of reality which ignores certain aspects of it and focuses on others. And so definitely once you get into the realm of social sciences, that's going to be even more the case.

Just before we jump into these figures, I did an economics degree, a module as part of my degree, and quickly realised it was going to get very mathematically heavy very quickly, so did not pursue that. Is this kind of maths focus an element to help science?

Well, my theory, my perspective is that the intensely mathematical treatment is an attempt by economists to provide a veneer of respectability to their science.

It definitely made it unaccessible!

Yes, exactly. And what I would say is that a mathematical treatment is fine if the mathematical variables and the mathematical relationships are really congruent with reality. I mean, if you look at... mechanics in physics, you have forces, masses and accelerations, and they're built up by this equation Newton's second law of motion that acceleration equals force divided by mass. The point is that you can independently measure those variables. You can see that there is that relationship between them and you can verify whether that's the case or not. In the case of economics, the numbers that you're feeding into the equations are themselves so nebulous and so suspect. And the alleged relationship between one of those variables and another is itself grossly oversimplified at best, and possibly completely erroneous. And therefore, the phrase that comes to mind for me is the one from the computer world, garbage in, garbage out. It doesn't matter how sophisticated your calculations are, if the fundamental reality that they're mirroring is not represented in the relationships and the measurements that you're feeding in, the conclusions are going to be very little use. Once again, I would say that this speaks for itself in terms of the validity of predictions that are made in the realm of economics.

We're continuously being given the assertion that such and such a thing is going to happen over the next month or the next six months or the next year or the next five years. And almost invariably, it turns out not to be the case. If you had a physical theory that predicted that objects falling under gravity would have a certain outcome, a certain speed after a certain length of time, and then you did the measurements and found out that that wasn't the case, then you'd throw that theory out. Whereas economics seems to be oblivious to this. I've heard it many times. We're disappointed.

If employment rises from... X percent to X percent, then the theory states that certain things are going to happen, but then those things don't always happen because how are those people being employed? How are they spending the money that they're earning?

And I mean, interestingly, there have been very, very few economic predictions that have been vindicated over any substantial period of time. Interestingly, one of the ones that was extraordinarily accurate is that sometime in the 1860s, an economist called Our topic today is economics and an introduction to some of the key people throughout history that have helped develop economics and economic theory, because we think that understanding these people and their thinking helps to understand the world as it is today. So, I think, firstly, let's maybe just start by defining what is economics?

Okay, so I think if you asked 20 economists, you'd probably get 20 definitions. But, I mean, broadly, it's the theory about how resources are allocated between actors in society in response to financial signals. And perhaps it also touches on... how policies can be formulated to produce any specific outcome.

And from a sovereign finance lens, for us at individual level, this matters because it's the pool that we're swimming in, I guess?

It's the pool that we're swimming in, and we're constantly assailed by a confidently asserted statements and assertions from government and from spokesmen and pundits on the TV about what's happening in economic terms and what the reasons for this are and what there is to be done about it. And of course,

there are enormous areas of controversy between followers of different prominent economic figures. I mean, probably in the 20th and 21st century, The tussle has been with the so-called Keynesians who feel that economic conditions for the population at large can be ameliorated by government intervention and the monetarists, people like Ludwig von Mises and Milton Friedman,

who insists that the problems are caused by the government monkeying with the money supply and that the solution to it is sound money. And then, of course, there is the perennial argument between the free market and some kind of market controls with The free market is suggesting that government should stay out of things entirely

and leave it to the magic of the marketplace to produce the best result. And opponents to that view suggesting that free marketing just ends up with a small elite monopolizing the assets of society as a whole and everybody else being exploited to that end.

So if you're in that small elite, you probably want the narrative of the free markets to be the popularly accepted doctrine.

Exactly. Anyway, so I'm just going to give an outline of the main figures. I've mentioned Keynes and von Mises and Friedman. And I think the... The background to this is economics wanting to regard itself as a science, or rather economists wanting their subject matter to be regarded as a science.

So in a science you have various theories and by a mixture of experimentation and demonstration and rational discussion between scientists, you eventually decide that one theory is the best approximation to reality and others are discarded as being obsolete attempts to understand that area of reality. And so an idea that...

The arguments should be settled by concluding the one theory is right and the other one's wrong. Whereas what I'm going to suggest in the course of this talk is that, in fact... The theories put forward by one person were to address the most pressing problems of their time. And on the face of it,

those of them were dealing with the problems that in their time, in their experience, were the most pressing ones. So let's go back and...

If I can just jump in, the reality of the world is very complicated. It's a complex system. So any theory you create on it is at best only going to be partially true, a true reflection of what's going on.

Well, this of course applies even to the hardest of the hard sciences. What you have is a model of reality which ignores certain aspects of it and focuses on others. And so definitely once you get into the realm of social sciences, that's going to be even more the case.

Just before we jump into these figures, I did an economics degree, a module as part of my degree, and quickly realised it was going to get very mathematically heavy very quickly, so did not pursue that. Is this kind of maths focus an element to help science?

Well, my theory, my perspective is that... The intensely mathematical treatment is an attempt by economists to provide a veneer of respectability to their science.

It definitely made it unaccessible.

Yes, exactly. And what I would say is that A mathematical treatment is fine if the mathematical variables and the mathematical relationships are really congruent with reality. I mean, if you look at... mechanics in physics, you have forces, masses and accelerations, and they're built up by this equation Newton's second law of motion that

acceleration equals force divided by mass. The point is that you can independently measure those variables. You can see that there is that relationship between them and you can verify whether that's the case or not. In the case of economics, the numbers that you're feeding into the equations are themselves so nebulous and so suspect. And the...

alleged relationship between one of those variables and another is itself grossly oversimplified at best, and possibly completely erroneous. And therefore, the phrase that comes to mind for me is the one from the computer world, garbage in, garbage out. It doesn't matter how sophisticated your calculations are, if the fundamental

reality that they're mirroring is not represented in the relationships and the measurements that you're feeding in, the conclusions are going to be very little use. Once again, I would say that this speaks for itself in terms of the validity of predictions that are made in the realm of economics.

We're continuously being given the assertion that such and such a thing is going to happen over the next month or the next six months or the next year or the next five years. And almost invariably, it turns out not to be the case. If you had a physical theory that predicted that objects falling under gravity

would have a certain outcome, a certain speed after a certain length of time, and then you did the measurements and found out that that wasn't the case, then you'd throw that theory out. Whereas economics seems to be oblivious to this. I've heard it many times. We're disappointed.

If employment rises from... X percent to X percent, then the theory states that certain things are going to happen, but then those things don't always happen because how are those people being employed? How are they spending the money that they're earning?

Yeah.

And so on.

And I mean, interestingly, there have been very, very few economic predictions that have been vindicated over any substantial period of time. Interestingly, one of the ones that was extraordinarily accurate is that sometime in the 1860s, an economist called William Jevons predicted that within 100 years, Britain would run out of coal.

and would no longer be a major world power. This was regarded as inconceivable at the time. Britain was truly in the ascending. It was the most powerful nation on earth and it was gaining more power every decade. But in fact, by 1960, Britain's coal production was a small fraction of what it had been at its peak just

before the First World War, and Britain was indeed no longer a credible leading world power. Another pertinent long-term prediction was made by people who were not economists, and that's the group of MIT computer modelers who published the report to the Club of Rome in 1971, The Limits to Growth.

And I think we'll discuss that in more detail in another episode. But one thing I just would say, is that they didn't actually make predictions. They had produced various scenarios from their simulation of the world economy, one of which was called the business as usual, the reference run.

And they got embroiled in a great deal of controversy and criticism over that because it was dismissed as Malthusian and overly pessimistic. And it was not a prediction anyway. It was intended as a counterfactual. hypothetical projection and it was intended as a warning so that of what would

happen if we didn't change our policies but the policies didn't get changed and 50 years later we're almost exactly on track of that projection but as I said we'll talk about that in more detail in a different

I think in predicting the future, it's more about directional accuracy and the directional accuracy of the model appears to be correct in this case.

Yeah.

Whatever else you think about the club of Rome and whatever, but just looking at the models, but yeah, we'll... We'll talk about that next week. The other thing that came to mind as we were speaking was one of the first things I learned in economics was the Latin phrase, ceteris paribus, which means all else being held.

Yeah, all else being equal. So it's looking at one variable and just assuming that nothing else is going to change, which, of course, isn't the true reflection of the way the world works. Yeah, yeah.

We'll go into that again when we discuss the whole discipline of system dynamics of feedback mechanisms which can either reinforce other effects or they can inhibit or stabilise other effects. So we'll definitely go into that in a lot more detail later. I want to first of all review the three economists from the end of the 18th century,

Adam Smith, David Ricardo, and Thomas Maltage. And Adam Smith is often held up as a kind of poster boy for free market, laissez-faire economic theories.

Usually by people who clearly haven't read his work.

Yes, exactly. He pulled out one or two threads. I mean, one of them is the invisible hand of the marketplace. And what he was observing was that people collaborate because there is some advantage in it for themselves. I don't think anybody would quarrel with that. And they strike a balance.

But having said that, we've got to look at one or two things about what he meant by the marketplace. For one thing, in his time, the marketplace was a tangible, physical thing. You'd find the same vehicle there every week. Everybody would know one another. And it was in nobody's interest to give bad deals because...

If they did, very soon word would get around and people would stop dealing with them. Also, it was in an explicitly strongly Christian society and the biblical exaltation to do unto others as you have them do unto you was something that even if people struggled to, they couldn't be seen too flagrantly to be flouting.

Or again, they'd be socially ostracized.

This is true in hunter-gatherer societies as well, wasn't it? Where when humans lived in smaller groups, you couldn't have psychopaths because they'd be chucked out of the group. Yeah, absolutely.

Let's hope we get back to that situation on a larger scale soon. So... put forward this theory that the natural rate of pay for a labourer was the marginal increase of contribution they could make to the output. And of course, All of these three thinkers were just pre-industrial era. Virtually the entire economy was one of agricultural production.

Something like 80% of the population would be directly involved with producing agricultural produce. And one or two percent would be the ruling elite, who would be very wealthy off the back of everybody else. And then the rest in between would be various artisans and craftspersons. who would provide the other facilities for society. So the suggestion was that,

particularly if you're thinking about a farm, if the farm could get more value in terms of produce by hiring one extra labourer, they would do that, and if the pay of the extra labourer was more than the extra produce that they would produce, then it would make no sense to hire them.

And so the outcome of this was that it was inevitable that the majority of the population would be just barely living above subsistence level, because the there would always be somebody who was prepared to work for enough to keep themselves and their family alive. And so if anybody wanted more than that, they wouldn't be hired,

and the one who was prepared to accept a subsistence return would be hired. And of course, One way or another, this was a very convenient theory from the point of view of the ruling classes. And even when mechanization and industrialism got underway and productivity became much higher,

the wages of the common factory worker were pretty much at a minimal survival level. And it was only really with the rise of union power in the latter half of the 20th century that we managed to get a much higher level of pay and standard of living across a broader selection of the population.

It would appear that The powers that be are currently reversing that trend and trying to get incomes back down to the survivable level.

Yeah, and it's worth noting in passing that, in fact, in terms of having a prosperous and profitable industry, it actually is beneficial to pay people well so that they can afford to buy the... the output of those same industries. And increasing productivity by putting more and more robots into the factories may

give a short-term boost to the profits. But in the longer term, it's going to result in the erosion of buying power in the population at large, and it's going to be self-defeating.

Effectively, you create a recession by doing it.

I like the phrase to sum that up, which is that robots don't eat chocolate. Anyway, and then, of course, we come to Thomas Malthus, who's probably one of the most maligned figures in economic history. Malthus was a clergyman, and one of the things he noticed is that he was carrying out royal christenings, and he was Theodos,

and he reflected that the natural tendency of population was to expand exponentially, and certainly this was the case human nature and biological nature being what it is in the absence of some defective form of birth control. And so he concluded that since, although there were improvements to agricultural output, these were in a sense marginal and essentially linear.

So if you had at best a linear improvement in agricultural produce, but you had a potentially exponential expansion of population, the population would all always be bumping up against a limit where the most impoverished people were limited by starvation.

And this happens in nature as well. This isn't just humans.

Exactly, exactly. And of course, probably one of the most significant effects of Malthus is outside the realm of economics, because it was by reading his theories that Darwin settled on the theory of evolution by natural selection. However, so, you know, once again, it was valid for the club.

And one of the reasons that he's so heavily criticised is, of course, that his prediction, such as it was, was... spectacularly refuted by the fact that the population of England doubled and then quadrupled and then doubled again over the next couple of hundred years, and that the general level of prosperity of the population of Britain increased to

levels that was unimaginable. The people who put that forward effectively go, well, there you are, QED. Things are not going to run into limits. They're going to go along inevitably. But the circumstance was that, of course, the Industrial Revolution was only just beginning to get underway.

It had only been a couple of decades since efficient steam engines had been produced. And mass production of uh textiles was well underway this this was rolled out over the next hundred years And Britain, of course, was able to export its produce and export its technology all over the world.

And with that, buy food, which was produced in many other locations, and import that to this country. And that was what enabled the expansion and the prosperity of the British population. Not to mention a rather brutal crisis exploitation of the people in various other parts of the British Empire as it expanded.

It would obviously be rash not to recognize that we're now in a completely different situation whereby we have a pretty much unified world and the world as a whole does have finite limits of its resources. and there isn't another place outside this world that we can go and get our food.

Do you think there are too many humans in the world, or do you think that they're carrying...

I think this is a very unhealthy question to frame. The point is that It would be a lot easier to provide an adequate standard of living and the population being 4 billion rather than 8, as it was only about 40 years ago. and it would be easier still if it were 2 billion,

which was the population of the world a few decades before that. However, having said that, it's entirely possible that we could feed 8 billion healthily and comfortably, and we could provide clean water and sanitation and health care in clothing and housing to 8 billion people if we had the will to do so.

16 billion, 32 billion, I'm not too sure.

But yeah, if we stop making war and actually invested those resources in social structures and things that actually benefit the society at large, then who knows?

A small fraction of what is spent on warfare could resolve all of those problems. And of course, if you resolve those problems, the population question would take care of itself. Everywhere where people have a reasonable expectation if their children are surviving to adulthood and access to birth until the population stables without any coercion or pressure whatsoever.

So that doesn't need to be dealt with. As I think we'll see when we discuss the systems dynamics of the world, we have probably overshot and there probably is going to be a correction of a great many things, including the world population level. The likelihood of there being anything other than a very significant reduction

over the next few decades is remote indeed. And that's going to be immensely important for a great many people. But that's not something that anybody needs to deliberately manipulate.

It just works out of its own accord, yeah.

Yeah. Anyway, and finally, I just wanted to mention the 20th century thinkers. On the one hand, you've got the militarists. On the other hand, you've got the Keynesians. And it goes backwards and forwards between champions on one side and champions on the other, saying which is right.

And I would say yet again that it's not that one is right and the other is wrong. Either way round, what it is is that each of them put forward theories and proposals for policy which were appropriate to what they saw as the most pressing problem of the time. Keynes came to prominence during the 90s.

The biggest challenge was the Great Depression, which gripped the entire Western world. production of everything, including food, but certainly industrial production especially, was way below capacity. Employment was way below capacity. people were literally starving. This is, of course, one of the things which led to many intelligent people thinking that capitalism was

self-defeating and that communism was the answer. Well, Now we have the virtue of hindsight, we can look at the attempts to impose communism throughout the 20th century and the fact that that didn't solve problems and it was actually a worse system for solving them than capitalism had been. But Keynes was not anti-capitalist.

He was certainly anti-free marketeer because he saw that the unfettered extent of the market had not solved the problem of balancing supply and demand of anything. And so what he proposed was that the government should step in and do useful things. He never suggested paying people to be unproductive,

but he suggested that perhaps if you paid people to, for example, build a better road system, that better road system would enable society to operate more effectively in the future, so it would be in itself a worthwhile investment, and planning to do that would put the money in the pockets of the people who were building the roads,

and they would then have money to go and spend in the shops. The shops would then have money to either buy produce from the farms or from the factories, and the economy as a whole would reach an equilibrium operating at a higher level. Now, Keynes was not irresponsibly suggesting that money should be indefinitely created

out of thin air, which is more or less what has happened since then, not necessarily just due to government expenditure, as were other discussions. But he suggested that when the economy was then running at a surplus, that the government should increase its share of the revenues and pay off the debts that it had heard at the outset.

Well, that was probably over-optimistic to imagine that any government was ever going to do that. I don't know whether Keynes was naive or whether he was simply ignoring the longer-term challenges in focusing on dealing with the immediate problems most effectively. Then, on the other hand, you have the monetarists who say, no, no,

the government should run a balanced budget and we should have sound money. Well, as we've seen in the discussions on what is money, how is it created, how is it destroyed, and what are its functions, sound money is definitely a good idea. And the fact that this was the perennial solution that was put forward by von Mises

and Milton Friedman and the monetarists was a reflection of their experience in Germany and Austria in the wake of the First World War, when of course they had hyperinflation and the value of people's savings was wiped out almost overnight. And once again, the fact that we now have had several decades of uncontrolled expansion of the money supply,

out of all proportion to any increase in genuine productivity, has brought us to the brink where we've certainly had very substantial inflation over the past year or two. Probably rather more inflation in reality than the official numbers would indicate. And there is, at the very most optimistic,

every likelihood of this continuing to be the case and a very real possibility that it will tip over into hyperinflation and run away, and the value of people's cash holdings will once again be completely wiped out. All over the Western world, because we have such a tightly coupled system.

And this has happened in individual civilizations throughout history, like it happened to the Romans, for instance, but only in the Empire of Rome, not everywhere.

Yeah, yeah. Exactly. And of course, we now have the world fracturing into a rival economic bloc, which with Russia and China and Brazil at the heart of it, but a great many other nations wondering whether they should cast in their lot with that group rather than with the US censored economic system,

which has been predominant for the last 100 years. Anyway, I think that pretty much wraps up most of the things I wanted to say. Have you got any comments or any other questions arising out of that? A few comments.

So it feels like all of the economists that we've covered, they all had an element of truth in what they were saying. Exactly. I don't think anyone was absolutely right or wrong. And there was definitely, when you consider their time and the world that they lived in at the time, it makes sense what they were saying.

The other thought I had was that in terms of the 20th century argument between free market economics and Keynesian government intervention, it's observable that we force developing countries to adopt free market policies using tools like the World Bank and the IMF, whereas many of our industries are actually quite well protected.

If you look at big tech, it's a good example. If you look at what they do and not at what they say, the situation perhaps becomes a bit clearer. Our topic today is economics and an introduction to some of the key people throughout history that have helped develop economics and economic theory, because we think that understanding these people and their thinking helps to understand the world as it is today. So, I think, firstly, let's maybe just start by defining what is economics?

Okay, so I think if you asked 20 economists, you'd probably get 20 definitions. But, I mean, broadly, it's the theory about how resources are allocated between actors in society in response to financial signals. And perhaps it also touches on... how policies can be formulated to produce any specific outcome.

And from a sovereign finance lens, for us at individual level, this matters because it's the pool that we're swimming in, I guess?

It's the pool that we're swimming in, and we're constantly assailed by a confidently asserted statements and assertions from government and from spokesmen and pundits on the TV about what's happening in economic terms and what the reasons for this are and what there is to be done about it. And of course,

there are enormous areas of controversy between followers of different prominent economic figures. I mean, probably in the 20th and 21st century, The tussle has been with the so-called Keynesians who feel that economic conditions for the population at large can be ameliorated by government intervention and the monetarists, people like Ludwig von Mises and Milton Friedman,

who insists that the problems are caused by the government monkeying with the money supply and that the solution to it is sound money. And then, of course, there is the perennial argument between the free market and some kind of market controls with The free market is suggesting that government should stay out of things entirely

and leave it to the magic of the marketplace to produce the best result. And opponents to that view suggesting that free marketing just ends up with a small elite monopolizing the assets of society as a whole and everybody else being exploited to that end.

So if you're in that small elite, you probably want the narrative of the free markets to be the popularly accepted doctrine.

Exactly. Anyway, so I'm just going to give an outline of the main figures. I've mentioned Keynes and von Mises and Friedman. And I think the... The background to this is economics wanting to regard itself as a science, or rather economists wanting their subject matter to be regarded as a science.

So in a science you have various theories and by a mixture of experimentation and demonstration and rational discussion between scientists, you eventually decide that one theory is the best approximation to reality and others are discarded as being obsolete attempts to understand that area of reality. And so an idea that...

The arguments should be settled by concluding the one theory is right and the other one's wrong. Whereas what I'm going to suggest in the course of this talk is that, in fact... The theories put forward by one person were to address the most pressing problems of their time. And on the face of it,

those of them were dealing with the problems that in their time, in their experience, were the most pressing ones. So let's go back and...

If I can just jump in, the reality of the world is very complicated. It's a complex system. So any theory you create on it is at best only going to be partially true, a true reflection of what's going on.

Well, this of course applies even to the hardest of the hard sciences. What you have is a model of reality which ignores certain aspects of it and focuses on others. And so definitely once you get into the realm of social sciences, that's going to be even more the case.

Just before we jump into these figures, I did an economics degree, a module as part of my degree, and quickly realised it was going to get very mathematically heavy very quickly, so did not pursue that. Is this kind of maths focus an element to help science?

Well, my theory, my perspective is that... The intensely mathematical treatment is an attempt by economists to provide a veneer of respectability to their science.

It definitely made it unaccessible.

Yes, exactly. And what I would say is that A mathematical treatment is fine if the mathematical variables and the mathematical relationships are really congruent with reality. I mean, if you look at... mechanics in physics, you have forces, masses and accelerations, and they're built up by this equation Newton's second law of motion that

acceleration equals force divided by mass. The point is that you can independently measure those variables. You can see that there is that relationship between them and you can verify whether that's the case or not. In the case of economics, the numbers that you're feeding into the equations are themselves so nebulous and so suspect. And the...

alleged relationship between one of those variables and another is itself grossly oversimplified at best, and possibly completely erroneous. And therefore, the phrase that comes to mind for me is the one from the computer world, garbage in, garbage out. It doesn't matter how sophisticated your calculations are, if the fundamental

reality that they're mirroring is not represented in the relationships and the measurements that you're feeding in, the conclusions are going to be very little use. Once again, I would say that this speaks for itself in terms of the validity of predictions that are made in the realm of economics.

We're continuously being given the assertion that such and such a thing is going to happen over the next month or the next six months or the next year or the next five years. And almost invariably, it turns out not to be the case. If you had a physical theory that predicted that objects falling under gravity

would have a certain outcome, a certain speed after a certain length of time, and then you did the measurements and found out that that wasn't the case, then you'd throw that theory out. Whereas economics seems to be oblivious to this.

If employment rises from... X percent to X percent, then the theory states that certain things are going to happen, but then those things don't always happen because how are those people being employed? How are they spending the money that they're earning?

Yeah. And so on.

The Difficulty With Predictions…

And I mean, interestingly, there have been very, very few economic predictions that have been vindicated over any substantial period of time. Interestingly, one of the ones that was extraordinarily accurate is that sometime in the 1860s, an economist called William Jevons predicted that within 100 years, Britain would run out of coal and would no longer be a major world power. This was regarded as inconceivable at the time. Britain was truly in the ascending. It was the most powerful nation on earth and it was gaining more power every decade. But in fact, by 1960, Britain's coal production was a small fraction of what it had been at its peak just before the First World War, and Britain was indeed no longer a credible leading world power.

Another pertinent long-term prediction was made by people who were not economists, and that's the group of MIT computer modelers who published the report to the Club of Rome in 1971, The Limits to Growth. We'll discuss that in more detail in another episode. But one thing I just would say, is that they didn't actually make predictions. They had produced various scenarios from their simulation of the world economy, one of which was called the business as usual, the reference run.

They got embroiled in a great deal of controversy and criticism over that because it was dismissed as Malthusian and overly pessimistic. And it was not a prediction anyway. It was intended as a counterfactual. hypothetical projection and it was intended as a warning so that of what would happen if we didn't change our policies but the policies didn't get changed and 50 years later we're almost exactly on track of that projection but as I said we'll talk about that in more detail in a different

I think in predicting the future, it's more about directional accuracy and the directional accuracy of the model appears to be correct in this case.

Yeah.

Whatever else you think about the club of Rome and whatever, but just looking at the models, but yeah, we'll... We'll talk about that next week.

The other thing that came to mind as we were speaking was one of the first things I learned in economics was the Latin phrase, ceteris paribus, which means all else being held.

Yeah, all else being equal. So it's looking at one variable and just assuming that nothing else is going to change, which, of course, isn't the true reflection of the way the world works. Yeah, yeah.

We'll go into that again when we discuss the whole discipline of system dynamics of feedback mechanisms which can either reinforce other effects or they can inhibit or stabilise other effects. So we'll definitely go into that in a lot more detail later. I want to first of all review the three economists from the end of the 18th century,

Adam Smith

And Adam Smith is often held up as a kind of poster boy for free market, laissez-faire economic theories.

Usually by people who clearly haven't read his work.

Yes, exactly. He pulled out one or two threads. I mean, one of them is the invisible hand of the marketplace. And what he was observing was that people collaborate because there is some advantage in it for themselves. I don't think anybody would quarrel with that. And they strike a balance.

But having said that, we've got to look at one or two things about what he meant by the marketplace. For one thing, in his time, the marketplace was a tangible, physical thing. You'd find the same vehicle there every week. Everybody would know one another. And it was in nobody's interest to give bad deals because...

If they did, very soon word would get around and people would stop dealing with them. Also, it was in an explicitly strongly Christian society and the biblical exaltation to do unto others as you have them do unto you was something that even if people struggled to, they couldn't be seen too flagrantly to be flouting. Or again, they'd be socially ostracized.

This is true in hunter-gatherer societies as well, wasn't it? Where when humans lived in smaller groups, you couldn't have psychopaths because they'd be chucked out of the group.

Yeah, absolutely.

David Ricardo

Let's hope we get back to that situation on a larger scale soon. So David Ricardo put forward this theory that the natural rate of pay for a labourer was the marginal increase of contribution they could make to the output. And of course, All of these three thinkers were just pre-industrial era. Virtually the entire economy was one of agricultural production.

Something like 80% of the population would be directly involved with producing agricultural produce. And one or two percent would be the ruling elite, who would be very wealthy off the back of everybody else. And then the rest in between would be various artisans and craftspersons. who would provide the other facilities for society. So the suggestion was that, particularly if you're thinking about a farm, if the farm could get more value in terms of produce by hiring one extra labourer, they would do that, and if the pay of the extra labourer was more than the extra produce that they would produce, then it would make no sense to hire them.

And so the outcome of this was that it was inevitable that the majority of the population would be just barely living above subsistence level, because the there would always be somebody who was prepared to work for enough to keep themselves and their family alive. And so if anybody wanted more than that, they wouldn't be hired, and the one who was prepared to accept a subsistence return would be hired.

Of course, One way or another, this was a very convenient theory from the point of view of the ruling classes. And even when mechanization and industrialism got underway and productivity became much higher, the wages of the common factory worker were pretty much at a minimal survival level. And it was only really with the rise of union power in the latter half of the 20th century that we managed to get a much higher level of pay and standard of living across a broader selection of the population.

It would appear that The powers that be are currently reversing that trend and trying to get incomes back down to the survivable level.

Yeah, and it's worth noting in passing that, in fact, in terms of having a prosperous and profitable industry, it actually is beneficial to pay people well so that they can afford to buy the... the output of those same industries. And increasing productivity by putting more and more robots into the factories may give a short-term boost to the profits. But in the longer term, it's going to result in the erosion of buying power in the population at large, and it's going to be self-defeating.

Effectively, you create a recession by doing it.

Thomas Malthus

I like the phrase to sum that up, which is that robots don't eat chocolate. Anyway, and then, of course, we come to Thomas Malthus, who's probably one of the most maligned figures in economic history. Malthus was a clergyman, and one of the things he noticed is that he was carrying out royal christenings, and he reflected that the natural tendency of population was to expand exponentially, and certainly this was the case human nature and biological nature being what it is in the absence of some defective form of birth control. And so he concluded that since, although there were improvements to agricultural output, these were in a sense marginal and essentially linear.

So if you had at best a linear improvement in agricultural produce, but you had a potentially exponential expansion of population, the population would all always be bumping up against a limit where the most impoverished people were limited by starvation.

And this happens in nature as well. This isn't just humans.

Exactly, exactly. And of course, probably one of the most significant effects of Malthus is outside the realm of economics, because it was by reading his theories that Darwin settled on the theory of evolution by natural selection. However, so, you know, once again, it was valid for the club.

And one of the reasons that he's so heavily criticised is, of course, that his prediction, such as it was, was... spectacularly refuted by the fact that the population of England doubled and then quadrupled and then doubled again over the next couple of hundred years, and that the general level of prosperity of the population of Britain increased to levels that was unimaginable. The people who put that forward effectively go, well, there you are, QED. Things are not going to run into limits. They're going to go along inevitably. But the circumstance was that, of course, the Industrial Revolution was only just beginning to get underway.

It had only been a couple of decades since efficient steam engines had been produced. And mass production of uh textiles was well underway this this was rolled out over the next hundred years And Britain, of course, was able to export its produce and export its technology all over the world.

And with that, buy food, which was produced in many other locations, and import that to this country. And that was what enabled the expansion and the prosperity of the British population. Not to mention a rather brutal crisis exploitation of the people in various other parts of the British Empire as it expanded.

It would obviously be rash not to recognize that we're now in a completely different situation whereby we have a pretty much unified world and the world as a whole does have finite limits of its resources. and there isn't another place outside this world that we can go and get our food.

Do you think there are too many humans in the world?

I think this is a very unhealthy question to frame. The point is that It would be a lot easier to provide an adequate standard of living and the population being 4 billion rather than 8, as it was only about 40 years ago. and it would be easier still if it were 2 billion, which was the population of the world a few decades before that. However, having said that, it's entirely possible that we could feed 8 billion healthily and comfortably, and we could provide clean water and sanitation and health care in clothing and housing to 8 billion people if we had the will to do so. 16 billion, 32 billion? I'm not too sure.

But yeah, if we stop making war and actually invested those resources in social structures and things that actually benefit the society at large, then who knows?

A small fraction of what is spent on warfare could resolve all of those problems. And of course, if you resolve those problems, the population question would take care of itself. Everywhere where people have a reasonable expectation if their children are surviving to adulthood and access to birth until the population stables without any coercion or pressure whatsoever.

So that doesn't need to be dealt with. As I think we'll see when we discuss the systems dynamics of the world, we have probably overshot and there probably is going to be a correction of a great many things, including the world population level. The likelihood of there being anything other than a very significant reduction over the next few decades is remote indeed. And that's going to be immensely important for a great many people. But that's not something that anybody needs to deliberately manipulate.

It just works out of its own accord, yeah.

John Maynard Keynes

Yeah. Anyway, and finally, I just wanted to mention the 20th century thinkers. On the one hand, you've got the militarists. On the other hand, you've got the Keynesians. And it goes backwards and forwards between champions on one side and champions on the other, saying which is right.

And I would say yet again that it's not that one is right and the other is wrong. Either way round, what it is is that each of them put forward theories and proposals for policy which were appropriate to what they saw as the most pressing problem of the time. Keynes came to prominence during the 1930s. The biggest challenge was the Great Depression, which gripped the entire Western world. production of everything, including food, but certainly industrial production especially, was way below capacity. Employment was way below capacity. people were literally starving. This is, of course, one of the things which led to many intelligent people thinking that capitalism was self-defeating and that communism was the answer. Well, Now we have the virtue of hindsight, we can look at the attempts to impose communism throughout the 20th century and the fact that that didn't solve problems and it was actually a worse system for solving them than capitalism had been. But Keynes was not anti-capitalist.

He was certainly anti-free marketeer because he saw that the unfettered extent of the market had not solved the problem of balancing supply and demand of anything. And so what he proposed was that the government should step in and do useful things. He never suggested paying people to be unproductive, but he suggested that perhaps if you paid people to, for example, build a better road system, that better road system would enable society to operate more effectively in the future, so it would be in itself a worthwhile investment, and planning to do that would put the money in the pockets of the people who were building the roads, and they would then have money to go and spend in the shops. The shops would then have money to either buy produce from the farms or from the factories, and the economy as a whole would reach an equilibrium operating at a higher level.

Now, Keynes was not irresponsibly suggesting that money should be indefinitely created out of thin air, which is more or less what has happened since then, not necessarily just due to government expenditure, as were other discussions. But he suggested that when the economy was then running at a surplus, that the government should increase its share of the revenues and pay off the debts that it had heard at the outset.

Well, that was probably over-optimistic to imagine that any government was ever going to do that. I don't know whether Keynes was naive or whether he was simply ignoring the longer-term challenges in focusing on dealing with the immediate problems most effectively.

Milton Friedman

Then, on the other hand, you have the monetarists who say the government should run a balanced budget and we should have sound money. Well, as we've seen in the discussions on what is money, how is it created, how is it destroyed, and what are its functions, sound money is definitely a good idea. And the fact that this was the perennial solution that was put forward by von Mises and Milton Friedman and the monetarists was a reflection of their experience in Germany and Austria in the wake of the First World War, when of course they had hyperinflation and the value of people's savings was wiped out almost overnight. And once again, the fact that we now have had several decades of uncontrolled expansion of the money supply, out of all proportion to any increase in genuine productivity, has brought us to the brink where we've certainly had very substantial inflation over the past year or two. Probably rather more inflation in reality than the official numbers would indicate.

And there is, at the very most optimistic, every likelihood of this continuing to be the case and a very real possibility that it will tip over into hyperinflation and run away, and the value of people's cash holdings will once again be completely wiped out. All over the Western world, because we have such a tightly coupled system.

And this has happened in individual civilizations throughout history, like it happened to the Romans, for instance, but only in the Empire of Rome, not everywhere.

Yeah, yeah. Exactly. And of course, we now have the world fracturing into a rival economic bloc, which with Russia and China and Brazil at the heart of it, but a great many other nations wondering whether they should cast in their lot with that group rather than with the US censored economic system, which has been predominant for the last 100 years. Anyway, I think that pretty much wraps up most of the things I wanted to say. Have you got any comments or any other questions arising out of that?

Conclusion

So it feels like all of the economists that we've covered, they all had an element of truth in what they were saying. Exactly. I don't think anyone was absolutely right or wrong. And there was definitely, when you consider their time and the world that they lived in at the time, it makes sense what they were saying.

The other thought I had was that in terms of the 20th century argument between free market economics and Keynesian government intervention, it's observable that we force developing countries to adopt free market policies using tools like the World Bank and the IMF, whereas many of our industries are actually quite well protected.

If you look at big tech, it's a good example. If you look at what they do and not at what they say, the situation perhaps becomes a bit clearer.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

Key: Rob’s comments in italics. Derek’s comments in normal font.

Back in maybe the first episode, we shared a quote from Martin Luther King, who said that:

“Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity. The ultimate tragedy is not the oppression and cruelty by the bad people, but the silence over that by the good people. The time is always right to do what is right. The question is not whether we will be extremists, but what extremists we will be. Will we be extremists for hate or for love?”

Should we revisit this idea?

Well, of course, the main context we were thinking there is that the ignorance and stupidity of the way that the banking system and the world finance system has been successively eroded is a prime example. I think that in the six or seven months that we've been producing these episodes, things in the world have become more and more dire. There's still a large majority of the general population who are either not perceiving it or not believing that they have any control over it or that saying anything would be of any significance. So this is even more relevant now than when we first looked at it.

The Concept of Sovereign Finance

Also, let's say a word or two about the title we've given to this series, "Sovereign Finance," and why we use that term. There's quite a significant conversation out there in the public sphere about sovereign money, or just money as an alternative to the increasingly unjust systems of money, which are really becoming more and more oppressive and are clearly a form of expropriation of the assets of the population at large into the hands of a small elite. There's also the concept of personal sovereignty in terms of being responsible and accountable for our own lives, which, of course, includes our finances, rather than being at the mercy of the actions of other people.

It's interesting because this is really at odds with the sense in which the word sovereignty is often used. It's often used in the context of entire nations, implying that the nation itself has sovereignty rather than focusing on the individuals within it.

You think of THE sovereign?

Yes, it obviously comes from the idea of the sovereign, the ruler of the nation. There was a lot of rhetoric about sovereignty at the time of the Brexit referendum, for instance. A lot of people were really exercised by the idea that we were at the mercy of faceless bureaucrats in Brussels and being in the EU, which was not entirely an invalid point of view, but it ignored a great many practical advantages of being within that union.

The Most Dangerous Superstition

And, of course, in the last eight months or so, there's been a lot of rhetoric about Israel's right to defend itself, as though Israel was a thing distinct from all the individual human beings who are being massacred on one side or another.

It's a very interesting turn of language where it absolves any one individual from responsibility for what happens, things like that.

Exactly. And, of course, to the extent that it would be advantageous for independent countries to be in charge of their own affairs, that's largely a myth in the present world. We live in an integrated world with dominant actors on the international scene, and we all have a pretty good understanding of how that works in reality.

Have you seen any reference to a book called "The Most Dangerous Superstition"?

No, I don't think so.

This superstition is the idea that we need rulers at all.

That's the basis of anarchy, isn't it? And they deliberately demonised anarchy to mean chaos. And that isn't actually what it means.

No, exactly. It means devolving decision-making to the lowest possible level. There's a catchphrase for this, the principle of subsidiarity, which is a very valid principle. What we lose sight of is that until very recently, in practical terms, that was what happened. Medieval kings may have had nominal sovereignty over their entire nation, but they had very little control over how people conducted their day-to-day affairs.

The fact is that the number of psychopaths and sociopaths who are prepared to take advantage of the rest of the world is a very small proportion of the population. It's only because they have been much better at bamboozling the rest of the population into either not noticing the extent of the imposition on everybody else that their behaviour represents, or believing that the operation of those in charge, whether they are kings, emperors, popes, or bureaucrats, is necessary.

The reality is that 99% of the people could regulate their own affairs, their own family's affairs, their own community's affairs, and their own district's affairs without anybody bossing them around.

We've recently had the UK election, and this has been the main question on my mind: why do we even have this party system? Why are they not just independent, representing the people of their constituency?

Yes, exactly.

The Absurdity of the Current System

The phrase "reduction to absurdity" crossed my mind. Reduction to absurdity is a term in formal logic and mathematics where you prove something by assuming the opposite and then developing from that opposite until you reach a contradiction, which proves that the original proposition is incorrect.

If you look at the way things are unfolding in the world right now, you see that in all kinds of areas, including the finance system.

One area we've been covering in these podcasts is specifically information about the principles of personal finance: how to keep track of it, how to manage your income and outgoings, what your long-term plans are, and what actions would be in line with those plans. This is applied common sense, and it's blindingly obvious, so obvious that it's almost embarrassing to spell it out. But it's actually not obvious to everyone, and it's certainly not something that's part of our education.

The Gaps in Our Education

We typically spend 13 years in education or 16 years in the case of probably half the population now. There are a few things that are absolutely critical to having a satisfactory life which somehow don't get mentioned at all, even though a day or two of serious examination would probably be enough to give you clarity. One of them is finance. Another is nutrition.

I was just thinking about how I don't remember being taught how to grow food.

No. And another thing, of course, is just health in general, what it takes to maintain a balanced life. Some exercise is better than none, and you need certain elements in your diet in a certain balance. You could learn that in a day or two, yet somehow we go through 13 or 16 years of education without actually grasping it.

In a similar way, the essence of personal finance, and personal finance as a microcosm of business finance, is not taught. The same principles apply to both.

To summarise, the key elements are to ensure that your income is greater than your outgoings, and to do something constructive with the difference between the two. The three kinds of financial statements – the cash flow report, the profit and loss account, and the balance sheet – cover it.

Economics and Common Sense

People would probably see through the ludicrousness of using GDP as a measure of prosperity and well-being if they understood these principles. GDP is essentially a cash flow statement rather than a balance sheet.

We cover that, and how it relates to entrepreneurial activity. This doesn't even have to be a business. Any activity where people come together to achieve something – a charity, a hobby society, a sports club – follows the same principles. You won't stay in operation unless your expenditure is slightly more than matched by your resources.

This leads into the so-called science of economics. We're subjected to a lot of rhetoric about it. Ever since Margaret Thatcher started selling off the nationalised industries, we've been told that competition is always better. But that's questionable.

People quote Adam Smith as if he were some deity. If you actually read "The Wealth of Nations," you'll see that he was quite sensible and wary of corporations.

He was indeed. But his idea of a marketplace was very different from the abstract concept of a marketplace that we have today.

Exactly. His idea of a marketplace was a literal marketplace where people met and knew each other. If they were dishonest, everyone would know and stop using them. This was the case with the stock market until the Big Bang.

What was the Big Bang?

The Big Bang was the name given to the transition from person-to-person stock trading to computer-based trading. This change came with significant consequences.

Neoliberal Models and Reality

Another aspect is that the neoliberal models of economics taught and broadly accepted bear no real relation to reality. The most prosperous companies generally operate in protected industries. We've applied a free market model to developing countries, but it's a different story in developed countries.

Finally, big missing from economics is any conception that we operate within a finite world with finite resources. This didn't matter 200 years ago, but it does now. We're seeing the exhaustion of raw materials and energy.

The easy extraction of raw materials is long gone. For example, copper mines now involve extracting ore with as little as 1% copper, creating significant pollution. Fossil fuels are similarly harder to extract. We're using energy to get energy, which is not sustainable.

It's using energy to get energy, isn't it?

Exactly. We're reaching the limits of easy extraction for all kinds of minerals and fossil fuels.

Despite these challenges, I believe this is a solvable problem. However, it won't be solved by the official elite conversations about it.

My stance is that there is plenty of energy. We need to learn how to harness it.

All the energy that powered the Earth over geological time comes from the sun. We have technologies to harness that energy, but they need to be appropriate and sustainable. There are exciting prospects for using low-tech or intermediate-tech solutions to provide energy and improve living standards in developing regions.

To be sovereign requires affordable energy. The final aspect of our discussion is the finance system, which is the main focus of this series. We'll look at how the banking system has become increasingly greedy and self-negating.

One other thing I'd like to mention is that we have space for comments on Substack.

We do, yes.

If you're listening to this, reviewing our episodes, or preferring to read transcripts, please engage with us there.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.

Key:

Rob’s comments in italicsDerek’s comments in normal font

Introduction to BlackRock

Our subject today is BlackRock, which is an entity that I have to admit before 2020, I was not aware of. So what is it and what do people need to know?

BlackRock is a fund manager, which essentially means that it takes the aggregate investments of a large number of people or a large number of organizations, who in turn are collecting investments from large numbers of people and buys the stocks and shares and bonds and any other investments they want to make. They claim they are able to do this in a more effective way than those people could do themselves.

BlackRock's Reach and Influence

A large proportion of the capital they are operating is from various US pension funds. Various individual states have pension funds for their government employees. Large corporations have pension funds for their employees. And of course, a lot of people manage their own pensions, either because they're independent professionals or entrepreneurs or business owners, or because they want an additional provision for their old age that they create under their own initiative.

So, as I think we mentioned when we were looking at the way pensions are working out these days, it's essentially an arrangement where over the course of your working life you pay in regular amounts. The income and the capital gains from those investments get reinvested, which in theory, should allow it to grow exponentially to the point where it can produce an income of a similar order of magnitude to your final earnings.

The remarkable thing is the extent of BlackRock’s hold over the entire corporate landscape. If you want to go and buy a fizzy drink, should you be reckless enough to do that, you could buy Coke. Alternatively, of course, you could buy one from its major competitor. When you actually look at the ownership of the shares in Pepsi Cola and you would find that one of the top investors, typically with a high single-figure investment, is BlackRock. If you look at Coca Cola you’ll find the same thing.

Similarly, if you're in the computer world, you might choose Apple or you might choose Microsoft. And then if you look at the ownership of Microsoft and Apple, you'll find that BlackRock is one of the top three shareholders of both of those corporations.

So what are the implications?

One of the buzzwords that you may have come across recently is ESG: environmental, social and governance. These are supposed to be guidelines for running large businesses in such a way as they are responsible and looking after the planet. I think it's highly dubious whether this is just yet another attempt to steal the clothes of the opposition. Having recognized that there's public concern about these matters, this buzzword has been created. The ESG framework was in fact proposed by Larry Fink, who is the founder of BlackRock.

Larry Fink and BlackRock

I'll go a little bit into the history of this, because in itself it is quite extraordinary. Larry Fink was a fund manager at First Boston Bank, and in 1986, he managed to lose $100 million with a mistaken bet on the likely movement of interest rates. You would have thought that would be the end of his career. But two years later, he had managed to put together a series of proposals where he had decided that he could evaluate risks better. He took the proposals for doing that, two of them, which, funnily enough, was called Blackstone Investment Management. He managed to persuade the owners of Blackstone that they should give him a chance to try out his investment. Based on that, they offered him a $5 million line of credit in return for a 50% stake in that particular operation, which was originally a subsidiary of Blackstone. (It wasn't yet called BlackRock.)

By 1992, he'd managed to grow that $5 million up to $17 billion of assets. They decided that this was getting good returns for his investors, which is why they were coming back to him. But it's still a pretty astonishing rate of growth. So at that point they decided to spin it off as a separate company. That's when they called it BlackRock. There was sort of something of an in-joke that BlackRock and Blackstone would be confused between the two of them. By 1994, he was falling out with the owners of Blackstone and they sold their half share for $240 million. That turned out to be a very good deal for Larry Fink and not such a good deal for the ones who sold their shareholding! Seven years later by 1999, BlackRock was now managing $165 billion of funds.

Now they're up to something like $10 trillion. They have a computerized trading system, which is called Aladdin, which they developed. Aladdin is used by many other Wall Street investment firms, and there's a total of $20 trillion that are using the Aladdin software. I think this in itself has a great deal of capacity for systemic weaknesses appearing in the market. If everybody's singing from the same hymn sheet, the price movements are going to be avalanching all in the same direction.

The Scale of BlackRock's Influence

I think it's worth referring back to the episode we did on big numbers as well, just to underscore how big a trillion actually is.

I'll just summarize very briefly so that a million pounds or dollars is the typical lifetime earnings of an average person. If you're happy enough to accept my thumbnail definition of an average person as being the one who earns an average of $25,000 a year. In a working life of 40 years, that comes to a million dollars. So a billion is the lifetime income of 1000 people and a trillion is the lifetime earnings of a million people.

It's quite a big difference.

Yes. And of course, you know, a few other numbers in there to pack this out. Various figures are thrown about for the total wealth in the world. It's somewhere in the high tens of millions. The federal debt of the United States was $33 trillion the last time I looked at it. But in itself that's a revealing characteristic because it shows the amount of funds that are directly or indirectly influenced by BlackRock are of the same order as the entire American state.

BlackRock probably has a much greater GDP than the majority of nation states.

Absolutely, yeah. Incidentally, another interesting fact about Larry Fink is that in 1983, three years prior to his losing their $100 million, Larry Fink originated the concept of collateralized mortgage options. Which was the system for purchasing a large number of mortgages, putting them into various funds which were split into various levels of risk and various levels of return. Of course, this was the financial instrument which was a major contributor to the 2008 financial meltdown.

BlackRock's Future Involvement in Public Projects

An interesting thing I learned this morning. Rachel Reeves, our new Labour Party chancellor of the Exchequer, is talking about managing to invest in the infrastructure of Great Britain by a scheme of public-private partnerships and actually mentioned BlackRock as being likely to be helpful in doing that.

The whole notion of this way of handling public finances is something we should cover in another episode. Anyway, the Labour Party and Gordon Brown years were heavily into public-private partnerships. This has resulted in a lot of rather shoddily built schools and poorly supported hospitals which had cost an entire enormous amount of money and will continue to do so in the future. It was essentially an accounting measure to ostensibly reduce the government borrowing, but of course by having part of it financed, they still finance that with borrowing. But as the government is able to get the best interest rates of anybody raising the same amount of money through some private bond issue is inevitably going to be more expensive.

Then of course, you've got all of the whatever other payments there are to the so-called private investors. It's really more a transfer of taxation into the pockets of financiers. It would be very interesting to watch that space and see how that works out.

What are we arguing then? For people just to be aware of what's going on and have a sort of top-level understanding?

I think that's all I can really offer at the moment. As we've said elsewhere, if you're looking out for your own pension, you want to join up the dots and see who is investing on your behalf, how they're investing and whether BlackRock are involved with this and whether there are alternatives.

At some point, I imagine BlackRock are going to be invited to rebuild Ukraine, Gaza, all of these places. You might not necessarily want your pension going to that end!

Yeah, that is fair comment. And another point to be made is that, of course, BlackRock is heavily invested in all of the arms manufacturers, all of the mining companies, all of the energy companies, all of this great tentacle of capitalist enterprises between them are the real existential threat to the planet.

Are there known resources that people can go and look at to learn more about this?

Well, James Corbett, Corbettreport.com has got several pieces on BlackRock and a very great deal more detail than I've been able to convey in this talk, but that is a very good source.

Thanks for reading this episode of Sovereign Finance. For more episodes, transcripts, in-depth articles, and the community, please take a minute now to subscribe free using the button above. You’ll receive a free email notification whenever we publish a new article or conversation.