Hollow Men, Hollow Markets, Hollow World

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I used to write all of my Epsilon Theory notes by starting with two or three or twenty quotes and images, so that the note wouldn’t really start until like … page 5. It was an affectation of the sort that a lot of new writers adopt, and I dropped it when I finally realized it had become a shtick.

But sometimes the old ways are the best ways. Eight years ago, here’s how I started a note that was also titled Hollow Men, Hollow Markets, Hollow World.

Apocalypse Now (1979)
Kurtz:Did they say why, Willard, why they want to terminate my command?
Willard:I was sent on a classified mission, sir.
Kurtz: It’s no longer classified, is it? Did they tell you?
Willard: They told me that you had gone totally insane, and that your methods were unsound.
Kurtz: Are my methods unsound?
Willard: I don’t see any method at all, sir.
Kurtz: I expected someone like you. What did you expect? Are you an assassin?
Willard: I’m a soldier.
Kurtz: You’re neither. You’re an errand boy, sent by grocery clerks, to collect a bill.

I first saw Apocalypse Now as a college freshman with two roommates, a couple of years after it had been released, and I can still recall the dazed pang of shock and exhaustion I felt when we stumbled out of the theatre. Nobody said anything on the drive back to campus. We were each lost in our thoughts, trying to process what we had just seen. Our focus was on Marlon Brando’s Colonel Kurtz, of course, because we were 18-year old boys and he was a larger than life villain or anti-hero or superman or … something … we weren’t quite sure what he was, only that we couldn’t forget him.

When I reflect on the movie today, though, I find myself thinking less about Kurtz than I do about Martin Sheen’s Captain Willard. Both Kurtz and Willard were self-aware. They had no illusions about their own actions or motivations, including the betrayals and murders they carried out. Both Kurtz and Willard saw through the veneer of the Vietnam War. They had no illusions regarding the essential hollowness of the entire enterprise, and they saw clearly the heart of darkness and horrific will that was left when you stripped away the surface trappings. So what made Willard stick with the mission? How was Willard able to navigate within a world he knew was playing him falsely, while Kurtz could not?

Hollow Men, Hollow Markets, Hollow World (March 30, 2014)

Eight years ago.

Before Trump. Before Covid. Before a hot war with Russia and a cold war with China. Before Bitcoin became Bitcoin! .

It’s hard to remember the before-times, right? It’s hard to remember how alienated and disenchanted and hollowed-out we all felt THEN, even before all of the crap of the past eight years.

Forty years ago, as a teenage boy, I imagined myself as Kurtz, the anti-hero/superman/supervillain.

Eight years ago, as a 50-year-old man, I downgraded my imagination to Willard, the good soldier/assassin/errand boy.

Today? LOL. Ego is a powerful drug, and it takes events like those of the past eight years to draw it out of your system. Today I finally know who I am in Apocalypse Now, who we ALL are in its narrative arc terms.

I am a villager.

Apocalypse Now villagers

We are all villagers in Kurtz’s world, an unnatural, literally insane world created by proclamation and fiat. Sure, our standard of living may be a little bit better than in the picture above, but the essential hollowness is the same. Maybe worse. And now an implacable agent of change – in the movie it’s the assassin Willard but in the real world it’s inflation, war, disease and climate – has arrived to collect the bill that is due.

This is an Old Story.

I don’t just mean that Apocalypse Now was taken directly from Heart of Darkness, Joseph Conrad’s 1899 novel. I mean that the story of hubris at a societal level, where prideful human leaders lift themselves and their people up to unnatural heights by stealing what is not rightfully theirs, only to have their society struck down in retribution, is probably the oldest social narrative arc of them all.

And that is exactly what our Kurtzian leaders have done in the United States over the past 25 years. In their overweening pride, they have stolen what is not rightfully theirs to lift themselves and their people up to unnatural heights. Through monetary and fiscal policies that have pulled forward future growth and productivity into the present, they have not only stolen wealth and prosperity from our children and our children’s children, but they have also created a political dynamic that has hollowed-out the Constitution and its attendant political norms.

We are a husk of ourselves. A wealthy and pampered husk of ourselves, sure, where I find myself disappointed if the local liquor store has only five different artisanal mezcals to choose from, but a husk nonetheless. Sometimes I wonder what the 5th-century Roman equivalent of artisanal mezcal would have been.

How did this happen? Here, I’ll show you.

This is a 70-year time series of the growth in American wealth (US household and non-profit net worth) plotted against the growth in the American economy (US GDP). All of the data is from the St. Louis Fed’s FRED resource. I’ve superimposed the terms and headshots of Fed chairs over this period (that’s William McChesney Martin on the far left, followed by Arthur Burns, Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen and Jay Powell), along with the various major asset bubbles we’ve had since the path of US wealth growth diverged from the path of US GDP growth in the mid-1990s.

By using nominal dollar measurements we avoid issues of inflation, and by comparing growth rates we avoid issues of stock (wealth) vs. flow (GDP). Also, please don’t @me about log charts. They add absolutely nothing to the analysis here. This is a true apples-to-apples comparison between two things that, IMO, should typically grow together and pretty much in lockstep. That’s because I believe this:

As a people, you can’t be a lot richer than your economy grows without stealing that wealth from someone else.

Maybe it’s stolen (sorry, I mean extracted or taxed or traded for) from people in other countries through colonial terms of trade. Maybe it’s stolen (sorry, I mean pulled forward) from future people in your own country through artificially low interest rates, monetized debt-driven stimulus, and an increasingly levered financial system supporting increasingly non-productive mal-investment. Insert monocle-wearing Hmmm emoticon here.

By the way, nothing that I described in the prior paragraph is the exclusive or even predominant domain of one political party or the other. If you insist on saying, for example, that debt-driven stimulus policies are a Democratic party thing against which the Republican party stands in staunch opposition, then I will present you with a bound copy of the 2017 Tax Cuts and Jobs Act and just start laughing at you.

Also by the way, I believe that a modest national debt and modest leverage in the financial system are good things, not bad things. I believe that a gold standard is a pretty terrible way to run a monetary system. I believe that deficit spending is entirely justified across a pretty wide range of national exigencies. And as I’ll discuss at length in a bit, I believe that central banks play a crucial and necessary role in the modern world.

None of these things – a fiat currency, fiscal flexibility with the ability to take on substantial debt, an autonomous central bank with wide-ranging authority over monetary policy and financial system regulation – are at odds with the basic idea that our wealth as a people should grow hand in hand with the growth of our economy.

I know this is true, because that’s exactly what happened in the United States for almost 50 years.

Here’s the same chart from before, but zooming in on the 1951 – 1996 period.

As you’d expect, the Nixon shocks in the early 1970s (ending the gold convertability of the dollar and punting the post-WWII Bretton Woods system) plus the OPEC oil shocks separated the absolute lock-step relationship between wealth growth and economic growth, but the two were still very much joined at the hip throughout the 1970s, 1980s and early 1990s, across the Fed chairmanships of Arthur Burns, William Miller (only 1 year, not pictured), Paul Volcker and the early days of Alan Greenspan. Not coincidentally, the 1970s were the last time we had embedded wage/price inflationary pressures in the United States (CPI peaked at 14% in late 1978, just before Volcker took the helm), and US monetary policy over this period was consumed by trying to bring inflation down by any means necessary. As a result, it would have been inconceivable in the Volcker Fed (1979-1987) and the early days of the Greenspan Fed to even consider using monetary policy to inflate nominal wealth levels without risking resurgent inflation in the real economy.

By the mid-1990s, however, it was all too conceivable. About halfway through Alan Greenspan’s 20-year (!) Fed chairmanship, the Maestro had a revelation: blessed by the Great Moderation (high productivity and low inflation expectations), the Fed could use monetary policy as a political tool to make us richer than our economy could grow, without re-triggering wage/price inflation in the broader economy.

By keeping interest rates lower than what would have been considered ‘normal’ over the prior few decades and by relaxing regulatory constraints on derivative securities, banking regulations and the like, Greenspan believed that he could inflate home prices and financial asset prices without hitting wages and prices more broadly.

Now that’s a neat trick! Sure there would be occasional bouts of “irrational market exuberance”, like the Tech Boom (and crash) of 1999-2001, but that’s a small price to pay for the pareto-superior (how’s that for a ten-dollar word!) wealth outcomes provided by activist monetary policy.

This was the birth of our insanely financialized world.

I’ve included red arrows to show the slope or speed of the growth in US wealth at different periods over the past 25 years, as well as green arrows to show the slope or speed of the growth in US GDP. The plain graphical interpretation is exactly what you think it is – every Fed chair since Greenspan has not just continued the separation of wealth growth from GDP growth, but has accelerated that separation.

Ben Bernanke was the first to double down on Greenspan’s epiphany, and he achieved that acceleration by expanding the instruments by which monetary policy could inflate financial assets directly. The most obvious new instrument was what became known as ‘quantitative easing’ or QE, which covers a wide range of balance sheet actions. In simplest terms, QE just means buying enough stuff (‘large-scale asset purchases’, in the lingo) to drive the price of that stuff up and the yield of that stuff down. This has two big effects:

First, if you buy enough of something that’s fundamental or a reference point for how all borrowing is priced, like US Treasuries, then artificially pushing the price up and the yield down on that fundamental thing should make all borrowing cheaper. This is the essence of pulling forward investment from the future. By making the price of borrowed money artificially lower, you encourage companies and households to borrow money today and buy something with it … a new factory, maybe, if you’re a big company, or a new car, maybe, if you’re a household. And if the country is in the middle of the worst Depression since the 1930s and everyone is losing their job and no one is buying a new car, then pulling forward some investment from the future so that the present day doesn’t absolutely collapse makes a lot of sense! But if that’s not the situation … well, hold that thought.

Second, artificially pushing the price up and the yield down for something that is fundamental to every investment portfolio, like US Treasuries, means that all of the retirees and pension funds who buy US Treasuries and are counting on that yield as income to fund their retirement or their obligations are going to be forced to buy riskier assets, like mortgage-backed securities or dividend-paying stocks, to get that same level of income. This is called the ‘portfolio channel effect’ in the official lingo, but you may also hear it referred to as ‘financial repression’, especially if you get to the point of a yield or interest rate of zero, so that savers don’t get any income at all from holding their government bonds. And if you have negative interest rates, such as have been commonplace in Europe over the past 5 years or so, then savers and retirees are truly forced to do something substantially risky with their money. Now again, if you’re in the middle of the worst Depression since the 1930s and no one is willing to invest any money in any stock for fear that the entire financial system is about to collapse, then prodding everyone to take more risk than they’d otherwise be comfortable with makes sense. I’m not crazy about the nudge, but I get it!

That situation – the worst Depression since the 1930s, where everyone is losing their job and no one is willing to invest any money in anything, and everyone is afraid that the entire financial system is about to collapse – is exactly what Ben Bernanke and the Fed faced in early 2009. I think that the emergency action they took then, what became known as QE1, is totally fine. More than fine. Honestly, I think that QE1 saved the world. I think that QE1 was exactly why central banks were invented in the first place – to provide emergency liquidity in incredible quantities when everyone else is too scared to do it. It’s like that scene in Pulp Fiction when John Travolta plunges the syringe of adrenaline straight into Uma Thurman’s heart. The Fed is Travolta, Thurman’s heart is the global economy, and the adrenaline is QE1.

No, the problem wasn’t QE1. The problem was QE2 and QE3 and QE-infinity. The problem was turning a $2 trillion balance sheet with the completion of QE1 into a $9 trillion balance sheet today! The problem was turning a one-time straight-in-the-heart shot of adrenaline into a permanent intravenous mainline of adrenaline.

The problem – like it always is in this Old Story – was the transformation of emergency government intervention into permanent government policy.

The problem – like it always is in this Old Story – was the hubris of people like Ben Bernanke and Janet Yellen, who honestly believe that it is not only possible to rescue an economy through monetary policy, but that it is also then possible to control an economy through monetary policy.

Yes, control. As direct market actions through more and more QE began to lose their edge as early as 2010, the Fed found yet another toolbox “to support a lagging economy”. They found narrative. They found that their words (‘forward guidance’ in the lingo, or sometimes ‘communication policy’) could be used instrumentally, not as a reflection of authentic belief or (god forbid) uncertainty and humility, but as a conscious tool to drive market behaviors in a desired direction. And that desired direction, of course, in the absence of inflation in the real economy, is always up.

Ben Bernanke, in his final substantive speech as Fed chair, marveled at the efficacy of this new toolbox for modern monetary policy. Their first and historically primary toolbox – setting very short-term interest rates – had proved ineffective at stopping the financial system freefall of the Great Financial Crisis. Their second toolbox – balance sheet expansion and QE – had saved the world initially, but required more and more purchases for less and less impact. This third toolbox, however – communication policy and forward guidance – well, there seemed to be no limit to its ability to shape market and broader macroeconomic outcomes, provided that the Fed maintained its ‘credibility’ with these verbal promises today to maintain its “extraordinary accommodation” far into the future. And oh by the way, we were in good hands with Bernanke’s retirement from the Fed (as he headed off for a well-remunerated future with Ken Griffin and Citadel), because the person who had led the development of this new toolbox within the Fed was none other than the incoming Chair, Janet Yellen.

The Yellen Fed was peak Fed. Peak, not in the sense of maximum balance sheet expansion, but in the sense of maximum faith and maximum zealotry that the Fed’s three toolboxes – short-term interest rates, balance sheet operations and communication policy – could achieve any desired macroeconomic outcome in this, the best of all possible worlds. Business cycle? What business cycle? Welcome to the era of permanent recovery! As for financial crises … well, haha, it would perhaps be presumptuous to say that a financial crisis will never occur again, but with our current knowledge and tools for prudential monetary policy, certainly we can say that a financial crisis will not occur in our lifetimes. These were, in fact, Janet Yellen’s literal words.

Ben Bernanke and Janet Yellen were true-believers in the power of monetary policy to control markets and the economy in a way that – in my experience as a former professional academic – only former professional academics can be. They were true-believers in a way that, to read his memoir, Alan Greenspan was not. Greenspan thought he could sneak in some wealth creation on the coattails of Volcker’s inflation-crushing campaign, not that he could eliminate the business cycle and rule the world from the Mount Olympus of the Eccles Building. Now, to be sure, that doesn’t let Greenspan off the hook here. In fact, you can argue that Greenspan was the most culpable of the lot because he knew better!

I think that Jay Powell is a lot more like Greenspan than Bernanke and Yellen. I think he knows better. I think he knows that it is economically unsustainable, socially destructive and politically poisonous to inflate wealth so much more than an economy grows. I think that his efforts to raise interest rates and start shrinking the balance sheet, efforts he started making almost as soon as he was sworn in as Fed Chair, are a reflection of this.

I also think that Jay Powell, centimillionaire, has personally been an enormous beneficiary of the wealth-inflation policies that Alan Greenspan set in motion in the mid-1990s. I also think that Jay Powell, banker, would sooner betray his convictions than risk a tarnished reputation with his Wall Street tong as the man who ended the decades-long party. I also think that Jay Powell, politician, was on the verge of having his career summarily ended at that White House dinner with Trump on Christmas Eve, 2018. And for all of those reasons, that tiny little notch in household wealth in Q4 of 2018 – the bear market of 2018 that felt like the end of the world to so many – was reversed into stronger than ever wealth inflation and economic financialization.

And then came Covid.

And then came the economic response to Covid, which was not only a resumption of full-bore QE and balance sheet expansion (about $2 trillion worth), but also the largest stealing pulling forward of wealth for direct distribution to the already well-off of any government program in the history of man.

Again, I am 1,000% in favor of emergency government action to save an economy in general and to save jobs in particular. What our government did in reaction to the Covid recession and bear market was not that. The Paycheck Protection Program (PPP), for example, distributed about $800 billion directly to American businesses, ostensibly to cover the cost of maintaining workers on payrolls. In truth, only about one-quarter of that money supported jobs that would have otherwise been lost. More than 70% of the PPP distributions, more than half a trillion dollars, went to the richest 20% of American households. That’s separate from the $680 billion in Federal unemployment benefits and $800 billion in ‘economic impact payments’ (stimulus checks), both of which also saw substantial, although less than PPP, wealth payments flow directly to already well-off households that were in no danger of losing a job or, really, suffering any sort of economic hardship from the Covid pandemic.

For millions of Americans, particularly relatively wealthy Americans like lawyers and doctors and bankers and accountants and consultants and financial advisors, 2020 wasn’t a difficult year financially, it was their best year ever.

This is what drove the enormous post-pandemic acceleration of wealth growth over economic growth.

This is what created resurgent inflation and inflation expectations.

This is what broke the world.

How? Because the hundreds of billions of non-emergency dollars pulled forward from future Americans that went straight into the pockets of Americans who suffered zero economic damage from Covid on top of the hundreds of billions of non-emergency dollars pulled forward from future Americans that went straight into the pockets of relatively well-off Americans from the 2017 Tax Cuts and Jobs Act on top of the TRILLIONS of non-emergency dollars spent by the Fed to artificially lower the price of money and inflate financial assets and channel mal-investment and create the worst decade of productivity growth in the history of the United States and make us FEEL rich without BEING rich … yeah, THAT is what causes inflation.

The entire justification for Greenspan’s original sin was that a little bit of egregious wealth inflation wouldn’t spur inflation in the real economy. So long as inflation stayed tamped-down in the real economy, so long as it wasn’t persistent, so long as everyone knew that everyone knew that inflation wasn’t a problem … we could party on. We could survive the central-banking-as-religion academic zealots. We could survive the reputation-over-soul bankers. But once that common knowledge shifts, once everyone knows that everyone knows that inflation IS a problem, it all goes poof.

Low inflation – in both real world and narrative world – is the necessary and sufficient condition for these red arrows to be steeper than the green arrows.

High inflation – in either real world or narrative world – requires the red arrow to be less steep than the green arrow.

Greenspan’s magic trick – inflating wealth without sparking inflation in the real economy – is dead. It doesn’t work anymore. There’s no more room for monetary policy to create “free” wealth, for these growth lines to separate further. There’s only room for these lines to converge, and the only realistic way for that to happen is for the wealth growth line to go down. A lot. Remember, a bear market is only a little notch in that line. A nationwide collapse in home prices, like in 2008-2009, is only a modest dip.

Roughly speaking, we need a wealth destruction event that’s equivalent to the 2008-2009 Great Financial Crisis just to get the ratio of wealth to GDP back to pre-pandemic levels.

If you sincerely want to eliminate inflationary pressure and expectations, that is.

If you don’t want to eliminate inflationary pressure and expectations, or rather, if the political consequences of the wealth destruction required to eliminate inflationary pressure and expectations are too unbearable, then you can instead simply mandate the effects of inflation away through wage/price controls and related policies (effective nationalization of large swaths of economic activity, for example). But those are your choices. Neither is attractive. At least with the former – wealth destruction to get at the heart of what creates inflation – you can recover and grow your way back to a more equitable and more vibrant society. The latter, though – wage/price controls and outright nationalization or pseudo-nationalization of entire economic sectors – man, you never recover from that.

Unfortunately, I think the political consequences of the wealth destruction now required to control inflation authentically ARE too unbearable for every status quo political institution, for both the Dems and the GOP. I think by far the most likely path forward is greater and greater political lashing-out into worse and worse policy positions, both economically and culturally.

Apocalypse Now.

Or at least now-ish.

So what happens to us villagers when Captain Willard kills Kurtz and calls in the air strikes?

You know, when I wrote that original Hollow Men note eight years ago, I thought I understood this quote from Conrad.

The question is not how to get cured, but how to live.

Joseph Conrad (1857 – 1924)

That’s a quote from Lord Jim, not Heart of Darkness, but whatever. It’s a wonderful quote, because there is no “cure” for the modern condition, whether it’s our modern condition or the modern condition of 1899. This is the world we’ve got. There is no other. The warped Kurtzian kingdom isn’t hidden away up-river in some jungle, it’s all around us. Right now. We are IN that warped Kurtzian kingdom, and there is no escape, no cure. There is only how we choose to carry ourselves as human beings through the conclusion of this Old Story. There is only how to live.

Eight years ago, I thought the answer to this question was just to play the game better.

On defense, recognize that modern markets are, in fact, quite hollow and everything you hear from a public voice is being said for effect. But that doesn’t mean that the underlying economic activity of actual human beings and actual companies is similarly fake or bogus. The trick, I think, is to recognize the modern market for what it IS – a collection of socially constructed symbols, exactly like the chips in a casino, that we wager within games that combine a little skill with a lot of chance. There is a relationship between the chips and the real-world economic activity, but that relationship is never perfect and often exists as only the slimmest of threads. The games themselves are driven by the stories we are told, and there are rules to this game-playing that you can learn. But it’s a hard game to play, and it’s even harder to find a great game-player who will bet your chips on your behalf. A better strategy for most, I think, is to adopt an attitude of what I call profound agnosticism, where we assume that ALL of the stories we hear (including the narratives of economic science) are equally suspect, and we make no pretense of predicting what stories will pop up tomorrow or how the market will shape itself around them. What we want is to have as much connection to that underlying economic activity of actual human beings and actual companies as possible, and as little connection as possible to the game-playing and story-telling, no matter how strongly we’ve been trained to believe in this story or that. I think what emerges from this attitude can be an extremely robust portfolio supported by more-than-skin-deep diversification … a portfolio that balances historical risks and rewards rather than stories of risk and reward, a portfolio that looks for diversification in the investment DNA of a security or strategy as well as the asset class of a security or strategy.

On offense, look for investment opportunities where you have information that reflects an economic reality at odds with the public voices driving a market phenomenon. This is where you will find alpha. This is where you can generate potential returns when the economic reality is ultimately revealed as just that – reality – and the voices shift into some other story and the market matches what’s real. These opportunities tend to be discrete and occasional trades as opposed to long-standing strategies, because that’s the nature of the information beast – you will rarely capture it in a time and place where you can act on it. Almost by definition, if the information is being generated by a public voice it’s probably not actionable, or at the very least the asymmetric risk/reward will have been terribly muted. But when you find an opportunity like this, when you have a private insight or access to someone who does against a market backdrop of some price extreme … well, that’s a beautiful thing. Rare, but worth waiting for.

Hollow Men, Hollow Markets, Hollow World (March 30, 2014)

It’s still really good advice for a game-player! Meaning, if your day job or your position in life requires you to take an active interest in markets, like if it matters to you or if you find it interesting how the market reacted to the CPI report this morning, much less if you know that the CPI report comes out every mid-month on a Weds at 8:30am ET, then I think this is really good advice on how to live. And in my professional life, I’ve spent the past eight years building a business with my partner, Rusty Guinn, to put exactly this advice into practice.

But today, as opposed to eight years ago, I am thinking about a lot more than just the narrow confines of the market games I play in my day job.

I am thinking about what happens to the games of markets and politics if we have wealth destruction along the lines of what I suspect will be necessary to wring out inflation from our insanely financialized world.

I am thinking about what happens to the games of markets and politics if we DO NOT have wealth destruction along the lines of what I suspect will be necessary to wring out inflation from our insanely financialized world, but instead choose to order inflation away through the fiat commands of price controls and economic dirigisme.

How do we live when we know full well how this story ends?

Because we all know exactly how this Old Story ends, right? We know that when prideful human leaders lift themselves and their people up to unnatural heights by stealing what is not rightfully theirs, their society is struck down in retribution. We’ve seen this movie a thousand times before.

I don’t have an Answer with a capital A to Conrad’s question of how to live, and if I said I did you shouldn’t believe me. All I know is a Process. All I know is this: We may work in a hollow market and we may live in a hollow world. Kurtz’s time may be up. But let us refuse to be Hollow Men.

Mistah Kurtz – he dead
            A penny for the Old Guy


    We are the hollow men
    We are the stuffed men
    Leaning together
    Headpiece filled with straw. Alas!
    Our dried voices, when
    We whisper together
    Are quiet and meaningless
    As wind in dry grass
    Or rats’ feet over broken glass
    In our dry cellar

T.S. Eliot, The Hollow Men (1925)

Nope. Hard pass. This is NOT how we live. Instead, how about we live as autonomous human beings possessed of a soul and a conscience? We find our pack – online and offline, networked and meatworked – other autonomous human beings who treat us as ends in ourselves, never as a means, and demand the same human treatment in return.

And then we tell ourselves a new story.

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  1. The progression from Kurtz, to Willard, to villager. Bingo! Ben previewed that change in OH last week by discussing feelings of vulnerability in the miasma of recent events. We are inculcated with the arrogance that we can never be the villager. Adopting the villager point of view is the only way out of this.

  2. image

    Does the data set for the orange line in the chart get updated, monthly, quarterly or annually? (could you also link to the data set directly? Not sure I’m finding it exactly when I search on FRED)
    I’m curious to see what the YTD damage has been so far in trying to forecast for the period ahead.

    I’m also curious about the size and impact of crypto on this data set. To go from a $2trillion market cap at the beginning of January

    to a market cap of about $882 billion currently is a pretty steep drop.

    Granted, it is dwarfed by public, private and other markets but it is a non-zero contribution to what should be a declining orange line.

    I guess I’m just looking for a silver lining in what an implied reversion to the mean looks like wealth wise.
    Because the third outcome is a combination of both your scenarios - large wealth destruction AND wage/price controls and fiat policies. (A very dismal use of the AND philosophy to be sure). And it would be very grounding to be able to get any help in discerning between real alarm in the world and fake alarm from fiat world.

  3. Ben’s other message is that it has been real alarm in the real world (those who are below median wealth and don’t own financial assets) the entire time the orange line has been accelerating away from the blue one!

  4. Point 1. Apocalypse Now - greatest movie of all time. The only reason it is second to Pulp Fiction on my favorite movies list is because Pulp Fiction is far less harrowing to watch (amazing they are referenced in the same note!). Even thinking of Martin Sheen’s line reading, “I don’t see any method…at all…sir” - haltingly because he is too bewildered by the encounter to do anything but tell the truth, but also aware that in this audience with a mad king who fancies himself a god, any word he utters might get him killed - gives me chills every time. The strange thing is, living in this insane world, where people have given themselves over to ridiculous narratives and worship of missionaries, I feel just like Willard in that moment when I tell people what I really think (not literally killed…yet) of the nonsense they apparently buy into.

    Point 2. I’m sure many have seen this website, chronicling how myriad indicators of real productivity and growth abruptly stagnated as indicators of the paper wealth and the “hollow” economy took off starting around 1971 : https://wtfhappenedin1971.com/ I’ll repeat my refrain that while these effects are often attributed to leaving the gold standard, and no longer having “sound” money, I think those are actually both the effects of increasingly restricted supply of cheap energy. Tim Garret of University of Utah has produced a series of papers directly linking economic growth and wealth production to the rate of increase in primary energy consumption as a matter of thermodynamics. https://twitter.com/nephologue/status/1537848492323876865

    The idea is that, increasing the potential to harness untapped energy and resources and integrate them into organized networks of utility is, in a literal physical sense, what wealth production is. Producing wealth means either growing those networks or make them work faster and more interconnectedly, both of which require energy. If your ability to do that is limited or diminishing, you will not see real growth, although you may still see nominal growth.

    If there is a large difference between the nominal and real GDP, it appears in economic accounts as high values of the GDP deflator or as hyperinflation. Interpreted physically, civilization dissipates energy along previously produced networks. Even as current production continues to grow these networks, there is concurrent fraying of those previously constructed that is sufficient to offset any productive gains.

    In other words, when nominal growth exceeds the requisite level of primary energy consumption, this shows up as inflation (and probably other ‘hollow economy’ indicators). The US left the gold standard in '71, but consider also that it suffered severe energy supply shock lasting about a decade. What happened? Stagflation - high inflation, low real growth, the hollow economy really began then. Look at the pandemic. Primary energy consumption dropped precipitously as a matter of demand, then demand returns only tentatively due to latent pandemic related drag, combined with two absolutely titanic money bazookas - what followed? Massive inflation, Bitcoin → Bitcoin!™, stocks → Stonks!, crypto bubble, housing bubble, everything bubble.

    This matters because EROEI of energy sources has been steadily falling for several decades, meaning the ability to increase primary energy consumption has been getting increasingly restricted. It was thought that we would hit peak oil in the 2000s, and while that was averted thanks to revolutionary innovations in tight oil and shale, output increased but EROEI did not improve nearly so much. And so we are still on a path to an ever-increasing proportion of energy having to be reinvested into future energy harvests, reducing the potential for real growth. This is terrible news, by the way, for so-called renewable energy sources by which might be the area where we are seeing perhaps the largest misallocation of capital in economic history. The only thing that could improve this situation is nuclear, or some yet undiscovered energy source (not energy carrier, which is what batteries and hydrogen cells are).

    So, we have to recognize that the monetary policymakers have been playing a crooked game for the past few decades, especially the last one, but the reason they are doing that is perhaps because, as a matter of physics, it is the only game in town.

    Point 3 This isn’t just a story about the wealthier sect ripping off the rest. There was massive amounts of fraud in the COVID assistance programs for rent and unemployment assistance from regular people. Many of the COVID rent protections and assistance did not actually require a person to declare that COVID had any effect on their life in any way. In New York it was basically a “get out of rent free” card, later ruled unconstitutional by the New York Court of Appeals as a taking. In some states the unemployment benefits could be and were utilized people who were not actually employed in the YEAR prior to the pandemic, and now the unemployment agencies are in a situation where they are trying to claw back money and demand something, anything to prove that you did in fact qualify for unemployment. Unfortunately certain political factions wanted to PREVENT the enaction of measures that might have mitigated this amount fraud waste and abuse.

    What’s going on here is that, in an era of limited real growth, Malthusian competition effects are taking over. It’s okay to pretend fraud and abuse don’t exist, at least not among your constituents, because the pie isn’t growing and we’ve gotta do what we gotta do to get our piece. So we adopt whatever narrative suits us, and to hell with truth or sanity. And this really increases the risk of disastrous nationalization and price control policies.

    My Answer There is a third way, between wealth destruction and disastrous economic management policies. We need massive investment in energy supply, first for fossil fuels supply increase, and deployment of nuclear and research into the discovery of new energy sources. This is the only way to repay what’s been stolen from the future without destroying what we have now. Or, maybe, another way of saying it is, this wouldn’t be stealing from the future the way we are now, but borrowing from it and in return creating greater growth potential for the future.

  5. Yes…but first you have to see that you are a villager. This is why the Emperor Having No Clothes is such an excellent story. Because we all see ourselves as the boy (the contrarian who can see through the haze) or the villagers (the peoples that got fooled). We never recognize that we are the Emperor with false clothing (false ideas, an inability to recognize the water in which we swim) and that we can’t see the world until we lose our air of arrogance and become a villager once more.

  6. I’d also like to point everyone to a somewhat obscure work, Joseph Tainter’s Collapse of Complex Societies. He argues based on data from Roman Empire, the Mayans, and Chacoan Society of the American Southwest, and modern results, that the collapse of complex societies can be explained by the following:

    1. human societies are problem-solving organizations;
    2. sociopolitical systems require energy for their maintenance;
    3. increased complexity carries with it increased costs per capita; and
    4. investment in sociopolitical complexity as a problem-solving response often reaches a point of diminishing marginal returns.

    It is possible to speak of sociocultural evolution by the encompassing term ‘complexity,’ meaning by this the interlinked growth of the several subsystems comprise a society. This growth carries an associated energy cost, which before the development of fossil fuels was largely met by human labor. Growth also yields an array of benefits, including administration of resource storage and distribution, investment in agricultural, energy, and minerals production, internal order and external defense, information processing, and public works. …[A]t some point in the evolution of a society, continued investment complexity as a problem solving strategy yields a declining marginal return.

    (please forgive the previous owner’s markup)

    Society begins to break down as

    … [t]ax rates rise with less and less return to the local level. Irrigation systems go untended, bridges and roads are not kept up, and the frontier is not adequately defended. The population, meanwhile, must contribute ever more of a shrinking productive base to support whatever projects the hierarchy is still able to accomplish. Many of the social units that comprise a complex society perceive increased advantage to a strategy of independence, and begin to pursue their own immediate goals rather than the long-term goals of the hierarchy. Behavioral interdependence gives way to behavioral independence, requiring the hierarchy to allocate still more of a shrinking resource base to legitimization and/or control. Thus, when the marginal costs of participating in a complex society becomes too high, productive units across the economic spectrum increase resistance (passive or active) to the demands of the hierarchy, or overtly attempt to break away.

    Most of the resistance from the non-ruling class will be passive. For example, “[i]n both the later Roman and Byzantine Empires, the overtaxed peasantry offered little resistance to the foreign incursions that ultimately toppled these regimes.”

    That bold sentence I emphasized as especially disturbing given @bhunt’s comments on how the ruling class might choose to respond to the lack of real growth in the long term. He argues that one of the classic responses is temporary resurgences in state strength as they re-assert control at a new, higher level. These will be your strong leaders and authoritarians, but exercising increased power of course leads to greater complexity and imposition on the productive base of society, and only at best stalls the ultimate decline.

    It’s not all doom and gloom though!

    For human societies, the best key to continued socioeconomic growth, and to avoiding or circumventing (or at least financing) declines in marginal productivity, is to obtain a new energy subsidy when it becomes apparent that marginal productivity is beginning to drop. Among modern societies this has been accomplished by tapping fossil fuel reserves and the atom. Among societies without the technical springboard necessary for such development, the usual temptation is to acquire an energy subsidy through territorial expansion.

    So we need a new energy subsidy! We are tapping out fossil fuels, the atom is not fully tapped out yet, so we can increase reliance on that. No idea what the next new energy discovery will be.

    Territorial expansion for the entire world economy is only possible through…interplanetary expansion and there’s some new energy source there? Maybe Elon is right about colonizing Mars and we really are at the beginning of a space travel revolution? That’s not where I thought reading this note would take me but…here we are.

  7. It is notes like this that made me subscribe to ET!

    This one is a bit grimmer than the notes I first read , but truth is , we are several years down the road of the Long Now , and not only have we not reversed course , we have stepped on the accelerator.
    This could easily be the final note of that series.

    I think there might be another consequence , we are going to export an enormous amount of our inflation to very poor countries around the world , with catastrophic results for them. Some rich ones too.

  8. Avatar for bhunt bhunt says:

    Great post, David. Thank you!

  9. What is a person with fiduciary duty to do after reading this excellent post?

  10. That’s my question too!

  11. Thanks Ben. Great post, finds yet another way to understand and express my horror at what our prideful leaders have wrought over (especially) the last 25 years.

    Three thoughts to share:

    1. Your working definition of wealth is based on price, i.e. market cap. I have come to appreciate John Hussman’s definition of wealth as being more appropriate. As he puts it, “The wealth is in the denominator [of valuation ratios].” Real wealth is the productive (i.e. value-added) capacity of the assets, not their price. For financial types, it is typically estimated as the discounted sum of future cash flows. When you view wealth this way, you realize that all this evil undertaken to separate price from value is (a) likely fragile, and (b) mostly an exercise to transfer wealth from asset-gatherers (villagers, future bag holders) to asset-holders (sharpies, financiers, politicians, their cronies, sometimes their political constituents, other rentiers, and gamblers). It is not an actual expansion of wealth; GDP comes much closer to measuring that.

    2. Much of my anger concerning the sins of our prideful human leaders in recent decades boils down to their wanton corruption of capitalism and the incentives they’ve created to speculate and game rather than truly invest in productive assets that would lift median standards of living. Yes there’s still legitimate alpha to be found based on true productive investment merit, but it’s a relatively rare find and not the quickest or even surest route to success. Why bother building when you can steal instead? The rest of the villagers, especially those too young to have seen anything else, see this outcome as “capitalism is evil” rather than “capitalism has been corrupted,” and we will all likely suffer even more as they exact revenge on the wrong targets.

    3. Although I saw your request that we not @you regarding log charts, and your claim that they add nothing to the analysis, I respectfully have to disagree. Sorry! Although one can compare slopes of different curves over a given time period without log charts, comparing slopes over different time periods is greatly improved with log charts. Further, doing so in real rather than nominal terms (to the extent one trusts the deflators) allows one to eliminate inflation’s artificial contribution to those slopes and their comparisons across time periods with different inflation rates.

    Thanks again and cheers,
    – Jeff

  12. Avatar for Trey Trey says:

    @bhunt I’d rather spend my time discussing artisanal mezcals, my current favorite is Del Amigo.
    As I read I found myself saying, these are the waters that we swim. I expect stealing forward to infinity. It’s political suicide to allow the lines to converge. The largest voting block needs their portfolios to live. NGMI

  13. This answer is not intended to be snarky, we actually did a Pack sourced OH where I was tasked with leading a discussion about how to invest with inflation. I didn’t have many great answers other than reminding everyone of the water we all swim in.

    1. Financial services asset allocation models (all of them) lean heavily on the correlations and returns produced during a falling inflation, falling interest rate, financializing, higher P/E, 40 year backtest.
    2. Investors expecting that model output to generate real returns above lost purchasing power to inflation, aren’t thinking critically enough about a rising inflation, deleveraging world that we keep discussing is unfolding from zero rates and high valuations.
    3. The last time we did have inflation in the US in the late 70’s/early '80’s the lines on Ben’s chart had not disconnected from each other. Interest rates were high single digit or low double digit so the duration of a bond portfolio was extremely short to yield 8-10%+. Therefore, rising rates just offset some of the coupon income earned and did not produce negative total returns from bonds. Because bonds yielded so much and inflation was so high, stocks routinely traded at 6-10 P/E’s. Again, it is harder to lose much money in a recession owning a stock that starts with an 8 P/E and yields 5% and isn’t junk financed.
    4. Knowing the facts in #3 tells an investor nearly NOTHING about how inflation and higher interest rates will impact a portfolio of stocks and bonds today. Witness the performance of the 60/40 balanced portfolio being the worst ever calculated in a half. High quality bonds are down 10-12%! Why? Nearly no coupon and very long maturities in the benchmarks today… Ben’s extended market cap line shows that a stock missing sales, having margin issues or whatever causes an EPS miss easily drives the price down 20-50% when they pay nearly no dividends and trade at excruciating valuation.
    5. Owning overweights like energy, other commodities, and holding hedges like a long dollar position can mitigate some of the carnage. But, the math of high valuation, a return of inflation, and a resulting rise in interest rates makes all manner of the diversified portfolios that worked the past 30-40 years challenged. Remember that these inflation hedge recommendations touted are typically only a small allocation to an overall portfolio and by themselves cannot fix the big picture.

    That is an unfortunate answer, but I hope it elicits a better understanding of the dilemma all investors face.

  14. Great post, Ben. After reading and digesting, and especially studying the hyperbolic separation of the curves of the financial vs. the real, I could not help but think of the similarities to the political worlds of the West.

    The divergence between the Uniparty in power and the villagers in the developed world (think US, UK, Europe) could be graphed in a very similar fashion, I believe. In fact, they might overlay. Seems to me, the separation between the power elites and the proles has also gone hyperbolic.

    Hard to see how it ends without authoritarian control (the political version of price controls).

    Hail to the pack!

  15. Brilliant post… and terrifying. That orange line has a long way to fall before it ever touches the blue one.

    This note feels a bit like Jeremiah prophesying the destruction of Jerusalem because Israel refuses to repent from their wicked ways. Like you said, it’s an Old Story.

    Because of what faces us, refusing to be Hollow Men will be the greatest challenge we have ever endured.

    I don’t have an Answer with a capital A to Conrad’s question of how to live, and if I said I did you shouldn’t believe me. All I know is a Process. All I know is this: We may work in a hollow market and we may live in a hollow world. Kurtz’s time may be up. But let us refuse to be Hollow Men.

    I sincerely hope we are up to the challenge.

  16. Avatar for Pat_W Pat_W says:


    This is a marvelous contribution. Thank you. It reminds me of a small theory I cooked up one day while reading other peoples tedious ideas about why Mayans civilization declined.

    The Guatemalan Highlands in particular have nurtured a vibrant Mayans civilization for many centuries. They have even managed to cope through the survival of their verbal traditions.

    Here it is – as the priestly class in the cities of the Yucatán Peninsula grew more and more top-heavy, taxes became an ever heavier burden. For centuries the priests had contributed through their brilliant development of astrology to predict when to plant. In a region where the weather does not change that much that was a big advance. Over the centuries peasants gained enough experience that they could figure these things out for themselves. You count the moons, you count the days, you burn some incense, and hope for the best. Supplement that with offerings to whatever deity it is you think it might be helpful. Make a few offerings to the competition. Who knows which deity might actually help.that year? This is how Mayans still behave- pay a Mayan priest to sacrifice a chicken, then go say some prayers and burn candles at the Catholic Church if you don’t get results. And if you still don’t get results, swing by the evangelical church, sing loudly, and make a donation.

    So maybe groups of peasants started moving away. If They got caught they could just say they were looking for more fertile fields.

    It’s a simple theory – peasants wandered off because they did not want to support the priestly class anymore. It’s not really very different from the theory of Roman subjects on the frontiers offering no resistance to the Goths when they came through. It’s a soft “meh” and shrug by the producers in response to being overtaxed and underserved.

    I have no data to validate this idea, nor do I need it. It’s a private musing by someone entirely sick of the overcomplexity of the scholarly class.

  17. Avatar for Pat_W Pat_W says:

    “Stealing forward to infinity” is an outstanding description of what humanity has done to hasten climate change and environmental collapse. We now see that the earth’s ability to endure human “theft” forward is NOT infinite.

  18. Avatar for xmj xmj says:

    Many excellent points in the original post and in the ensuing discussion, I’ll add two things:

    1. The reason log charts are useful is because they simplify discussion about integrated processes - and almost all measures of stock and most measures of flow are time series with I(1) or higher. Applying log-differences lets us talk about a stationary process, which behave in more predictable ways. :wink:
    2. “Once the dust settles”, that is in the mid-term future once real rates are positive again and price inflation has abated, we’ll hear a lot more about defined-benefit plans. Defined contribution is all the rage in a “lower-for-longer” scenario where LT interest rates decline from double digits down to nil if not negative ; defined benefit might be considered very useful in the opposite scenario.
  19. @bhunt Agreed that open jaw chart should lead to a natural recessionary collapse that would devolve into a massive Great Depression, but of course we don’t live in a natural world. So it will be reacted to with MMT and political survivalism by our leaders on an even more insane level. We’ll get our wheelbarrows of money moment, but it will probably come after a big scary f’ing collapse. Surviving through that roller coaster of depression-Zimbabwe-collapse in a closed system is going to be damn near impossible. The only survivors of these events in history have been the ones to escape the closed system in Weimar/Venezuela/Zimbabwe/Argentina/etc and escape to a country less affected. But we’re not talking a country here. This time the closed system is the entire globe.
    The ending is the same as every civilization collapse Old Story. We revert to the natural state of mankind. Tribal/Fuedal/Oligarch ism.

  20. “And then we tell ourselves a new story”

    I think the only way out is to Grow our way out.
    No, I don’t mean more Stimulus via Government spending or Tax cuts or QE
    They are all played out, wasted really.

    I mean organic growth, using a unique strength of America, strength of our culture
    That being a culture that’s inherently encouraging to individual endeavors for success and acceptable to individual failures .
    We love individual rags to riches success stories and accept failures. We’re not Japan.

    I think old fashioned free market capitalism is the best way out of a bad hand.
    One way to accomplish that while utilizing our cultural resources is to have government policies fund and help any and all start-up businesses.
    Take the money we currently give to our Oligopolies and Monopolies that have such influence over our government and fund start-ups

    In the aggregate, it is start-ups that create the most efficiencies, produce the most non-inflationary growth, use the least debt to achieve. In the aggregate as there are many , many failures.
    As an extra benefit, it gives hope and energy to the younger generations as
    Nothing is more exhilarating than starting one’s own business.
    As an additional benefit, start-up businesses can start chipping away at the economic power of the Oligopolies and Monopolies with the ancillary benefit of reducing their political power.

    Let’s tell ourselves this “new” story , that free market capitalism works. And that the best form is creative destruction via new companies

  21. :laughing: @ing Ben when he has specifically asked to not be @ed is like bidding in bridge with a weak hand, can’t go first but maybe can go second! I wanted to see the log charts anyway…and Ben is right they don’t change the analysis, but maybe they do add to it? At the least it removes some skepticism for me and crystallizes the interpretation. Something like by '85 or so it was clear that the real acceleration in growth experienced 1960-1980ish had been lost. Despite all the efforts since then the slope from '60-'80, and perhaps not even the 1950-1960 slope, has never been regained until pandemic stimulus.

  22. Thanks for a really nice piece. It is a difficult thing to look at old reports and realize what you didn’t know. That takes a deep sense of self and remarkable ego strength.

    I spent about an hour on the phone with a financial advisor yesterday; the conversation began with "what do I tell my clients when they say the dollar is going to be worthless?'. I felt a bit like Col. Jessup. The real truth (at least a bit of it) is that we have so seriously mismanaged the world since the fall of the Berlin Wall that we managed to bring defeat from a wonderous victory. My take is that after the Berlin Wall fell, America’s leadership decided it no longer needed to pay attention to the rabble; it went whole hog to efficiency at the cost of everything else to maximize “shareholder value”:. In that process, we destroyed our industrial base; the pandemic revealed how the lack of redundancy has left us in a dangerous position. It’s worth nothing that we thought it was OK to put the world’s most sophisticated semiconductor foundries in the range of China’s short-term missiles or base the entire German industrial machine on cheap Russian oil and gas. Or built retailers without stockrooms. Inflation becomes a real problem not just when there is too much money chasing too few goods but when I am not confident the goods will be there and thus I will pay any price.

    So. what I told the advisor is that we are looking at a world of short duration assets, short business cycles, and really difficult financial markets. I don’t think he really heard it.

    I have always been struck by John 5:1-8. The cripple at the well thought he knew what he needed; help to get in the pool if it stirred. Instead, Jesus showed him what he really needed, which was faith in him.

    Thanks again, Ben.

  23. It’s not just that we thought it was OK, we thought it was great! It was a feature, not a bug.
    “We can’t have war or conflict if we are so interconnected that hurting us will hurt them.”
    Turns out we can.

  24. I really enjoyed reading Ben’s Hollow ground and everyone’s post have greatly expanding the depth of my understanding!
    Has anyone seen or done charts like Ben did for USA on China, Europe, etc…? Wondering if they have the same issues?

  25. Avatar for bhunt bhunt says:

    OMG! These are, without a doubt, the best comments an Epsilon Theory note has ever generated. Honestly, there’s too much to respond piecemeal, and the threading system we’ve adopted guarantees that my responses will be disconnected from the original post. So there’s only one thing to do, and that’s to write and publish a Mailbag note as a postscript here! Just amazing comments, everyone … thank you!

  26. There is a defensiveness that presents itself in men of a certain age (read: Boomers) whenever you even hint at the notion that perhaps the vast wealth they’ve created was not entirely earned by pure genius and instead relied on a combination of skill, hard work, and being alive at the right time. They do not like to entertain the possibility that timing was as much of a factor as hard work was, because for whatever reason this is seen as a personal insult. Michael Kao (@UrbanKaoboy, a Twitter user I push relentlessly) has dubbed the post GFC era as ‘The Liquidity Lottery’, and I am each day ashamed that I didn’t think of that. It’s the perfect way to encapsulate what happened. Being alive during that time was useful. But being older and established was even better. For a huge chunk of the Baby Boomers the last ~13 years have coincided with the years that they have had the absolute peak amount with which to invest. An annualized return of ~12% does a lot more for the recently retired 62 year old with a huge IRA than it does for the 28 year old who’s setting aside 4% of her $42,000 salary. A rising tide lifts all ships, sure, but some of them had much taller masts when the tide came in.

  27. I read your comment, and I totally agreed with it. Then I re-read the first part and as a boomer, I thought why do I agree and why am I not defensive about that statement at all?
    Answer: I am reading your comment Post living through the Covid pandemic. I own a small manufacturing business, and I make patented parts for large commercial printers world wide. I know for me, the Covid Pandemic knocked me awake, and knocked my ego down and out too, The Pandemic made me realize, that as smart, hard working and as passionate as I was, when the Government decided to shut down so many industries for our protection, they also shut down the industries that required printed material so overnight my customers (printers) went to idle speed, and many small family owned printers did not survive. My business went to idle speed also. That was when I realized my success was based on a myriad of issues totally out of my control, and purely based on luck of timing and government policies (pro business, currency exchange rates, tariffs / duty, and whether your customers would stay in business or not, or even whether your tenant’s had to pay you rent or not). So post Covid Pandemic Dan definitely agrees. The silver thread in that year of chaos was I woke up and saw reality.

  28. Really enjoyed this one and the discussion - bummed to miss office hours today!

    It feels that identifying as a villager is a bit of a cathartic function and I wonder if it’s a genesis moment as well. I wonder, and I’m sure the Pack has been contemplating this for some time now, where do we actually go from here? The conversation that Rafa brought up in last week’s office hours (in addition to some parts of the back and forth between Ben and Mike Green on Twitter), really speaks to the heart - and challenge - of this question, “what next”.

    If I had to guess I imagine the next piece might speak to this more. But at the same time, this conversation is a clear reminder that the answer is really, really hard to find. Is there even an example of something that we can point to that has mass and potential? This thread is a good reminder that the answer is not the most important aspect. It’s the conversation and the journey to getting there that matters most.

  29. I agree - these comments on this HM,HM,HW are great! I especially appreciate the comments of David C Billingsley. He has chosen to use the physics of energy. The chase after consumable energy as a necessary part of 'progress" is the conundrum of our time. Perhaps the Amish approach to daily life is less invasive. Certainly, contemplation / meditation of one’s navel as in the Buddha could be more appropriate. Both of these approaches are low carbon impact. I continue to wonder why low energy consumption (and so low entropy production) is never the first choice?

  30. I reckon it’s a lot harder to get the population to do less and be happy. For better or worse, consumption is the driver to our economy as well. Society can’t function if everyone’s meditating in the free time, the service industry would die.

  31. Avatar for xmj xmj says:

    Thank you for adding the charts :wink:

  32. Avatar for xmj xmj says:

    You might get a lot of value out of Jacob Lund Fisker’s “Early Retirement Extreme” book (which he wrote after reasoning through the consequences of energy shortages)

  33. This was one of the most impactful articles I’ve seen from Epsilon Theory in a long time, and there have been some good ones. Many of the comments from other pack members were very thought provoking. Wow!

  34. Avatar for jrs jrs says:

    Here’s a summary of this essay as a pop song, “Robber” by Weather Station:


    The song (actually the whole album) was written about global warming, but your opinion on that makes no difference. The story is the same.

    You never believed in the robber
    You thought a robber must hate you
    To wanna take from you
    The robber don’t hate you
    You never believed in the robber
    But the robber never believed in you
    You’re two halves of the same piece
    Divided into two
    No, the robber don’t hate you

  35. Great post! Much thanks.

  36. “our lands were ravaged, we seek a new beginning”

    Apocolypto (2006)

  37. Exactly. Nice!
    “He had permission
    Permission by words, permission of thanks
    Permission by laws, permission of banks
    White table cloth dinners
    Convention centres, it was all done
    Make real imagination, make unreal
    That which can be taken”

    I also like the forest and mirror themes in the video. We can’t see ourselves for what we truly are because we’re wearing the mirror - dazed and confused by the reflections of each other in a forest where permitted bandits roam freely.

  38. I think that you left off a third possibility in the potential responses to the widening gap between the increase of wealth and the increase in GDP. That would be the “do nothing” option or just let inflation continue at an ever increasing rate. I guess that one could argue that this option would eventually lead to wealth destruction also but it would be in a longer term.

    I have also been thinking about your Conrad Lord Jim quote. Maybe in today’s context you could substitute the word “survive” for the word “live”. Because if your very survival is at stake one isn’t making lifestyle choices.

    This “Hollow World” has really changed me. I have stopped getting angry (otherwise I would be angry almost all of the time). Now I just get disappointed. I don’t know what happens next after I stop getting disappointed. I have stopped putting a large effort into maintaining my economic standing. I am putting more effort into safeguarding my survival. It just seems that at some point soon, the narrative and the reality are going to separate so wildly that it will be impossible to ignore. It might happen in Europe this winter.

  39. Actually, you’ll find that data in The Collapse of Complex Societies !

    Tainter observed that most of the time the lower classes in a given society will not be organized or interested enough in presenting overt or violent resistance to the system, which in the decline period is in a vicious cycle of being increasingly burdensome but providing less and less benefit for its subjects. And so what we observe is that outside of isolated uprisings and upheavals, most of the resistance is the ‘meh.’

    I’d probably argue the biggest soft ‘meh’ that I see today is my generation’s (elder Millennials) reluctance to participate in traditional productive growth, such as home ownership and having children. We’re doing those things, but when we get around to it. Children were just too burdensome economically given the precarity we faced coming into our 20s. I wish I could find this twitter exchange from a couple years ago, but someone asked, “What’s the most effective birth control method?” Someone responded “Daycare costs $500/week.” Home ownership? So you want me to use all of my liquidity to take on hundreds of thousands in debt to buy one single asset, that I will then also have to pay taxes and maintenance on? Yeah…maybe after my hundreds of thousands in graduate school debt is paid off when I’m 40. Getting a fancy education toward a professional job that pays for a house used to be as close to a guarantee of safety if not affluence as you could get. Now thanks to diminishing marginal returns, we millennials were told it was a minimum, something necessary but not sufficient. And it might turn out to be even less useful than that.

    But there is much more potential for chaos and violence when the members of the middle or upper classes attempt to harness the dissatisfaction of the lower classes in order to topple the ruling class. Other historical observers have noted, for example, that most revolutionary leaders throughout history are members of the middle and upper middle classes. Ray Dalio in Changing World Order says to watch out for the leader who is well-educated from a middle class background, is charismatic, and able to lead and work well with others to build big, well-run organizations.

    Right now it seems like we certainly have a widening gyre as people fight over what people (knowingly or knowingly) perceive as a no-longer-growing pie. It seems to me this is resulting in the educated middle classes adopting radical or even nonsensical beliefs having to do with the legitimacy of institutions that are perceived to have failed the common man.

    On the left this manifests itself as a foundational belief in the inherent illegitimacy of our institutions due to their history of actual and imagined oppression of “marginalized groups.” The problem of course is that the oppression has generally gotten less actual and more imagined over time and so they are constantly having to invent new classes of victims and ever more arcane theories of oppression. On the right it seems it be showing up as bizarre, sometimes even idiotic conspiracy theories about the straightforwardly corrupt and criminal behavior of the elites at the expense of the masses generally - and, of course, good old-fashioned anti-semitism.

    The thing that makes me most afraid today is not even the absurdity of things you can hear the educated classes commonly claiming to believe. I have started to think now that absurdity is in some way becoming the point. People are quite intentionally infecting others with these ridiculous narratives in self-conscious disregard of truth and fact - and that disregard is the signal of one’s allegiance to their faction and strength of their opposition to the enemy factions. The goal of political discourse is no longer discourse, it is recruitment. Jacques Ellul wrote in Propaganda that

    The aim of modern propaganda is no longer to modify ideas, but to provoke action. It is no longer to change adherence to a doctrine, but to make the individual cling irrationally to a process of action. It is no longer to transform an opinion but to arouse an active and mythical belief.

    That was written in 1973. I don’t need to recount all the social, economic, and technological developments over the past 50 years that have made the potential for these effects orders of magnitude stronger.

    But I don’t yet see who the charismatic leader of a big, well-run organization might be from either camp. I do wonder if the fractiousness that our technological means introduce, combined with the fact that everybody in modern society is somewhat well-educated by historical standards, is preventing a real leader who can harness/exploit popular discontent from emerging. Like, there are too many potential leaders competing with each other in a highly fractious and alienated society of LARPers for any one to reach a critical mass of support. I’m not sure I would call that a hope, but it’s … something giving us time.

  40. This was essentially what people thought prior to WWI. It turned out that the interconnectedness allowed one to stave off conflict, because there is a higher threshold to cross in the parties thinking a fight is worth it, but once the conflict does start, it creates a cascading effect that can be quite explosive.

  41. The closest to that mantle of leader seems to be Zuckerberg. He’s able to leverage other peoples charisma for his own ends. He’ll probably impact the world more than anyone else for the next 50 years. At least he’s had the greatest impact on our online data collection as I understand it.

  42. This is surely a force in media that has siloed itself based on the audience it seeks to reach. I agree it is absolutely happening in politics and ET has spilled lots of ink on the approaches. Thinking about finding the big, well-run organization that has a charismatic leader is challenged by these very realities. If the organization was entrepreneurial and/or financially successful then the leader is almost certainly a centimillionaire. This is disqualifying for one tribe. If the leadership was shown in academia, union organization, or a career in public service then the other side has their sureties of where the allegiances are (not their side). Maybe a military backround could still pull from each side? I would reason that the spark of an idea/movement is a more likely source rather than the strength of a particular personality. I associate the American Revolution founders as men who carried a set of ideas forward and then became famous for taking the risk to execute on the vision.

  43. Ndamukong Suh, NFL Pro Bowl lineman and now venture capitalist posted a chart on Twitter last week showing average mortgage rates over the last 20 years. His caption was, paraphrasing, “There are two types of Millennials: those who locked in a low rate by 2020, and those who will never own a home” and I’ll be damned if that didn’t feel pretty accurate. If I were to buy my house today, at the exact same price, I’d be looking at a 20% increase in the monthly payment just from the difference in rates. That’s enough to keep a ton of buyers out of the market for years to come.

  44. I’ll repost what I wrote in another thread regarding energy scarcity:

    Our society literally does not have a clue what energy scarcity really is. The only people that have a clue about this are those living in the poorest countries.

    Energy scarcity is not just the electric bill doubling or tripling. It’s rolling blackouts, if you have a working electrical grid to begin with. There’s no supercomputer made in China and now in your pocket halfway across the world that you can somehow still afford, there are no data centers for them connect to with zero marginal cost. There are no container ships to block the Suez canal because it’s too difficult to manufacture cheap goods and stack them onto gargantuan ships which themselves can’t get across the ocean in any reasonable time. Actually cheap goods don’t exist. Energy scarcity is you make everything yourself or you pay gigantic prices for what you need but can’t make because everything is extremely labor or capital intensive. The service economy is literally servants in your household because there aren’t machines that run off petroleum and electricity to do all that manual labor you don’t want to do. Anyway nobody invented most of these things because science and technological innovation proceeds at only a fraction of the speed it has since the Industrial Revolution.

    But in more direct answer to your question, there is basically a floor on the amount of energy that an advanced economy consumes. There are a couple reasons for this.

    First, the more advanced/developed the economy, the more energy that is required to maintain it at its current level of functioning. Think of something infrastructural like the US interstate system. After inflation, I think it was $4 trillion of investment - the largest public works project in the history of civilization. There is no question that by making travel easier, faster, and more efficient for such a huge landmass unlocked enormous productive potential. However, this was not a one-time sunk cost. In order for travel on the interstate system to stay fast, easy, and efficient, it requires billions upon billions of dollars worth of ongoing maintenance every year. It probably easily pays for itself in dollars, but in energetic terms, our economy depends upon being able to continuously sink a certain amount of energy into its upkeep. Analogously, the Internet revolutionized so many things by reducing the marginal cost of information transfer and processing to nearly zero! But the data centers on which internet based technologies rely consume gargantuan amounts of energy to maintain 100% uptime and reliability. There is an estimate showing that your smartphone itself consumes a negligible amount of electricity unto itself, but streaming an hour of Netflix induces as much energy use in the network as a whole as your refrigerator does all year.

    This leads to the second point, which is that, because the economy is so advanced, reductions in consumption or gains in efficiency in certain sectors of the economy do not lead to overall reductions in consumption throughout the rest of the economy. Sometimes, they actually induce greater consumption. This is because the system is interconnected enough that when some energy is freed up at one part of the system, another part of the system immediately starts to consume it.

    This is best observed with the fact that, while carbon emissions in developed countries have fallen in the past 10-15 years, demand for fossil fuels in developing economies has been increasing as they grow and develop, and so carbon emissions in total continue to grow. So what you see is that, strictly within advanced economies, it is possible to reduce overall consumption without this effect - but only because there is very little marginal gain from increased consumption to be had within that economy. In the less developed economies, there is greater marginal gain.

    Again, Garrett has argued in his publications that these are consequences of the principles of thermodynamics and not any particular social or economic arrangement. For these reasons, Garrett and others have argued that it isn’t really possible to maintain, let alone grow, the standard of living or wealth the world enjoys while significantly reducing energy consumption, or carbon emissions. See e.g., ESD - No way out? The double-bind in seeking global prosperity alongside mitigated climate change

  45. Pat W,

    Potentially, imo, humanity’s "stealing forward to infinity’ hastening global warming is our greatest existential threat. The economics are trivial…

    Tree hugger Jim

  46. The stranglehold robot man has over us terrifies me.

  47. The pictures where he walks around in a sea of people wearing occulus helms is really poignant:

  48. Avatar for jrs jrs says:

    I haven’t read Garrett and know very little about energy. But the only way possible, in theory, would be for both developed and developing countries to go all-in for nuclear fission +/- renewables by mandate. Correct?

    (I’m not implying this could ever actually happen.)

  49. I’m just doing to leave this here… :smirk:

    *when I saw this today, I immediately thought of this thread.

  50. Looks like sugar cane biofuel is promising!!!

  51. I hope you don’t mind, but I passed along the Twitter link to Grant Williams and Doomberg. Tim Garrett would be a great guest on their podcast. Thanks for contributing to this post.

  52. Ben: Your podcast w Hugh Hendry is a delight. I’ve always found his approach to the investing world most edifying and certainly is a different tone from what we’e used to here.

    If you haven’t heard it, check it out. It’s worth the hour.



  53. Something like that, yes, in my opinion. Renewables will never do more than diversify the sources. They can never reach a level where they will be a primary baseload power source, and they will not replace and possibly not even reduce usage of other fuels.

  54. If that is the case, why does Congress and the Prez keep pushing it?

  55. They key impediment to renewable power is energy storage, because the production is so variable. Until a storage solution is found, it can not be thought of as base load capacity.

  56. A chart from today in the TX power grid makes Patel1975’s point about renewables not being effective baseload capacity. Renewables have been key to keeping the supply here growing to keep up with demand- wind/solar add up to almost 30% of Texas’ rated capacity. The sun has a habit of not shining overnight and the wind speed drops off during the heat of a Texas afternoon.

    Natural gas is still roughly 40% of the fuel mix and is our baseload fuel. Check out how the rising price of natural gas has moved electricity prices in the Lone Star State! Seeing charts like this make it easier to see why Walmart sales are flagging.

  57. I think that even with a storage solution, it will not work, at least not without an unforeseen revolution bring the efficiency up and the cost of down, both by several orders of magnitude. This is because introducing storage reduces EROEI and massively increases costs. Is it possible this could change thanks to some amazing technological innovation? That is always possible. But, in this case we are relying on it. To give you an idea:

    In Germany, an analysis found that “Integration costs increase with growing wind shares.” (my emphasis). When wind is 20% of electricity, the cost of electricity rises by 60%. When it is 40%, the costs rises by 100%. That is, higher wind percentage is MORE costly, not less. That’s because there needs to be a large amount of excess capacity in traditional power generation that have to be on standby when the wind stops blowing, extra power lines that have to be built for a highly distributed system of generation as opposed to a centralized plant, all of which comes with more personnel ,extra equipment, etc.

    Some other points on cost and efficiency:

    Another 2018 study found that for the US to rely on wind and solar + storage for all power generation, when accounting for weather and seasonal variation, it would cost $23 trillion. For comparison, 2019 GDP was $22 trillion.

    Michael Shellenberger estimated in Apocalypse Never that to back up all power consumers in the US with the state of the art battery storage facility found in Escondido, CA for only four hours would cost almost $900 billion to build - assuming, as the US Energy Agency does that prices for storage fall 25% from 2018 to 2025.

    Vaclav Smil estimated in Power Density that if 50% of US power consumption at the 2012 level were generated by solar and wind, it would occupy about 250 million hectares - about 25% of ALL land area in the United States - and that is before accounting for any storage capacity. In this book he also quotes another study to say that “in a decarbonized world that is renewable power, the land area required to maintain today’s British energy consumption would have to be similar to the area of Britain.” (my emphasis).

  58. Seems like a mix of nuclear and renewables is the only answer.

  59. Avatar for xmj xmj says:

    Maybe if by renewables we mean hydro (whether dams or more innovative in-sea solutions), and perhaps solar on top of existing structures - otherwise it is a land sink even worse than golf courses.
    Wind is fickle.

  60. Nuclear is the only ‘clean energy’ answer that makes any sense. Everything beyond that is a vanity project. Nat gas is easily the most logical bridge you’d use to get there over the next 10-15 years, but the neo-Malthusians won’t let that happen.

    Wind is not a real solution. Outside of the coasts it’s not viable. Hell, the government has been fighting with itself for more than a decade trying to get a transmission line built from Wyoming to California. We are governed by morons, at every level, and there is zero chance that major projects could get done without wasting billions of dollars for bribes permits and years of waiting for bureaucrats to approve them. Most of the clean energy space is dominated by narratives that are detached from reality, and reality is, sadly, where we actually reside.

  61. You guys hashed out a lot of the good arguments so I can’t add much more to that discussion. One thing that is typically left out of the renewables discussion is the amount of -other- material that’s required for the manufacture of renewable energy production itself. The copper, aluminum, steel, iron, concrete, lithium, cobalt, nickel, plastics, silicon, and so on. Most of which is produced in 3rd world countries with very low environmental standards, and even those standards are easily bribed away when they are rarely encountered. All of those materials also take loads of energy to produce, and refine, and bring to market and that energy is also produced in the same countries using absolutely the cheapest and usually dirtiest methods as well.

    Quite a bit of virtue signaling goes on about the “clean-tech” wind/solar/EV industries. The dirty little secret is those industries carbon footprints are in many cases far worse than the “dirty” industries we are replacing in the West. From an environmental standpoint I would much rather see a robust oil/gas industry complying with western environmental legal and ethical concerns; as opposed to a robust wind/solar industry that FEELS clean, but is made of parts using copper, lithium, aluminum, etc from a corrupt jurisdiction with lax environmental protections, child labor, etc.

  62. I believe the stat I saw said 500,000lbs of earth has to be moved in order to make one EV battery. Couple that with the millions of gallons of diesel that’s burned by mining equipment and your Tesla on net pollutes about the same as a comparable ICE vehicle.

  63. Out of curiosity, I worked up a spreadsheet on the silver needed for generating all energy requirements with solar.

    Answer? Cannot be done. There is not enough silver ever mined to come close to meeting the need. I wouldn’t be surprised if I found that same issue with lithium, cobalt etc…

  64. Could you share , I would love to see it.

  65. I don’t know how to put a spreadsheet on here but this is what I calculated (E&OE) based on info I could find and welcome corrections or revisions if I’ve made a mistake.

    Silver worldwide = 1.740 metric tons = 55.9B troy ozs
    source: How much silver has been found in the world? | U.S. Geological Survey

    One 2Msq solar panel requires 20g silver = .643015 troy ozs
    that implies that max no. of possible panels = 87B

    one panel produces (est) = 120.45kw/yr
    so 87B panels = 10,479,231,484,491KWh = 10.479TWh

    except in 2017, worldwide electricity demand was 25,000TWh
    Source: https://www.silverinstitute.org/wp-content/uploads/2018/07/Role_of_Silver_Green_Revolution_28Jun2018.pdf

    Which is a 14,521TWh shortage (assuming no further growth in electricity demand ever))

    The auto industry requires 55M troy ozs annually
    The medical industry requires unknown
    Worldwide silver demand is 1.0bB troy ozs

    As a side note, all those panels would also consume 1% of habitable land mass.

  66. In the UK I built a solar farm in 2016, so I have some real world figures for you.

    My panels are 1.67 x 1 metre and run in 600 volt dc strings.

    I have been too busy to fit actuators to them , so there would be a significant gain to be had by tracking the sun (maybe +20%).

    This is what I sold to the grid per panel:

    2017- 251 kw/h
    2018- 222 kw/h
    2019- 261 kw/h
    2020- 273 kw/h
    2021- 254 kw/h

  67. Thanks and interesting. If I recollect, I believe the 120 number I got was an online estimated average taking into account various better/worse sunshine spots plus an actual set of nearby solar panels production I was looking at acquiring. Perhaps it is too low.

    Regardless even if jacked up to say 285 kw/h things would just about breakeven AND that would consume every lick of silver ever mined since forever. No silver for cars or medicine etc…

    So solar alone won’t do it. The question in my mind then “Is there enough of other necessaries to meet the need for wind, batteries etc?”

  68. It is possible to use copper instead of silver in a solar panel.
    Silver is used spread as a paste to conduct away from the silicon crystals.

    Copper conducts electricity only slightly less well than silver. It is difficult to form into a thin film though.

    If silver prices increased enough, copper sheet might replace it as a component in solar panel manufacture.

  69. “Copper—the “metal of electrification”—is essential to all energy transition plans. But the potential supply-demand gap is expected to be very large as the transition proceeds. Substitution and recycling will not be enough to meet the demands of electric vehicles (EVs), power infrastructure, and renewable generation. Unless massive new supply comes online in a timely way, the goal of Net-Zero Emissions by 2050 will be short-circuited and remain out of reach.

  70. Thus spurring a rash of solar panel thefts. Pretty bad over here.

  71. see Chudson below. Haven’t done the work but I wouldn’t be surprised if not enough copper to meet current demands let alone replacing silver for solar panels.

    I’m also guessing that if we don’t burn up or choke out first that silver demand for medical/sanitation uses will rise aggressively.

  72. Excluding gold for obvious reasons, the next metal on the table of conductivity is aluminium and that has almost twice the resistance to a current so would need nearly twice the cross sectional area.

  73. Hi James:

    I know aluminum wiring was used in the 60’s and into the mid-7o’s in the U.S. Not 100% sure what factors caused it to be phased out. Another research project.

  74. High voltage grid overhead transmission cables are aluminium alloy due to the relative weight between pylons.

    It could be dangerous to mix aluminium cables with copper cables in a domestic setting due to the different thermal performances at the same amps and volts.
    Mistaking an aluminium cable for a copper one of the same diameter could cause it to severely overheat.

    Also in respect of silicon crystal backing for solar panels the heat cycle fatigue affect on the electrical contact bond would favour certain types of silicon materials and this would probably reduce possible efficiency.

  75. Thank you James, I didn’t know any of that. I’m a little more informed than I was 5 minutes ago. I would infer that the industry knows what it is doing and there is a reason for why they are doing it a certain way ie if there was a better way they probably would already be doing it.

    Suggestions by the less informed are well meaning but generally naïve. Unless you’re Melon Dusk of course who is all powerful and knows everything about science and how to fix everything. Too bad he is so busy making babies with his employees, otherwise he could save us.

  76. Hi James

    Yes I was aware of the use of aluminum for overhead transmission lines but was only speaking in terms of residential use. My knowledge comes from having “flipped” a couple of late 60’s single wall construction homes, referred to over here as plantation homes, many years ago and the contractor I was partners with insisted that we steer clear of aluminum wired homes as he was of the opinion that a number of house fires in Hawaii had been linked to such construction and that possibility would have a negative impact on resale value.

    I was fishing for somebody that might know why the practice was discontinued back then with the hope that would have some bearing on this discussion of materials.

    I do know aluminum wiring does not meet UBC at this time. But I don’t currently build, flip or have any other activities that would lead me to having useful knowledge beyond what I already offered.

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