Value on the edge of a cliff — when wealth suddenly vanishes without trace — Part I

What all finance people should know to survive what’s in train since 2008 but never bothered to find out

The above picture shows the what’s left of wealth once it has vanished. Some 2800 years later archaeologists dig them out and ponder. These are bronze axes from the transition from Bronze Age to Iron Age (à_douille_Riec-sur-Belon.jpg). The axes from this period, are found in the thousands in the Brittany and Normandy regions of France. They contain large amounts of lead rendering them useless for any practical purpose. Instead, they were hoarded as stores of wealth and prestige, as a form of proto-money. With the breakdown of Bronze Age civilisations and the transition to the Iron Age, their value vanished and the hoards were soon forgotten.

In a fairly near future, a similar fate awaits all current fiat currencies, most crypto currencies, and most existing wealth. Wealth holders, investors, financiers, bankers of all kinds would benefit to ponder.

In the shadow of the blooming Covid-19…

Under the huge shadow cast by the Covid-19 pandemic and its impacts, one can sense the beginning of the beginning of an intuition, wafting and swirling around what is commonly called “Planet Finance”, that wealth, money, currencies, value, assets, debt, stocks, bonds, commodities, anything and everything tradeable on stock exchanges, anything investable in, and markets themselves, are no longer what they used to be, without anyone having yet any sense of what they could have been and even less what they could become in the future. One word fixates anxieties: DEBT. Solid ground is caving in. What was taken for granted floats in a mist of uncertainty. What is this about? How can we think this through? Is there anything an investor, a fund manager, a banker, the CEO of a large corporate or of a tiny SME, a politician, or just an ordinary citizen in any country might rely on and make sense of?

Let’s first look at where this wave of uncertainty came from. In the wake of the 2015 Paris Agreement to combat the Climate Emergency, the required funding remained way short of the mark. Most players could still believe that they knew what they were dealing with. Notwithstanding the push for all things “green” and Environmental, Social and Governance (ESG), most remained rather conservative and prudent, especially concerning debt.

Then, over the last two years, in the wake of an avalanche of increasingly alarming reports, studies and peer reviewed papers, combating the Climate Emergency moved to the forefront of “Planet Finance” matters. Month after month, the media have been filled with relentless warnings from heads of Central Banks, major fund managers, coalitions of funds, venture capital, banks, and other groups, such as the Asia Investor Group on Climate Change (AIGCC, Asia), CDP, Ceres (North America), the Investor Group on Climate Change (IGCC, Australia/New Zealand), the Institutional Investor Group on Climate Change (IIGCC, Europe), Principles for Responsible Investment (PRI) and the UN Environment Finance Initiative (UNEP FI). Involving altogether over €160 Trillion at stake in late 2019, the tally at the beginning of 2021 is over €280 Trillion, and counting — amounts that were unthinkable say, over 5 years ago…

2019 was marked with a sense of mounting panic, echoing the famous Greta Thunberg admonishment, “We want you to panic…”. Recall for example:

  • Mark Carney, Bank of England governor, François Villeroy de Galhau, Banque de France governor, Frank Elderson, chair of Network for Greening the Financial System (NGFS, 34 central banks): “The catastrophic effects of climate change… destroy wealth… insured losses have risen five-fold in the past three decades… The enormous human and financial costs of climate change are having a devastating effect on our collective wellbeing.” (The Guardian, 17–04–2019)
  • Mark Carney (The Guardian, 13–10–2019): “Companies and industries that are not moving towards zero-carbon emissions will be punished by investors and go bankrupt… Mark Carney also told the Guardian it was possible that the global transition needed to tackle the climate crisis could result in an abrupt financial collapse. He said the longer action to reverse emissions was delayed, the more the risk of collapse would grow.”
  • Sarah Breeden, Executive Director, International Banks Supervision of Bank of England’s Prudential Regulatory Authority (PRA): “A climate Minsky moment, where asset prices adjust quickly with negative feedback loops… could be as high as $20 Trillion” (Official Monetary & Financial Institutions Forum, London, 15–04–2019)
  • Global Investor Statement to Governments on Climate Change (477 investors representing over US $34 trillion in assets — just under half the world’s assets under management): stressed “the urgency of decisive action… There is an ambition gap… This ambition gap is of great concern to investors and needs to be addressed, with urgency” (26–06–2019)
  • 2nd Transition Forum — Shifting to Sustainable Lifestyles, Monaco, 26–27 June 2019–250 finance, business & NGO participants: “We all agree it’s very urgent… But how?” No one there had any clear idea how to.
  • Investors that manage US$47Trillion demand world’s biggest polluters back plan for net-zero emissions — “Climate Action 100+, an initiative supported by 518 institutional investor organisations across the globe, has written to 161 fossil fuel, mining, transport and other big-emitting companies to set 30 climate measures and targets against which they will be analysed in a report to be released early next year. It is the latest step in a campaign by climate-concerned shareholders to force business leaders to explain how their targets and strategies will help reach the goals of the 2015 Paris agreement.” (The Guardian 14/09/2020)

Still, the mainstream remained conservative, focused on prudent fiscal responsibility, especially in governmental and supra-national circles. Then, almost overnight, under the Covid-19 pandemic, the above avalanche of ecological and climate concerns morphed into a tsunami of actual funding coming out of nowhere. Suddenly it was a matter of trying to stem the precipitous drops in GDPs, the mounting unemployment, the cascading business closures, and to push, prompt, drag forward an elusive “recovery”. All previous staunch stances concerning austerity, balanced budgets and fiscal responsibility, were suddenly thrown out of the window. The amounts involved are staggering. In comparison, the quantitative easings of the 2007–09 Great Recession look modest. Total Global Debt, that had been shooting to the stars since the early 1980s and had shot even more steeply with the 2007–09 crisis, has now shot even higher, over 250% of world GDP, whatever this may mean. In fact, when debt, in the trillions, is no longer something that has to be repaid, when instead it could be some gift popped out of nowhere, when oil prices can abruptly go deeply negative and shoot back up again, when bank deposits attract negative interest rates, no one has any sense any longer of what it all means or what they can rely on.

In the face of this tsunami, we call the snowballing avalanche of issues, comingling pandemic, energy supply and resource depletion matters, Climate Emergency, 6th mass extinction of species, the myriad of other ecological, social and financial threats, the Energy Seneca. That is, after a long period of growth and having passed through a peak, our world is reaching a thermodynamic cliff where the self-powered energy foundations of civilisation begin to breakdown. Moving everyone past the peak and towards the cliff, the Energy Seneca’s terminal phase began sweeping through the industrial world some 10 years ago. Yet to date, the immediate danger has remained largely unnoticed, masked by the mountain of global debt and the concerns about the more distant Climate Emergency. We analysed the Energy Seneca challenges and how to extricate ourselves from them in a previous essay, Thermodynamics, Fossil Fuels and Renewables, The Good, the Bad and the Ugly, (GBU for short, published on Medium here).

In 2020, the pandemic has abruptly jolted us much closer to the edge of that cliff, a cliff that most still keep resolutely sleepwalking toward in complete oblivion. Now, inching ever closer to the edge, while the world has already gone through the pandemic’s two waves, is facing the prospect of a third, amidst floundering Covid-19 vaccination logistics, the emergence of substantially more contagious virus mutants that current vaccines may or may not protect against, progressing relentlessly beyond the two million deaths mark, thousands of media pundits, politicians, captains of industry, consultants, financial advisers, academics and NGOs of all kinds agitate, debate, advocate in bewildering frenzy about what this funding orgy may mean, where does it lead. What are the funds for or should be applied to, how to “recover”, how to use them to go “green”, what to do next… a maddening cacophony.

For a long time now, money, finance, investing has no longer been confined to savings, real estate, tangible capital (as in actual factories, ships, planes, railways, mines, oil fields, etc.), or productive land. The list of financial “assets” created since the turn of the century to keep propping up a nearly 100% financialised industrial world, way past any realistic “use-by date”, was already long. Under the pandemic it is being stretched indefinitely: CDO, Collateralised Debt Obligation; CBO, Collateralised Bond Obligation; MBS, Mortgage Based Security; CPFF, Commercial Paper Funding Facility; TALF, Term Asset-Backed Securities Loan Facility; PDCF, Primary Dealer Credit Facility; TALF, Term Asset-Backed Securities Loan Facility; MMLF, Money Market Mutual Fund Facility; SMCCF, Secondary Market Corporate Credit Facility; MSELF, Main Street Expanded Loan Facility; PPPLF, Paycheck Protection Program Liquidity Facility (PPPLF); MSNLF, Main Street new Loan Facility; Foreign and International Monetary Authorities (FIMA) swaps, and Repo Facility, etc., essentially on the US Fed run financial system’s side but also within the EU with the recourse to loans guaranteed by the state, direct subsidies of various kinds, lowering of taxes, etc., and worldwide in China, Japan, and the so-called “emergent” countries…

The value of thinking straight

In GBU, we observed that those trillions injected into stimulus packages, by whatever names, amount to no more than a post-modern cargo cult. We all know that no cargo plane would ever land on the mock-up landing strips cleared by some Pacific islanders in the wake of WWII in the naïve hope that they could entice, seduce even, further planes to keep coming and disgorge their cargoes of mirific goods. We are rational people. We do not believe in childish magic. Yet, some already call those trillions “magic money”, since they appear suddenly from nowhere. That tsunami of magic money raises many unanswered questions. Have those trillions still any value left in them? What does this surge mean for the money we use in everyday life, the wages, the salaries, the mortgages, the investments, tiny or large, properties bought or sold, the ongoing running of businesses? In the wake of that flood of magic money, what is meant by value nowadays, and in the future?

In response to these questions, the following casts some tentative light on matters concerning Value, Money, Finance, Funds, Investments, and more.[1] The aim is not to provide any new comprehensive theory. Instead, our aim is to bring into view matters from a range of disciplines that have a bearing on the above questions — matters that interrogate established views and beliefs, that invalidate many and thus open up spaces for each reader’s further enquiries.

Let’s begin with some basics we are all familiar with — buying food in a supermarket, or at a stall by the roadside, or while travelling overseas…

Figure 1

Economists like equations. So, as shown on Figure 1, let’s say we buy a packet of ground coffee and some apples. Economists equate 1 packet of coffee to 2kg of apples. But at the roadside stall we get 4kg of apples for the same price… and at a farm in Columbia the coffee costs us only 5 cents while at the local supermarket for that price we can get only a slice of an apple… So, by weight the economists’ equations violate physics, we get different weights for the same thing, apple or coffee, while in terms of value the only thing the equations expresses is that a Euro is a Euro — meaningless tautology or pure power to impose unequal exchanges to various parties to transactions.

In other words, the economists’ equations are meaningless. Instead, what we are dealing with are congruence identifications modulated via power relationships between parties to the transactions. As pointed out by Jacques Fradin in the 1970s, economics masks social relationships. There is no such thing as an intrinsic value of some good or service that could be “discovered” via a “market”. The attribution of value to anything is the outcome of complex social processes where power relationships loom large — who can extract what value by what means?

Figure 2

As Figure 2 hints, it has not always been like this. Before the advent of banking, long distance trade and industrialisation, rural people, peasants, lords and ladies alike had a take on value that was profoundly other, one that is not commensurate with the implicit notion now prevailing in the industrial world.

Old land transaction records kept by medieval monks show that in many parts of Europe land was not sold and bought by units of area but in terms of the energy returns on energy investments (EROI) attached to each parcel of land. To bring a crop of hay in (the transport fuel of the time) cost energy in terms of food for the reapers. One number, here 17 days of scything by one harvester, was enough for a buyer to gauge both the amount of feed to be harvested and the cost of harvesting it (the food one had to supply to the harvesters). Ditto for wheat, cartloads were standard, had not changed since Greco-Roman times, centuries old grooves left by carts in the rock paving of country lanes show it. One number, here 14 cartloads, tells how much work to exert in terms of food and feed for ploughing, sowing, harvesting and how much net wheat to expect to last for another year. Surpluses, by way of taxes, were converted into gold. Still nowadays, ratios of wheat to gold have not changed much since Roman times. Gold was a proxy for energy, representing by weight a store of past work, understood in energy terms.

Put in other words, what days of scything and cartloads of wheat flag is that tangible wealth translates in social terms power, in the thermodynamic sense. A harvest of x cartloads of wheat per year, is energy (in Joules) per unit of time, that is, power (in Watts). Right at the early beginnings of what was going to be the 1st Industrial Revolution, 18th century Physiocrats had a sense of this, ahead of the development of thermodynamics knowledge. With Adam Smith, their intuition was gone.

Figure 3

Since the industrial revolution, things have changed. As summarised in Figure 3, for urbanised people no longer rooted in rural life, value got progressively disconnected from the harsh realities of energy flows to become endowed with the magical and mythical thinking that preindustrial people applied in other domains of living, typically religions. We elaborated further on this in GBU. Now more than ever before, the whole of economics and finance operate on the myth of a perpetual motion machine fantasy. We call this rather childish fantasy the Tooth Fairy Syndrome.

Calling it the Tooth Fairy is not merely a convenient label derived from a quip by an engineer frustrated at the ineptitude of oil traders. It is also a very apt label neatly encapsulating the magical thinking at the heart of contemporary economics. Think of it. A child has lost a milk tooth. Puts it under the pillow and bingo, magic, the next morning it’s replaced with a coin. His/her body sheds something now useless and it gets converted into money, something of value. Prior to this, that child had been potty trained, while also working hard to acquire language. She/he had to intuit what was expected, some control of sphincter functions and the shedding by his/her body of some substance. The process was important to adults. The outcome had value… The toddler was getting gratified upon success. Sub- or unconsciously a bodily process of acculturation to magical production of value was in train. Note that many psychoanalysts do link money and shit… along with colloquial expressions like “dough”, “shit load of money”, etc. Earlier on still, the new born, well before any mastery of language, was entirely dependent on the substance coming into her/his mouth from a breast — cornucopia, abundance, bodily bliss, no lack, no need, no work… from the original magical substance, through “potty magic”, to the Tooth Fairy, and beyond, to pay cheques and all, a long, slow, mindless process of acculturation into “economics”… for the children of the industrial world.

Recall, notwithstanding what many like to believe, before the Industrial Revolution, while exchanges, trade and money transactions had taken place for thousands of years, there was no “economics” in preindustrial societies. The emergence of economics is a recent phenomenon. Its imposition as hegemonic mode of thinking was a painful process, a specific social phenomenon inherent to the industrial world’s development. Possibly the most comprehensive analyses of the non-scientific character of economics, whatever the school, can be found in the life works of Emeritus Prof. of Economics, Serge Latouche (mostly only published in French) and that of Jean Baudrillard, one of the most prominent social scientists and critical thinkers of the 20th century, from his The System of Objects, 1968, through Symbolic Exchange and Death, 1976, to his last work, The Agony of Power, published posthumously, 2010.

Tooth Fairy economic nonsense did not matter too much while plenty of easily accessible energy was available on net terms, that is, the net energy surplus available after spending energy to access, transport and refine the gross energy extracted. This availability of net energy is now nearly gone. We estimate that it will be fully lost by about 2030. Now, on the downside of the Energy Seneca, the operational bases for the industrial world are crumbling and the incontrovertible realities of thermodynamics are coming to the fore with a vengeance. Currencies no longer function as safe and reliable units of accounts, units of exchange or stores of value. They float in a kind of limbo, “waiting for Godot”[2]

In Parts II and III, we will explore how Tooth Fairy fantasies are rooted in a distant sacrificial past and their dire consequences in the present, decaying, globalised industrial world.

[1] This is based on a Seminar we ran for some 30 PhD students in 2019 in Cork, Ireland.

[2] Waiting for Godot is a famous play by Samuel Beckett in which two characters engage in a variety of discussions and encounters while awaiting Godot, who never arrives.



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Dr Louis Arnoux

Louis is the catalyst and main author for the Fourth Transition Initiative and Cool Planet Foundation.