#120: The need for new ideas

PLANNING THE POST-GROWTH SOCIETY

This article explores an issue that is always at or near the centre of where the economy is going. Worldwide, the long years of growing prosperity are over, and this change fundamentally invalidates many things that government, business and the public have always taken for granted.

The reason why growth is over, of course, is that we no longer have access to cheap energy. Where geographical expansion and economies of scale once drove down the cost of accessing energy, the driving factor now is depletion, which is pushing costs upward, and is doing so in an exponential way.

Though no abrupt plunge in global prosperity is on the cards, there is scant comfort in that. Prosperity in most Western developed economies has already passed its peak. Our economic and financial systems are extremely vulnerable, because they are predicated on perpetual growth.

Thus far, and in spite of all the accumulating evidence, we haven’t recognised that growth in prosperity is over. Rather, we’ve tried to delude ourselves, by using cheap and easy debt, and latterly ultra-cheap money as well, to pretend that perpetual growth remains alive and well. In themselves, these expedients are harmful in ways that can be managed. Efficiency is being undermined by keeping sub-viable entities afloat, and a major crash in asset values has become an inevitably. Neither of these problems is existential in itself.

But changes are happening, too, in ways that are fundamental. A system dependent on ever-growing consumption and ever-increasing profitability is becoming invalidated. The very concept of debt is becoming untenable, because the process depends on growth in borrowers’ income, something which is no longer happening.

These effects have profound political and social as well as economic and financial implications. As growth unwinds, so does tolerance of inequality – that’s why “populists” have enjoyed an ascendancy, and why trends are moving strongly in favour of the collectivist Left.

The dangers of complacency

If you’re a regular visitor to this site, you’ll know that world prosperity, as measured by the Surplus Energy Economics Data System (SEEDS), is projected broadly flat out to 2030. To put some numbers on this, global average prosperity per person is estimated at $11,050 in 2016, and is expected to be very little changed in 2030, at $11,360 (in 2016 PPP dollars).

There are a lot of reasons, however, not to be lured into any form of complacency by this flat trajectory. First, our economic system isn’t geared to stable-state, but is predicated on perpetual expansion – and that’s a huge problem, now that the conditions which favoured growth in the past are breaking down. Though we can be pretty sure that the era of meaningful growth in prosperity has ended, we cannot know how much collateral damage will result from the challenge of trying to adapt to that change.

Second, the projected global figure for 2030 disguises a wide regional divergence of experience. China, for example, is on the positive side of the equation. Prosperity may not be growing at anything like the rate depicted by GDP per capita, but Chinese citizens are continuing to become better off. For 2016, prosperity is estimated at 30,800 RMB per person – roughly double the equivalent number for 2003 – and the SEEDS projection for 2030 is 42,225 RMB, an improvement of 37%. Improvement is likely, too, in India.

But prosperity in the developed West, already in decline, is set to deteriorate steadily. Comparing 2030 with 2016, prosperity is likely to be 7% lower in the United States, for example, and 10% lower in Britain. These projected declines are in addition to the deterioration that has already happened – prosperity has already peaked in the US, Canada, Australia and most European countries.

Third, and even in countries where prosperity trends are positive, current economic policies suggest that both debt and deficiencies in pension provision will go on growing a lot more rapidly than prosperity.

Worldwide, we’re subsidising an illusory present by cannibalising an already-uncertain future. We’re doing this by creating debt that we can’t repay, and by making ourselves pension promises that we can’t honour. So acute is this problem that our chances of getting to 2030 without some kind of financial crash are becoming almost vanishingly small.

Finally, any ‘business as usual’ scenario suggests that we’re not going to succeed in tackling climate change. This is an issue that we examined recently. Basically, each unit of net energy that we use is requiring access to more gross energy, because the energy consumed in the process of accessing energy (ECoE) is rising. This effect is cancelling out our efforts to use surplus (net-of-cost) energy more frugally.

The exponential nature of the rise in ECoEs is loading the equation ever more strongly against us. This is why “sustainable development” is a myth, founded not on fact but on wishful thinking.

The lure of denial

These considerations present us with a conundrum. With prosperity declining, do we, like Pollyanna, try to ignore it, whistling a happy tune until we collide with harsh reality? Or do we recognise where things are heading, and plan accordingly?

There are some big complications in this conundrum. Most seriously, if we continue with the myth of perpetual growth, we’re not only making things worse, but we may be throwing away our capability to adapt.

You can liken this to an ocean liner, where passengers are beginning to suspect that the ship has sprung a leak. The captain, wishing to avoid panic, might justifiably put on a brave face, reassuring the passengers that everything is fine. But he’d be going too far if he underlined this assurance by burning the lifeboats.

The push for electric vehicles threatens to become a classic instance of burning the lifeboats. Here’s why.

We know that supplies of petroleum are tightening, that the trend in costs is against us, and that burning oil in cars isn’t a good idea in climate terms. Faced with this, the powers-that-be could do one of two things. They could start to wean us off cars, by changing work and habitation patterns, and investing in public transport. Alternatively, they can promise us electric vehicles, conveniently ignoring the fact that we don’t, and won’t, have enough electricity generating capacity to make this plan viable, and that we’d certainly need to burn in power stations at least as much oil as we’d take out of fuel tanks. At the moment, every indication is that they’re going to opt for the easy answer – not the right one.

This is just one example, amongst many, of our tendency to avoid unpalatable issues until they are forced upon us. The classic instance of this, perhaps, is the attitude of the democracies during the 1930s, who must have known that appeasement was worse than a cop-out, because it enabled Germany, Italy and Japan to build up their armed forces, becoming a bigger threat with every passing month. Hitler came to power in 1933, and could probably have been squashed like a bug at any time up to 1936. By 1938, though, German rearmament reduced us to buying ourselves time.

Burying one’s head in the sand is actually a very much older phenomenon than that. The English happily paid Danegeld without, it seems, realising that each such bribe made the invaders stronger. It’s quite possible that the French court could have defused the risk of revolution by granting the masses a better deal well before 1789. The Tsars compounded this mistake when they started a reform process and then slammed it into reverse. History never repeats itself, but human beings do repeat the same mistakes, and then repeat their surprise at how things turn out.

Needed – vision and planning 

The aim here is simple. There is an overwhelming case for preparation.  With this established, readers can then discuss what might constitute a sensible plan, and try to work out how any plan at all is going to be formulated in a context of ignorance, denial and wishful thinking.

Let’s start with a basic premise. For more than a millennium, the population of the earth has increased, a process that has become exponential since we first tapped fossil fuels. The population exponential has been paralleled by trends in food and water supply, and in economic activity and complexity.

The “master exponential” driving all the others has been energy consumption. Basic physics dictates the primacy of energy in this mix. If we hadn’t grown our access to energy, we couldn’t have expanded our foods supplies, our population, our economic activity or the complexity of our societies.

For much of the era since 1760, energy has got cheaper. The petroleum industry, for instance, didn’t limit itself to Pennsylvania, but spread its reach across the globe, most notably finding huge oil resources in the Middle East. The same broadening process benefited coal and natural gas. As the energy industries expanded, they harnessed huge economies of scale. A third positive factor, in addition to reach and scale, was technology.

Since a high-point in the post-1945 decades, however, the trend of energy costs has crossed a climacteric. Reach ceased to help, and economies of scale reached a plateau. The new driver became depletion, an entirely logical consequence of using the most profitable resources first, and leaving less profitable ones for later. The role of technology changed, from boosting gains to mitigating decline. The extent to which technology can mitigate the cost of depletion is limited by the envelope of physics.

Only in science fiction, or in wishful thinking, can we get a quart of energy out of a pint pot.

The cost uptrend (and by ‘cost’, of course, is meant the energy consumed in accessing energy) hasn’t stopped growth in aggregate access to primary energy – yet. So far, we’ve been able to offset worsening cost ratios by using more energy. This said, cost is likely to make it harder to grow total supplies in the future. Fundamentally, as the energy consumed in the energy supply process rises, the amount of value that we get from each unit of energy diminishes, just as we hit limits to our ability to use greater volume to offset reduced value.

In petroleum, at least, we are now scraping the bottom of the barrel. If there were lots of gigantic, technically-easy fields still to be developed, we simply wouldn’t be bothering with shales, or crudes so heavy that they have to be mined rather than pumped. It’s become difficult to find a price that is high enough for producers without being too high for customers. Cost, rather than scarcity of reserves, is the factor that’s going to cause “peak oil”.

Renewable energies, though desirable, don’t offer an instant escape, not least because we have to use legacy fossil fuel energy to build wind turbines, solar panels and the infrastructure that renewables require. We once believed that nuclear energy would be “too cheap to meter”, and would free us from dependency on oil, gas and coal. We’re in danger of repeating that complacency with renewables. We need to assume that energy will get costlier, just as growing the absolute quantities available to us is getting tougher.

Growth – the bar keeps rising

As the cost of energy rises, economic growth gets harder. We’ve come up against this constraint since about 2000, and our response to it, thus far, has been gravely mistaken, almost to the point of childish petulance. We seem incapable of thinking or planning in any terms that aren’t predicated on perpetual growth. We resort to self-delusion instead.

First, we thought that we could create growth by making debt ever cheaper, and ever easier to obtain. Even after 2008, we seem to have learned nothing from this exercise in credit adventurism.

Since the global financial crisis (GFC), we’ve added monetary adventurism to the mix. In the process, we’ve crushed returns on investment, crippling our ability to provide pensions. We’ve accepted the bizarre idea that we can run a “capitalist” economic system without returns on capital. We’ve also accepted value dilution, increasingly resorting to selling each other services that are priced locally, that add little value, and that, in reality, are residuals of the borrowed money that we’ve been pouring into the economy.

We seem oblivious of the obvious, which is that money, having no intrinsic worth, commands value only as a claim on the output of a real economy driven by energy. When someone hands in his hat and coat at a reception, he receives a receipt which enables him to reclaim them later. But the receipt itself won’t keep him warm and dry. For that, he needs to exchange the receipt for the hat and coat. Money is analogous to that receipt.

The first imperative, then, is recognition that the economy is an energy system, not a financial one, in which money plays a proxy role as a claim on output. In this sense, money is like a map of the territory, whereas energy is the territory itself – and geographical features can’t be changed by altering lines on a map.

It’s fair to assume that the reality of this relationship will gain recognition in due course, the only question being how many mistakes and how much damage has to happen before we get there. No amount of orthodoxy can defy this reality, just as no amount of orthodoxy could turn flat earth theories into the truth.

With the energy dynamic recognised, we’ll need to come to terms with the fact that growth cannot continue indefinitely. Rather, growth has been a chapter, made possible by the bounty of fossil fuels, and that bounty is losing its largesse as the relationship between energy value and the cost of access tilts against us.

In one sense, it’s almost a good thing that this is happening. If we suddenly discovered vast oil reserves on the scale of another Saudi Arabia, we would probably use them to destroy the environment.

Undercutting the rationale – consumption, profit and debt

With growth in prosperity no longer guaranteed, a lot of other assumptions lose their validity. One of the first will be the nexus of consumerism and corporate profit, where we assume that consumption by the public must always increase, and, over time, profits must always grow.

We’ll find ourselves in a situation where consumption doesn’t keep growing, and will decrease in per capita terms at a pace which at least matches the rate at which population numbers are growing. In this situation, expecting suppliers to keep on expanding, and carry on increasing their profits, becomes unreasonable. Businesses which insist on trying to maintain profits growth in this context will probably have to resort to cheating, both exploiting consumers and falsifying information. It may well be that this process has already started.

Meanwhile, the invalidation of the growth assumption will have profound implications for debt, and may indeed make the whole concept unworkable. If borrowing and lending ceased to be a viable activity, the consequences would be profound.

To understand this, we need to recognise that debt only works when prosperity is growing. For A to borrow from B today, and at a future date repay both capital and interest, A’s income must have increased over that period. Without that growth, debt cannot be repaid.

There are two routes to the repayment of capital and the payment of interest, and both depend on growth. First, if A has put borrowed capital to work, the return on that investment both pays the interest, and also, hopefully, leaves A with a profit. Alternatively, if A has spent the borrowed money on consumption, A’s income has to increase by at least enough to for him to repay the debt, and pay interest on it.

In an ex-growth situation, both routes break down. Invested debt isn’t going to yield a sufficient return, because purchases by consumers have ceased to expand. A’s income, on the other hand, won’t have increased, because prosperity has stopped growing.

This scenario – in which repayment of debt becomes impossible – isn’t a future prediction, but a current reality, and a reality that is already in plain sight.

We need to be clear that the slashing of rates to almost zero happened because earning enough on capital to be able to pay real rates of interest has become impossible.

Businesses which aren’t growing cannot – ever – pay off their debts, and neither can individuals whose prosperity is deteriorating.

Critically, prosperity, which drives both profits and incomes, is declining.  This is evident, not just in real wages (which, in many developed economies, haven’t grown since 2008), but also in the adverse relationship between nominal incomes and the cost of essentials.

To reiterate, if borrowers’ incomes don’t grow, they cannot pay off their debts, and are likely to go under because they cannot carry indefinitely the burden of compounding interest.

The politics of inequality

Financial exercises in denial (including escalating debt, ultra-cheap money and the impairment of pension provision) have already created a stark division between “haves” and “have-nots”. Essentially, the “haves” are those who already owned assets before the value of those assets was driven upwards by monetary policy. The “have-nots” are almost everyone else, especially the young.

Critically, the cessation of growing prosperity creates a fundamental change in attitudes towards inequality. Someone whose own prosperity is increasing is likely to be pretty tolerant towards a richer neighbour. Put prosperity into reverse, though, and that tolerance evaporates.

Again, this isn’t forecast, but fact. It’s one of the reasons why “populist” politicians are doing so well, and it also lays the foundations for a return to ascendancy by the collectivist Left. For this to happen, left-of-centre parties need to purge themselves of the centrists whose logic ceased to function when prosperity stopped growing.

The need to do this isn’t exactly rocket-science, and it’s already happening. We know that Hillary Clinton failed to see off Donald Trump, but we can’t know whether Bernie Sanders might have succeeded. We cannot know whether Labour under Jeremy Corbyn can win power in Britain, but we can be pretty sure that a Labour party led by a returning Tony Blair, or by someone else with the same “New” Labour policies, could not.

This stacks up to the return of division. The reason for this is that it’s becoming impossible for parties of opposition to accept big chunks of the incumbency’s economic agenda. As ordinary people become poorer, and as their ability to carry their debt burdens diminishes, the focus on inequality will intensify. The “politics of envy” will become “the politics of indignation”. Questions will start to be asked about how much money any one individual actually needs. The deterioration in the ability of the state to provide public services will intensify the politics of division.

To be clear about this, collectivism won’t solve our fundamental economic problems, and neither will a system which mutates Adam Smith’s free and fair competition into something akin to the law of the jungle. Deregulated capitalism is failing now, just as emphatically as Marxist collectivism failed in the past.

A logical conclusion, then, is that we need a new form of politics, just as much as we need a new understanding of economics, new models for business and a new role for finance. Co-operative systems might succeed where corporatism – both the state-controlled and the privately-owned variants – have failed.

All of these new ideas need to be grounded in reality, not in wishful thinking, denial or ideological myopia. But reality becomes a hard sell when it challenges preconceived notions – and no such notion is more rooted in our psyche than perpetual growth.

#119: A predicament in pictures

MAPPING THE ENERGY ECONOMY

A picture may or may not be (as the old saying has it) “worth a thousand words”, but what follows is a story told in eight pictures. Essentially, it’s a by-product of work on Energy and Prosperity, the planned guide to Surplus Energy Economics.

Before we start, a word about the charts. Though all start in 1965, the first four finish in 2016 whilst the latter four include projections out to 2030. All are global numbers and, with two exceptions, are expressed in trillions of dollars at constant 2016 values, with non-American amounts converted using the purchasing power parity (PPP) convention. The exceptions are the final pair of charts, which show global per capita equivalents in thousands of dollars.

The charts may be hard to read in the blog format, so a downloadable PDF version can be found at the end of this article. It’s hoped that the commentary will make the charts easier to understand.

Fig. 1 shows GDP (in blue) for the period between 1965 and 2016. Superimposed on it, in black, is what GDP would have looked like if it had simply tracked world energy consumption. Essentially, GDP in 2016 is depicted 3.6x what it was in 1965, because that’s the increase in primary energy consumption over the same period.

As you’ll see, GDP and energy consumption tracked very closely until the late 1990s. Since then, however, the two have diverged. Between 1997 and 2016, GDP increased by 91%, which is a lot faster than the expansion in energy consumption (+49%) between those years.

Of course, this divergence might simply be a matter of getting more value out of each tonne of energy consumed. Fig. 2, though, suggests that something very different might have been going on.

In this chart, two new elements are superimposed. The first, shown in red, is annual net borrowing. The second, in orange, adds the estimated annual under-provision of pensions, an issue addressed here before on a number of occasions. The huge leap shown after the global financial crisis (GFC) of 2008 is the massive one-off impairment to pension provision created by the collapse of returns on investment, when central banks slashed interest rates to all-but-zero, creating an escalation in capital values and a corresponding slump in returns.

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What this second chart seems to be telling us, then, is that we didn’t, from the late 1990s, suddenly discover new ways of getting more economic activity out of each tonne of energy. Rather, what happened was that we started juicing GDP by running up ever bigger debts, a process described here as credit adventurism.

After 2008, we added monetary adventurism to the mix, adopting policies which boosted apparent activity by destroying pension provision. This is why, as a recent WEF report showed, pension provision in an eight-country group had soared to an estimated $67 trillion by 2015, and is likely reach $428tn by 2050, a number which dwarfs any conceivable level of world GDP at that date.

This interpretation is supported by fig.3. This differs from the previous chart, because it shows debt, and the estimated shortfall in pension provision, as end-of-year totals, rather than annual increments. The post-GFC leap in pension deficiencies is again visible, where the onset of monetary adventurism crushed future returns on existing investments.

Fig. 4 again shows GDP (in blue), and an equivalent of GDP tracking energy volumes (black), but adds a third series. Shown in red, this deducts the trend energy cost of energy (ECoE) from the energy-based line. This adjustment expresses trend-energy GDP for the cost of energy supply, so the red line is indicative of the resources available for all purposes other than energy supply.

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Essentially, this is an indicator of aggregate prosperity. Because these two charts are side by side, what can be seen here is the divergence between prosperity, on the one hand, and the aggregates of debt and pension deficiency, on the other.

The insight here is that we are deluding ourselves about economic output, using the proceeds of borrowing and pensions erosion to create a GDP number increasingly out of kilter with reality.

This helps explain why typical wages aren’t keeping up with GDP, and why incomes are being eroded by the rising cost of household essentials, most of which are energy-intensive. It also helps explain why an increasing proportion of recorded GDP consists of residual, locally-priced services of questionable real value, whilst output in solid, globally-priced activities such as manufacturing and construction keeping shrinking as a share of GDP.

The bottom line is that prosperity and GDP are diverging, with results which are showing up both structurally and in on-going balance sheet impairment.

It should be added that the inflated values of assets (such as stocks, bonds and property) do not offset these trends – these values cannot be monetised by their owners selling assets to each other. Any significant attempt to monetise them – and a panic rush to do exactly that can’t be ruled out – would cause values to collapse.

The obvious question arising from this is “what happens next?” – and this is addressed in the next pair of charts, which extend these data series out to 2030. Fig. 5 shows how reported GDP (in blue) looks set to go-on outpacing core activity (black), whilst prosperity (red) drifts ever further away from trend activity as ECoEs carry on increasing. In fig. 6, the much larger vertical scale should be noted. Unless there is a fundamental change of tack, the massive miss-match between income and liabilities is set to balloon exponentially.

 

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If you think that the progression pictured in fig. 6 can’t happen, by the way, then you’re almost certainly right. According to the projections used in this chart, the aggregate of debt and pension shortfalls by 2030 will be close to $800tn (at 2016 values), dwarfing even claimed GDP ($193tn), let alone trend output ($100tn) or underlying prosperity ($89tn).

The only realistic conclusion which can be drawn from fig. 6 is that a very serious crash is extremely likely to occur at some point well before 2030.

The final pair of charts converts these numbers into their per-capita equivalents. The takeaway from figs. 7 and 8 is that, if we go on deluding ourselves about economic output, we’re going to travel ever further into a world in which smoke and mirrors can no longer disguise the difference between GDP and prosperity, and cannot reconcile the triangle of consumption, output and the destruction of the balance sheet.

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#119 charts set

#118: Good idea, bad idea

THE MERITS OF RENEWABLES, THE FOLLY OF EV

Whilst there seems no limit to the new and valuable insights that can come from looking at the economy through the lens of surplus energy, there are limits to the time and resources than can be applied to following up these leads.

This is making selection of subjects an increasingly tricky task. The preceding analysis of the American economy is a case in point. Data exists to apply the same treatment to the United Kingdom, and can be obtained for the Euro Area. But these are not being pursued, because the critical point has, it is hoped, been made. Essentially, ‘growth’, being geared towards residually-priced services which we can sell only to each other, is adding very little real value to the Western economies in return for the trashing of their balance sheets.

Some time ago, it was recognised that the topics of renewable energy and electric vehicles (EVs) needed to be discussed here. The following assessment condenses a great deal of analysis into a format that, it is hoped, will explain, succinctly, why conclusions on these issues are starkly different.

In short, whilst the case for maximising renewables seems irrefutable, the logic supposedly backing conversion to EVs is hopelessly flawed. We need to start by looking at why renewable energy is such a good idea, before turning to why EVs are such a bad one.

An existential imperative

The case for maximising the development of renewables (such as solar and wind power) is wholly compelling. Failure to do this would condemn the world economy to stagnation in the near-term, with prosperity deteriorating steadily in the developed world whilst making little progress in the emerging economies. In the longer term, continued reliance on fossil fuels would be a recipe for economic disaster.

This conclusion is dictated by an appreciation of two critical issues. The first is the umbilical linkage between energy access and economic output. The second is the accelerating rate at which the costs of energy access are rising across the fossil fuel mix that continues to deliver the vast majority of the global energy slate.

Put at its simplest, investing in solar and wind power is imperative, and is one of the most important issues that society needs to address. It ranks in importance alongside tackling climate change, and raising living standards in emerging economies.

Renewables are vital because they offer the only plausible way of escaping the economic trap posed by the rising energy costs of fossil fuels. We’re not about to “run out of” oil, gas or coal, but the value that these energy sources contribute to prosperity is already coming under severe pressure.

The ECoE trap

What really matters to prosperity isn’t how much energy we can access, but how much energy is consumed in the process of accessing it. This is measured here as ECoE (the energy cost of energy).

Some figures will illustrate the nature of this trap. For starters, the ECoE of the existing energy mix is rising exponentially, because it remains biased overwhelmingly towards oil, gas and coal. Over the fourteen years between 2002 and 2016, the estimated trend ECoE of fossil fuels rose from 4.4% to 8.4%, but this increase is just a mild foretaste of what’s to come – over the next fourteen years, fossil fuel ECoEs are set to rise to over 13%.

This represents a huge qualitative as well as quantitative change. In recent years, rising ECoEs have rendered economic growth all but impossible in the developed world, leading to the use of credit and monetary adventurism to fake an expansion in prosperity that is no longer possible. Even in the emerging economies, sustaining growth in the face of increasing ECoEs has required a growing recourse to debt.

Put very simply, when higher ECoEs collide with growth imperatives, ‘something has to give’ – and that ‘something’ is futurity, where we are destroying pension capability as well as racking-up ever larger amounts of debt.

Meanwhile, the environmental downside of rising ECoEs is that, to maintain net quantities of energy at any given level, we have to keep increasing the gross quantities that we access. As we have seen, this upwards trend is already more than sufficient to cancel out efforts to use energy more efficiently.

Looking ahead, further rises in ECoEs aren’t just going to act as a road-block to growth, but, in the developed world at least, are going to put growth into reverse. Credit and monetary exercises in denial are creating an enormous bubble, and it’s likely that supply constraints in energy will burst this one, just as the surge in oil prices (from $20/b to a peak of $147/b) was the real trigger for the previous crash. After the burst, reality will begin to dawn on anyone who believed in a ‘recovery’ based on cheap debt, cheap money, and residually-priced ‘activity’ that inflates recorded GDP whilst very little real value to economic output.

The energy equation

To see what rising ECoEs mean, it’s necessary to compare total (gross) energy consumption with surplus (net-of-ECoE) amounts. The split here is that the ECoE component of gross energy pays for energy access, whilst the net-of-ECoE surplus pays for everything else.

Between 2002 and 2016, the gross amount of fossil fuel energy accessed increased by 35%, from 8.4 bn tonnes of oil equivalent (toe) to 11.4 bn toe. Adjusted for the 17% rise in the world population over the same period, this equated to growth of 15% in the gross quantity of fossil fuels consumed per person.

But the increase in the ECoEs over that same fourteen-year period translated a 35% increase in gross supply into a rise of only 29% at the net-of-ECoE level. That difference may not seem huge, but it’s already had a big impact in per capita terms. Whereas gross fossil fuel consumption per person increased by 15% over that period, net fossil fuel energy use grew by only 10%.

Perhaps most tellingly of all, fossil fuel supply per person has already peaked (in 2013).

Looking ahead, the exponential upwards trend in fossil fuel ECoEs is poised to cripple surplus energy access, but for two main reasons, not one. Obviously, rising ECoEs are undermining the net (surplus) energy available from any given gross quantity.

Less obviously, energy availability at the gross level is likely to be depressed as well, because higher ECoEs simultaneously undercut the viability of production whilst increasing the cost to the consumer. In petroleum, we are already reaching a situation where any price high enough for producers is too high for consumers. A recent report by the China University of Petroleum forecast an imminent switch from oil to coal consumption in China, citing deteriorating EROEIs (energy returns on energy invested) as a key factor. This issue won’t be confined to China – and neither will it be confined to oil.

Quantifying the trap

Here are some illustrative numbers for what is likely to happen over the next fourteen years. First, gross supplies of fossil fuels, which increased by 35% between 2002 and 2016, are unlikely to rise at all looking out to 2030.

Gas availability is likely to increase further, but not by enough to offset a probable decrease in supplies of oil. Output from low-cost ‘legacy’ fields is declining at between 7% and 8% annually. New discoveries, required to offset this decline, are at record lows, whilst a combination of price and cost pressures continues to restrict development. By 2030, meanwhile, shale production will be well past its peak. Energy from coal is likely to diminish slightly, not least because the energy content per tonne mined is continuing to deteriorate.

In per capita terms, the implications of these trends are stark. Comparing 2030 with 2016, gross access to fossil fuels per person is projected to have declined by 14%. Higher ECOEs, of course, will exacerbate this problem at the net level – fossil energy per person, available for all purposes other than energy supply, is likely to be 19% lower by 2030 than it was in 2016.

Two final statistics are necessary to put this into context. First, fossil fuels continue to account for 86% of primary energy supply – hardly changed at all over two decades, from 87% in 1996 – whilst renewables still deliver only 3.2% of the total. (The remaining 11% comes from nuclear and hydroelectricity).

Second, 97% of all transport continues to be fuelled by petroleum, with the only significant exception (electrified rail) delivered, overwhelmingly, by gas- and coal-fired generation, not renewables.

Electricity – a yawning gap

Even without large-scale adoption of EVs, demand for electricity is growing more rapidly than our use of primary energy. Between 2002 and 2016, when total energy consumption increased by 37%, electricity use rose by 52%, with the result that we now consume 28% of all energy as electricity, compared with 25% in 2002, and only 22% back in 1996. Perhaps more tellingly, the proportion of all coal, gas and oil supply used for power generation has risen from 26% to 36% over that same period.

Looking ahead – and ignoring, for now, EVs – demand for electricity is rising at about 2.5% annually, well ahead of the rates at which either population numbers or total energy consumption are increasing. By 2030, we are likely to need 35,000 terawatt hours (TWH), an increase of 41% compared with 2016 (24,800 TWH).

The critical question is where that extra 10,200 TWH is going to come from. Between them, nuclear and hydro may contribute 19% of the required increment, though that might be a hard target to hit. About 45% of the increase in demand might be met by renewables, with output likely to rise from 1,854 TWH in 2016 to 4,600 TWH in 2030.

That still leaves us needing to source 3,700 TWH, or 36% of the required increase, from fossil fuels. These projections would mean that renewables would contribute 18% of electricity (and 10% of all primary energy) by 2030, compared with 7% of electricity (and 3% of all energy) in 2016.

Of course, there are some who believe that renewables output can grow a lot more rapidly than the 3.5-fold increase projected here. In support of this, some cite annual rates of growth, which, for all renewables, was 14.4% in 2016.

But this rate of growth is already slackening – from 19.7% in 2011, and 17.7% in 2013 – for the simple and obvious mathematical reason that rates of growth from an extremely low base are neither indicative nor sustainable. In 2011, renewables output increased by 148 TWH on a base of just 752 TWH. In 2016, the increase was a lot bigger (234 TWH), but so was the base number (1,621 TWH). By 2020, we are likely to be adding renewables output at rates of over 300 TWH annually, a number that is projected to increase to 475 TWH by 2030. These equate to projected annual rates of growth of 11% in 2020 and 8% in 2030.

A more fundamental reason for caution about the rate at which renewables output can grow is that these technologies are derivatives of fossil fuels. Building wind turbines and solar panels requires the use of materials which can be accessed only by courtesy of existing fuel sources, most importantly oil. Everything from humble steel and copper to many of the more sophisticated components relies on fossil fuel energy, all the way from extraction and processing to manufacture and delivery.

This consideration reinforces the case for developing renewables as rapidly as possible, because we need to use our dwindling legacy resources of net energy to create the alternative sources of the future. But it also adds to the bottlenecks likely to be encountered in the development process.

A further twist here is that, to the extent that they are derivatives of a fossil fuel set whose ECoEs are rising, there is likely to be upwards pressure on the ECoEs of renewables themselves. Thanks to two main factors – early-stage technical improvement (“low hanging fruit”), and economies of scale – we have become accustomed to declining unit costs in the development of renewables. Costs are likely to continue to fall, but at a decelerating rate, as the scope for ‘easy’ technical improvement diminishes, economies of scale benefits reach plateau, and the ECoE of inputs rises.

Finally, on this score, we need to note that, by 2030, renewables supply would need to multiply, not by the 3.5x projected here, but by 5.5x, just to keep the fossil fuel requirement for power generation constant at current levels. Delivering enough additional power from renewables to start reducing hydrocarbon-based generation looks extraordinarily difficult – and that’s even before we start adding to electricity demand by switching to EVs.

EV – the wrong road

As we have seen, realistic assessment of the outlook for expansion in renewables supply suggests that growing demand for electricity is likely to require increases, not decreases, in the amount of fossil fuels needed for power generation. If we add EVs into the mix, the increase in the need for oil, gas and coal for electricity supply escalates dramatically.

Many in government and industry seem to think that society can make a complete transition of road transport from internal combustion (IC) power to EV by 2040. The assumption made here is that, for this target to be met, switchover will need to have reached 66% by 2030. If we remain a long way short of two-thirds conversion by then, the target date of 2040 is unlikely to be met, requiring a rethink of the objective.

Accomplishing 66% conversion to EV by 2030 would reduce annual petroleum consumption by 1,670bn toe over that period. But the corresponding increase in electricity demand would be 7,350 TWH. Now, instead of requiring additional generating capacity of 10,160 TWH (+41%) by 2030 just to meet growing baseline demand, we would need to find extra capacity totalling 17,500 TWH (+71%).

The base case (ex-EV) used here already includes maximised development of renewables, so conversion to EV isn’t going to create additional incentives (or capital) for a purpose that is already imperative. Therefore, of the greatly-increased increment required by EV conversion, renewables are likely to supply only 26%, with a further 11% coming from nuclear and hydro. All the rest – 63%, or 11,060 TWH – would have to come from fossil fuels.

EVs and renewables – a false linkage

At this point, we need to note a number of mistaken assumptions which are sometimes made in creating a false relationship between EVs and renewables.

First, and as we have noted, EVs are not an essential driver for investment in renewables – this investment will (and must) happen anyway, even if EVs prove a blind alley.

Second, expansionary investment in renewables is not going to make EVs an appropriate strategy. Just like nuclear in an earlier era, renewables are not going to supply energy in such abundance that it will be “too cheap to meter”. We are going to need every KWH of renewable output just to keep up with growth in the baseload (non-EV) need for electricity.

Third, and unlike renewables, EVs are not going to make a positive contribution, let alone a major one, to stemming climate change. The fossil fuel currently burned in IC-powered transport will simply be displaced from vehicle engines to power stations. Battery technologies raise their own pollution and emissions issues, and some of today’s ultra-optimistic expectations for the life efficiency of batteries are already starting to look somewhat questionable.

Wisdom and folly

If it is accepted that EVs are as bad an idea as renewables are a good one, an inescapable conclusion has to be that EVs are likely to divert both effort and capital in ways that are wasteful. This risk would intensify were governments to allow themselves to be talked into subsidising EVs.

If the case for EVs is so flimsy (and, at the least, is so very far from proven) the question which remains is this – why are industry and government so determined to push ahead with conversion?

Beyond the human fascination with the new, the shiny and the technological, the reasons why we are likely to invest huge sums of our scarce energy-legacy capital into pursuing the chimaera of EVs are simple enough.

First, leadership in government and business still fails to recognise the challenge posed by the mounting cost pressures jeopardising the energy (and hence) economic future.

Second, EVs are a form of denial over the really pressing need, which is to readdress and redesign patterns of travel and habitation that are being rendered unsustainable by energy pressures.

Before the Second World War, and despite the efforts of Henry Ford in America and Volkswagen in Germany, cars were a luxury item, affordable only by the wealthy, and often more expensive to purchase than a house. Since 1945, we have pushed ahead, from the target of one car per household to something pretty close to one car per person. Efforts to tackle the energy, pollution and congestion consequences of the proliferation of car ownership have been half-hearted at best.

Whole patterns of work and habitation have been shaped by mass vehicle ownership, in much the same way that living and employment structures were transformed by railways in the Victorian era. The norm has become suburban and exurban sprawl, rather than the greater housing densities of earlier times. If we were ever forced to put the spread of car ownership into reverse, we would – quite apart from selling the idea to the public – have to redesign working practices and the structure of habitation.

These are issues that, for wholly understandable reasons, the public, government and industry have been extremely unwilling to confront. But the logic of rising ECoEs, climate change and a faltering energy-based economy is that we will have to face these challenges, whether we want to or not.

This implies that the push for all-out conversion to EVs is an exercise in denial, along much the same lines as the economic denial implicit in debt proliferation, pensions destruction and monetary adventurism.

We may not – yet, anyway – need to adopt a ‘one car per household’ strategy along the lines of China’s “one child” policy. But, at the very least, we need to be rethinking housing and transport patterns, and investing in incremental automotive technologies.

Leaner-burning engines, tighter (and strongly-enforced) emissions restrictions, hybrids, the increased use of engineering plastics and the imposition of a limit of, perhaps, 1.5 litres on engine sizes might be a better idea than building a new generation of heavyweight vehicles designed to harness an abundance of electricity which simply isn’t going to happen.

 

 

#117: Candyfloss economics

GROWTH WITHOUT SUBSTANCE?

Candyfloss – known as cotton candy in the United States – is a long-established confectionary product, much enjoyed by young and not-so-young visitors to fairgrounds and the seaside. Traditionally sold on a stick, it consists (apart from some flavouring and colouring) entirely of sugar. It is made by spinning a relatively small amount of sugar into a much larger confection of very low density. It is, then, a fluffy, largely hollow product whose apparent volume far exceeds its substance.

The resemblance between candyfloss and the modern developed economy is a lot closer than you might think. Using the United States as a representative example, this analysis takes readers through a deconstruction of reported growth in GDP. As you’ll see, Western economies, in particular, look increasingly like candyfloss, with an ever larger volume of fluff disguising a remarkably small kernel of solid value.

Some numbers and some caveats

Let’s start with the headline numbers, and two important caveats.

American GDP was $18.6tbn in 2016, which compares with $13.9tn in 2006. Adjusted to constant (2016) dollars, the 2006 number equates to $16.3tn, so the economy expanded by 14% over the decade to 2016. Over the same period, the population of America increased by 8%, leaving reported GDP per capita ahead by 5.8%.

Regular visitors to this site will be familiar with a number of critical caveats around economic “growth”. For starters, the $2.3tn (14%) increase in American GDP between 2006 and 2016 was accompanied by an $11.1tn (31%) rise in debt over the same period, so each $1 of reported growth came at a cost of $4.75 in net new borrowing.

Meanwhile – and primarily because of the collapse in returns on invested capital in an era of ZIRP (zero interest rate policy) – huge pension deficiencies have emerged right across the world economy. In its recent report warning of a “global pension timebomb”, the usually-conservative World Economic Forum (WEF) identified a shortfall in pension provision in the United States of $28tn in 2015, adding that this number is worsening by $3tn (about 17% of GDP) each year.

Back in 2006, before returns on investment were crushed by ZIRP, the equivalent shortfall was very small. Between 2006 and 2016, the gap in American pension provision increased by about $22tn. For each $1 of growth over ten years, that’s a further $9.50 in balance sheet damage, on top of the aforementioned $4.75 increase in net indebtedness.

Two types of activity, differently priced

These debt and pension caveats, of course, are familiar fare to regular readers. When all is said and done, Americans are still left with growth of 14% in their economy, aren’t they?

Well, no.

Deconstruction of the numbers suggests that even this recorded growth number is extremely questionable.

To understand why this is, we need to divide the economy into two broad streams of activity. The first of these streams is termed here globally marketable output (GMO). This consists of output traded at prices set on world markets. Agricultural and extractive products are examples of world pricing. Even if sold at home, wheat, oil and copper are still bought and sold at prices set globally.

The same is true of manufactured goods, because the customer isn’t going to buy a home-produced car or refrigerator if he or she can get better value from an imported alternative. Services which are exported are also, by definition, globally-priced – customers in, say, Europe, aren’t going to buy American financial services if the equivalent, supplied at home, or imported from a third country, is better value.

The second economic stream is known here as internally consumed services (ICS), and is the difference in amounts between GDP, on the one hand, and GMO, on the other.

Critically, these services are priced locally, not globally. A customer in Boston might very well purchase a German-made car, or a refrigerator manufactured in Romania. But he isn’t going to book a taxi from Berlin, or go to a dentist in Bucharest. ICS, then, is priced locally, which is very different from pricing in the full rigour of global competition.

Moreover, these internally consumed services are a residual. Customers’ primary requirements are for purchases which are priced globally, including food, energy, manufactured goods, and anything requiring components and materials, which themselves are priced on world markets. Customers buy these things first, before spending what they have left on discretionary purchases such as taxi rides, meals out, cinema visits and trips to the hairdresser. These discretionary purchases are priced locally, by the interplay of domestic supply and residual spending capacity.

These services then, are residually priced and, in a very real sense, are “soft”-priced, too, compared to the “hard” pricing characterising globally-competitive price-setting.

Additionally, GMO and ICS have very different value-additive characteristics. Building a new car plant in a given location has very substantial knock-on benefits in terms of components supply, materials, distribution and ancillary services. The same isn’t true of setting up a lot of hairdressing salons, estate agencies and government administrative offices, even if their annual turnover matches that of the car plant.

Whilst it’s true that 100kg of feathers weighs the same as 100kg of lead, $100 generated by a car plant is not the same as $100 generated by a pedicurist. The difference lies partly in how the underlying pricing is determined, and partly in the much higher value-additive characteristics of the globally-priced activity than the locally- and residually-priced alternative.

Governments, historically, haven’t grasped this point, which is why relocating activities like tax and benefits administration to depressed locations turns out to be a lot less beneficial than is often anticipated.

The implications of differential pricing

The distinction between GMO and ICS gives very important insights into changes in economic activity. In the United States, globally-marketable output contributed $160bn, or just 7%, to the $2,340bn increase in GDP between 2006 and 2016. All of the rest came from services which can only be sold internally.

Equally tellingly, the whole of the modest GMO contribution to growth came from increased exports of services. Together, agriculture, energy, extractive industries, construction and manufacturing contributed nothing at all to growth over the decade – their aggregate output actually declined, to $3,414bn in 2016, compared with $3,501bn in 2006.

With GMO deducted, the remaining 93% of all growth – totalling $2,180bn – came entirely from internally-consumed services. These services themselves richly repay further analysis.

For starters, a full 15% of all growth over the decade – $342bn – came from “imputations”, which, it is strongly arguable, do not really exist at all. Imputations are values attached by statisticians to services for which no charge is actually made. One of the biggest is “owner equivalent rent”, a notional sum which, the statisticians say, a home owner would have paid in rent (presumably, to himself) if he didn’t own his home. Other examples of imputations include banking services and employee benefits supplied free of charge. All of these are services for which no money changes hands, so nobody earns anything out of them, or pays any tax on them. Yet these imputations account for 16% of all American GDP.

Who needs farmers, miners or factory workers, when statisticians can add so much more to economic output?

Then there’s the FIRE sector, comprising finance, insurance and real estate. These are worthwhile services, but we are entitled to wonder quite how much value is actually created by selling houses to each other, paying each other rent, or moving money around. This activity looks a lot like “doing each others’ washing”. Yet increases in FIRE sector activity accounted for more than a quarter (27%) of all growth in the American economy between 2006 and 2016, adding $628bn to GDP. As of 2016, FIRE activities accounted for 21% of the American economy, contributing far more than manufacturing (12%) and construction (4%) put together. Of course, a significant proportion of imputations arise in real estate and finance, which means that these sectors overlap.

Government, of course, is also a major component (in America, about 13%) of GDP, but its activity really amounts to recycling taxpayers’ money. This 13% component isn’t the same as total public expenditures, by the way, because those include a lot of activity which simply transfers money between taxpayers and the recipients of benefits. Actual activity by government increased by $272bn between 2006 and 2016, accounting for 12% of all growth between those years. This alone is telling since, together, activity in manufacturing, construction, farming and the extractive industries added nothing at all to GDP over that period.

Before we move on from the numbers, the following table summarises contributions to growth in American GDP between 2006 and 2016.

#117 US GMO and ICS 2006-16jpg_Page1

A misleading confection

As we’ve seen, then, almost all (93%) of growth in the GDP of the United States over the last decade has come from services which Americans can sell only to each other.  It must be stressed that the US is by no means unique in this. Rather, America has been used here as an example, because of the importance of its economy, and because of the exceptional availability of economic data.

The picture in other developed economies is pretty similar, with ICS activities (such as finance, real estate and government) contributing even more to growth in Britain, where manufacturing output is barely 9% of output, compared with 12% in the United States, and almost 18% in the Euro area.

What emerges is an economy which produces very little that can be offered to overseas customers at world market prices. The bulk of the economy – in the United States, 80% – consists of services which people provide to each other, either privately or through the government. Within this ICS component there are further question-marks, most notably over “imputed” output dreamed up by statisticians, and over financial and real estate services which, whilst dwarfing activities like manufacturing, are of limited value-adding capability.

Together with this goes the important observation that there are two distinctive pricing mechanisms at work. One-fifth of American output is “hard” priced by international markets, whilst the remaining four-fifths are priced locally, in a way that is both “soft” and residual. In an era of ultra-cheap money, we are entitled to question the relationship between hard and soft pricing.

All of this, of course, is on top of our understanding that “growth” is being created by spending borrowed money, and by unwinding (through ZIRP) collective provision for the future.

We can summarise the situation like this. Essentially, we in the West are deluding ourselves about how much value our economies are really adding, because much of what we do is residual activity, delivering output that cannot be marketed at prices set by world markets.

Even as they grow – courtesy of mortgaging the future – Western economies are taking themselves ever further down the gradient of added value.

You might think, considering this, that we are in a self-delusional state that isn’t sustainable. If you did think that, you’d be right.

 

 

 

#116: The way ahead

ENERGY ECONOMICS AND THE FAILURE OF THE CONVENTIONAL

As a year draws to a close, it has long been customary for analysts to make predictions about specific events in the coming twelve months. That can be an interesting exercise, though perhaps one of questionable value.

But it’s a fair assumption that, rather than trying to pinpoint particular occurrences before they happen, many of the 36,000 people who have visited this site in 2017 are more interested in how new, energy-based thinking is making headway against the failing paradigms of the past and present. The aim here is to discuss with readers how this work has reached its present position, what has been learned from it, and where it might go next.

A learning and development curve

To look forward, it can be helpful to start by looking back. The position as head of research at Tullett Prebon was the best job that I had in a long City career. With the full support of management, the brief was to explore new ideas, and – to use a rather hackneyed phrase – to “think the unthinkable”.

This was a steep learning-curve, with an embarrassment of riches in terms of topics to investigate. Forever Blowing Bubbles asked if financial hubris and the abandonment of rationality was somehow intrinsic to our system. The Dick Turpin Generation looked into the transference of value from the young to the old, whilst Project Armageddon suggested that neither austerity nor stimulus might rescue the British economy from a structural trap. (In passing, there has been no reason to retreat from any of the conclusions reached in this research programme).

But it was Perfect Storm that really set out an agenda for the future. The central proposition was that the economy was a function of surplus energy, and that the exponential rise in the availability of energy since the Industrial Revolution had driven two centuries of exponential growth in population numbers, food supplies and economic activity. The contention was that, if the energy “master exponential” went into reverse, the same must happen in all related areas. It was further explained that a “peak” in the absolute availability of energy wasn’t the issue – rather, the real threat lay in the rising cost of energy, expressed as the proportion of accessed energy that is consumed in the access process.

The immediate objective after leaving Tullett Prebon was the publication of a book explaining and amplifying this thesis. This was Life After Growth, published in hardback in late 2013, and reissued in paperback, with a new introduction, in 2016. It should be emphasised that, although it followed much the same thesis, Life After Growth covered a lot of new ground, and was not simply an expanded version of Perfect Storm.

During the writing of Life After Growth, two immediate next steps became apparent. The first was the creation of this blog, as a platform for promoting these ideas and as a forum for discussion. Reader input has been hugely influential in establishing new areas of enquiry. Just one example is the recent venture into what the economics of surplus energy might be able to tell us about climate change and “sustainable development”. This simply would not have happened without input from readers.

The second, vital initiative was the modelling of the surplus energy economy. Life After Growth explained the issues, but couldn’t really quantify them, because the data required to do so did not exist. Setting out a thesis in a report, a book or an article is all very well, but the thesis can only become truly persuasive if it is put into a meaningful statistical format, including forecasting as well as analysis.

Doing this has taken a long time – about four years – but has been well worth it, as the Surplus Energy Economics Data System (“SEEDS”) has become an extremely powerful tool.

What we know

Based on the SEEDS platform, and helped enormously by reader input, we’ve reached a point at which our understanding of issues is very comprehensive, and can be considered leading-edge in providing interpretations unavailable to conventional methodologies. The system has proved itself a very effective predictor – so much so that some very general projections are made later in this discussion.

First, though, it’s well worth reminding ourselves quite how much we now know.

We know that the economy is an energy system, with a parallel financial economy attached to it in a subservient role. Most of us had long suspected that this might be the state of affairs, but we have now gone a long way towards demonstrating it. We can claim that our ability to predict has become superior to that of conventional thinking. The much-vaunted V-shaped recovery after 2008 hasn’t happened, and massive stimulus hasn’t restored robust growth. The surplus energy perspective always suggested that neither of these consensus expectations was likely to be proved right.

We have known for some time that, in the developed economies of the West, prosperity is deteriorating, something about which the consensus view is still in deep denial. Some of the consequences of waning prosperity have already become apparent, most notably in politics, where events such as “Brexit” and the election of Donald Trump were wholly predictable on the basis of adverse trends in prosperity. Some other logical consequences, in business and finance as well as in politics, are eminently predictable, even though they still lie in the future.

Energy-based analysis, and recognition of the proxy nature of the financial system, have enabled us to understand policy, and its failures, over an extended period. We know that real or “organic” growth began to fade after 2000, and, because we understand energy dynamics, we know why this happened.

We can identify two phases in a process of denial-response to this basic reality. The first was the period of credit adventurism, a policy of unfettered and irresponsible debt creation between 2000 and 2008.

The second, beginning in 2008-09 and still ongoing, is monetary adventurism, and comprises the addition of the recklessness of ‘cheap money’ to the debt recklessness of the earlier chapter.

Just as credit adventurism led to the 2008 banking crash, monetary adventurism is highly likely to create a second and an even more serious (and potentially existential) financial crisis, this time extending far beyond banking, and into the fiat currency system. We know that this must have political and social as well as economic and financial consequences, and we know that the destruction of pension viability – a direct consequence of the crushing of returns on capital – will play a big part as this unfolds. Just as importantly, the conventional thinking which didn’t see 2008 coming is now in blissful ignorance about what is likely to happen next. This ignorance isn’t simply hubris or blinkered thinking. It reflects the breakdown of established paradigms.

Finally – for now – we know that the case for “sustainable development”, as it is generally understood, lacks demonstrated viability, and is a matter of assumption rather than analysis. In short, it is wishful thinking. We know this because energy-based economics, with its distinction between the real and the purely financial, requires us to understand the dynamics of credit, money and “growth”. This process strips away the claims made for growth upon which, in turn, are predicated assumptions about climate change.

Looking ahead

From this body of understanding, backed up by statistics, we are able to make some projections with high levels confidence about predictive accuracy. This article isn’t the place for detailed predictions, but there are a number of broad outlines which are worth noting.

Critically, prosperity in the developed economies will continue to deteriorate. This trend appears irreversible and, in some countries, is being exacerbated by mistaken policies. ‘Prosperity’, in this context, means average discretionary incomes – that is, the spending power of individuals and households, after the cost of essentials has been deducted from their resources.

We also know that this waning prosperity will be accompanied by further balance sheet deterioration, meaning that debt will continue to increase faster than economic output, and that provision for the future (most obviously, pensions) will continue to be undermined. The “global pension time-bomb”, for example, cannot be defused without the adoption of policies which would have crippling near-term effects. It seems highly likely that the public will, sooner rather than later, come to understand that their chances of enjoying a comfortable retirement are being destroyed. This recognition is likely to become a political factor of immense importance.

In a political climate characterised by deteriorating prosperity, worsening insecurity and growing resentment over perceived unfairness, the centre-right can expect to get the blame, and it can only make its defeat all the more comprehensive if it argues for more, rather than less, of failed policies like privatisation and deregulation. “Popular” or “populist” politicians can expect to make further gains, though this does not mean that their policies will always be implemented. Donald Trump’s budget, and the growing likelihood of “BINO” – meaning “Brexit In Name Only” – illustrate the determination of the elites to frustrate popular demands. These are promising conditions for the political Left, once it has purged its ranks of the “new” or “centrist” wings perceived by activists to have “sold out” to “liberal” economics in the recent past.

All of this has profound implications for business and finance. The established model, which remains built around the promotion of volume expansion despite deteriorating consumer circumstances, is going to come under increasing pressure. Any business whose strategy is founded on low wages, reduced security of employment, globalisation or the deregulation of consumer and employee protections is in urgent need of a “plan B”. Meanwhile, the near-certainty of a second financial crisis requires a rethink from financial institutions, whose assumptions about another taxpayer bail-out are, very probably, dangerously complacent.

Finally, public tolerance of wealth and income inequalities seems certain to deteriorate still further. Sooner rather than later, either Left or “populist” leaders are going to start asking quite how much money any individual actually needs. The ultra-wealthy might need to dust-off those plans for flight, though it seems increasingly likely that they can forget about New Zealand as a bolt-hole.

What do WE do next?

All of this poses a big challenge, but also a big opportunity, to those of us who understand the energy-basis of the economy. Knowledge may not be power, but it is certainly competitive advantage. It has to be admitted that the “road to SEEDS” began without a master-plan, not least because, at the start, there could be no certainty that codifying the logic of the surplus energy economy would actually be possible. This said, a plan is now necessary, and reader suggestions will be welcomed warmly.

What we’re witnessing, with the failure of established paradigms, is a period of enormous change in how the economy is understood – and with this go corresponding changes in interpretations of politics and society. From a thematic perspective, historians of the future are likely to regard the most important feature of the current period as the discrediting of economic “liberalism”, much as the late 1980s were characterised by the failure of socialism.

With each of these paradigms looking like a busted flush, it seems highly probable that something new will arise to replace them. The discrediting of ultra-“liberal” economics does not invalidate all market-based ideas, any more than the failure of state-controlled socialism invalidated all co-operative systems. There has to be a likelihood that a new ownership model will emerge from a debate stimulated not just by waning prosperity but also by new trends including automation and the “gig” economy. The neoliberal nirvana – of a wealthy elite controlling both automated production and a disempowered, casual workforce – is pretty unlikely to be realised. There is likely to come a point, too, at which delusion over the viability of “sustainable development” gives way to reality.

In this context, the understanding provided by the surplus energy approach to economics becomes ever more important. But how can it be progressed?

Publication of a sequel to Life After Growth may be a good idea, given how very much more is known now than was known then. One idea, under serious consideration now, is the production of targeted reports which readers can forward both to opinion-formers (such as policymakers, specialists, academics and the media) and to like-minded people. Co-operation with government and business is a possibility. So is the creation of a commercial version of SEEDS, though this prospect has not yet progressed beyond the scoping of ideas.

Essentially, it makes no sense to ignore potential for influencing government, business and finance at a time when all three need answers that conventional methods of interpretation are no longer able to supply.

It only remains to wish readers a prosperous New Year. It promises to be an interesting one…….

 

#115: Paradigms lost

A LANDSCAPE OF BROKEN CERTAINTIES

Looking at the conduct of economic and related affairs in recent years, it would be all too easy to conclude that the world’s leadership cadres have (in the quaint English phrase) ‘lost their marbles’.

For the most part, they haven’t. But they have lost their bearings.

Policy and evaluation operate within parameters. These are determined by paradigms, which are based partly on experience, and partly on theory. When theory doesn’t work out as expected, the validity of these paradigms breaks down. What results is a vacuum in which literally almost anything can happen.

The aim here is a tightly-focused examination of paradigm breakdown. Put simply, have crucial formulae, supported both by logic and by prior experience, ceased to function?

If they have, much of the basis of policy, and of economics itself, loses validity.

We can cite several examples of where exactly this seems to have happened. Most important, policy responses to the 2008 global financial crisis (GFC) followed a tried-and-tested Keynesian formula, but they haven’t worked out as theory says they should. Long before now, those policies should have caused the economy to overheat and inflation to take off, setting the conditions for a return to normality. This simply hasn’t happened. This seems to be part of a broader paradigm breakdown which is particularly visible, too, in business and in capital markets.

When astronomers find anomalies between expectation and observation, this often reflects the gravitational pull of an object whose presence is unknown. One way of detecting this object can be to work backwards from the gravitational effects to the object that causes them. At that point, a new influence is posited, and calculations are recalibrated accordingly.

In much the same way, this discussion posits a factor hitherto excluded from mainstream economic theory, and examines whether this can explain the breakdown of theory. That factor is energy, and it is concluded that its gravitational pull has become large enough to invalidate much that has hitherto been assumed about the economy.

First, though, we need to examine the evidence for the crumbling of paradigms – and there is no better place to start with what’s happened to the world economy since the GFC.

Case-study #1: Post-crash policy – a theory overturned

The response of the authorities worldwide to the crisis of 2008 made sense within established paradigms. During late 2008 and early 2009, the authorities reacted by slashing policy rates, and using QE (quantitative easing) to drive bond yields sharply lower. This created a situation in which nominal interest rates were negligible, and real (inflation-adjusted) rates were negative.

This was monetary stimulus on a vast scale.

In the circumstances, it was a text-book response. Received wisdom said that this policy mix would be effective, and that it would be short-lived. Instead, it has mutated into what is known here as monetary adventurism – a seemingly-permanent state of monetary recklessness which can only end badly.

How did this happen?

The thinking behind ultra-cheap monetary policy was clearer than you might suppose, and was derived from Keynesian calculus. When demand weakens, the Keynesian prescription is stimulus, essentially meaning that the authorities inject money into the system. This boosts demand, thereby promoting economic activity.

Most commonly, this stimulus is fiscal. But this was hardly a viable choice in 2008. Fiscal deficits were already enormous – and fiscal stimulus takes time to operate, time that the authorities didn’t think they had.

Instead, then, they opted for monetary stimulus, which, theory tells us, works in much the same way. Access to cheap credit, it is reasoned, boosts demand, countering downwards and deflationary tendencies in the economy.

Of course, there are consequences to stimulus, consequences which will either restore equilibrium, or cause over-shoot. As well as promoting demand, stimulus is likely to push inflation upwards, and can make the economy overheat. That’s when the Keynesian formula calls either for moderation or reversal, including running fiscal surpluses, and raising interest rates.

In 2008-09, the authorities clearly thought that monetary stimulus would act as a short, sharp shock, and could be withdrawn (or reversed) when inflation and overheating showed up.

This goes a long way towards explaining ‘austerity’, too. The logic was that, if you’ve injected huge monetary stimulus, you hardly need vast fiscal stimulus as well. Whilst monetary stimulus was boosting demand, fiscal tightening could be used both as a regulator and as a way of rebuilding sovereign balance sheets. Cheap credit was expected to enable much of the debt that had migrated from the private to the public to be transferred back to where it began.

Yet none of this has worked out the way theory (and prior experience) say it should.

Monetary stimulus has been vast – quite how vast is almost incalculable, but certainly running into tens of trillions of dollars. This should have injected huge demand into the system. Within a year or, at most, two years, inflation should have been rising, and the economy showing unmistakeable signs of overheating. At that point, the stimulus could be withdrawn, or indeed reversed.

But this hasn’t happened. Asset markets have been inflated, but this hasn’t translated into broad inflation. The economy, far from overheating, has remained sluggish. There has been no opportunity for deleveraging the balance sheets of governments (and remember that deficit reduction simply slows the rate at which debt keeps growing).

At a point which – statistically, at least – is nearer in time to the next recession than it is to the last one, growth remains fragile, real wages remain depressed, both public and private debt are higher than ever, and some of the really nasty by-products of cheap money are showing up in forms that are as disturbing as they are unmistakeable.

So, does this experience prove Keynes ‘wrong’? Hardly. The Keynesian model, taken in its objective sense rather than in its political form, is mathematically demonstrable. It would have worked in the Great Depression of the inter-war years, and it ought to have worked now.

That it hasn’t worked tells us that something new must have entered into the equation.

Conventional theory cannot tell us what this new element is.

It is baffled.

The paradigm has failed.

Case-study #2: Britain – a productivity paradox

A further, briefer example underlines the breakdown of paradigms. In the years preceding 2008, British productivity grew at a trend rate of 2.1%. Ever since its inception in 2010, the Office for Budget Responsibility (OBR), which advises government, has expected this pre-crash trajectory to resume.

It hasn’t. Instead, it has remained obstinately low, at just 0.2%. This has confounded OBR forecasts and calculations, and has contributed to policy failures. Only now, seven years on, has the OBR conceded that it isn’t going to happen. The results have been sharp downwards revisions to growth projections, and acceptance of the grim (and, to some, “astonishing”) reality that real wages will remain lower in 2022 than they were back in 2008.

This does not, it must be stressed, make the OBR idiots. Rather, they are extremely able people, and their expectations were soundly rooted in theory. As we have seen, productivity, being based on the GVA subset of GDP, is a proxy for growth. Stimulus, both fiscal and monetary, has been enormous. This should have pushed demand sharply upwards, driving up growth and, therefore, productivity. The problems that chancellor (finance minister) Philip Hammond should be facing now ought to be an overheating economy, and a spike in inflation.

But this is exactly what hasn’t happened. Instead, growth (after necessary statistical adjustments) has become negligible, and the only source of inflation has been currency weakness.

Once again, the theoretical paradigm, within its own parameters, and reinforced by prior experience, is demonstrably correct. The divergence of outcome from theory can only mean that some new element has entered into the equation.

It’s a fair bet that the authorities have no idea what this unexpected, paradigm-busting element is. The pursuit of explanations for a non-existent “puzzle” around productivity is a textbook example of groping blindly in the dark.

To be quite clear about this, weak productivity is a symptom. Locally, as globally, the malady is the failure of the economy to react to enormous fiscal and monetary stimulus.

Policymakers don’t know why this happened – and their advisers are powerless to tell them.

Asset markets – accumulating disconnects

Governments and central bankers are by no means the only consumers of economic interpretation. It has a huge role to play in business and finance, too. In financial markets, most participants have enjoyed the fruits of monetary largesse, a policy which has inflated asset prices to giddying heights. Only the most astute, however, are likely to have pondered the implications of economics, and markets, failing to behave as theory says they should.

For those willing to look, there is no shortage of anomalies in asset markets. An obvious example is property, where inflated prices have become all but impossible to square with falling real incomes. This, at least, can be explained away by reference to cheap money and expanding multiples. These explanations may seem satisfying, even though they are very likely to prove wrong.

Bond and equity markets offer more intriguing anomalies. In equities, there are at least five phenomena which should be causing the wisest to wonder.

In no particular order, the first of these is cash-burn. Whole sectors, as well as significant individual companies, are characterised by rates of cash-burn reminiscent of the dot-com boom – yet these stocks and sectors are often amongst those most cherished by investors.

Second, some highly-rated stocks depend for their revenues on sectoral income streams which, locally as well as globally, are both comparatively narrow and potentially vulnerable.

Third, there is the phenomena of stock buy-backs, a highly influential trend in which cheap debt is used to deliver accretion (reverse-dilution) for stockholders, to the particular benefit of anyone owning options. Though the metrics seem to work well with debt so cheap, it’s most unlikely that the large-scale replacement of equity with debt is a positive trend. Any cessation of the practice could take a big buying presence out of the market – and rate rises could cripple companies which have loaded up on debt.

Next, there is the ongoing migration of client funds from active to passive management. This may or may not be a positive trend for clients, but the subtext seems to be one of giving up on analysis – and giving up on analysis doesn’t seem all that far from giving up on rationality.

Finally, there is real-world disconnect, where asset prices seem increasing difficult to square with the realities of customer circumstances.

To be sure, there is nothing new about ‘negative’ economic news being seen positively by markets. A deterioration in growth can be seen as a market positive because it softens the outlook for rates. The same can happen in reverse, where good economic news can be interpreted negatively by markets.

But inverse responses shouldn’t cancel out logic to the extent that now seems to be happening. Beyond some embattled retailers (whose woes are customarily explained away by technological disruption), the stock prices of most customer-facing businesses are high, even (or especially) in the case of stocks whose sectors are intrinsically risky. This seems impossible to reconcile with the all-too-obvious travails of the average consumer, faced, as he or she is, with stagnant or deteriorating real wages, increasing insecurity of employment, rising indebtedness, and growing uncertainty over pensions.

In the bond markets, British government debts (“gilts”) are an instructive example. Sovereign debt yields are supposed to include, where appropriate, a risk premium. In the British instance, this risk premium component ought, logically, to be pretty hefty – this is a sovereign borrower with rising debt, acute political uncertainty, a vulnerable currency and an economy in very big trouble. Yet the British government remains able to access funds at rates historically associated with ultra-low-risk, robust borrowers.

Missing in action – consequences of paradigm failure

Both in macroeconomics and in capital markets, then, the list of disconnects keeps growing, meaning that the validity of theory seems to be breaking down. Numerous demonstrable, historically-referenced ‘truisms’ have gone ‘missing in action’.

The landscape of economics and policy is littered with the corpses of dead paradigms.

The implications, both for policy and for commercial and financial strategy, can hardly be overstated.

Following the failure of stimulus to conform to theory, macroeconomics has moved into a new abnormal. Some of the numbers make this abnormality strikingly obvious, a point underlined by the following chart.

115 #1jpg_Page1

Since 2008, and expressed in constant (2016) PPP dollars, GDP growth of $24 trillion has been accompanied by an $84tn net increase in debt, meaning that $3.50 has been borrowed for each $1 of growth.

This is a lot worse than in the pre-crash borrowing bubble, when the ratio of borrowing to growth was 2.2:1. One reason for worsening of the ratio is that emerging market economies (EMEs) – and most obviously China – are now doing what the developed West alone was doing before 2008.

Meanwhile, the crushing of returns on investment has created a vast shortfall in pension provision worldwide. Globally, these deficiencies probably total around $125tn, and are growing at a real annual compound rate in excess of 5%.

There’s every reason to suppose that much, perhaps most, of the apparent “growth” in GDP has been nothing more substantial than the simple spending of borrowed money. A person does not become more prosperous by running up an ever bigger overdraft, or by pillaging his or her pension fund. Yet, globally, that’s exactly what we’re doing.

Apparent improvements in per capita GDP simply aren’t showing up in prosperity, quite aside from the rapid increases both in households’ own debt and in their share of government and commercial indebtedness. Anyone – and this includes far too many policymakers – who thinks that inflated asset values provide a cushion is guilty of naivety on a breath-taking scale, because we cannot monetize the notional ‘value’ of assets by selling them to each other.

Politics and business – cut adrift from paradigms

The purely political consequences of deteriorating prosperity have long been obvious to virtually everyone (except, apparently, the self-styled ‘experts’). “Brexit”, the election of Mr Trump, the defeat of all established parties in France, the travails of Mrs Merkel and the rise of “populism” have all been entirely predictable events. Even in countries like Britain, the public seem to be giving up on “capitalism”, within polls revealing striking levels of support for nationalisation even amongst erstwhile centre-right voters.

Though the political Left has failed to capitalise on this so far, it is now busily positioning itself for success by purging itself of a generation of “centrists” who bought in to the economic logic of the centre-right.

Commercial behaviour seems equally at odds with the reality of consumer deterioration. In business, as in economics and government, logic suggests that strategy should be framed by awareness of deteriorating consumer discretionary incomes, rising debt and the approaching implosion of pension provision, with all that that logically means for customer behaviour and sentiment.

Self-evidently, it is not. Businesses appear to be throwing ever-bigger advertising budgets at consumers who are getting ever poorer. There are strong reasons why consumers are likely to become a great deal more cautious. The biggest single factor is likely to be the impending recognition of the pensions “time-bomb”, which ought to push savings ratios back up from historic lows, to the detriment of consumption. A second strong possibility is that inflated property markets might crash if the law of gravity reasserts itself in income multiples.

The gravitational pull – energy

What we are witnessing, then, is an economic, political and commercial landscape in which players have been cut adrift from past paradigms without, yet anyway, finding any new ones. As regular readers will be well aware, the ‘gravitational pull’ which is wrecking past paradigms is the energy basis of the economy.

It should be unnecessary to stress that energy is the basis of all economic activity. This was true back in an agrarian economy which depended on human and animal energy, and is every bit as true now, when extraneous sources (and principally fossil fuels) have taken over almost entirely from human energy.

Energy is central to a resource chain which, most obviously, supplies food, water, minerals and chemicals. Add in the critical importance of electricity and it becomes apparent that economic activity is entirely a function of energy availability.

Over the comparatively short period between 2001 and 2016, consumption of primary energy increased by 40%, or by 18% on a per capita basis reflecting the increase in the world population over the same timeframe. It is a moot point as to whether this rate of increase can be sustained, and a logical certainty that the economy cannot continue to deliver genuine growth if it is not.

Absolute quantities of energy, however, are not the critical issue. Whenever energy is accessed, some energy is always consumed in the access process, and the real driver of economic activity is the surplus energy available after this access cost has been deducted.

Access cost is measured here using ECoE (the energy cost of energy), expressed as a percentage of the gross amount, and measured as a trend. The main driver of ECoE is depletion, moderated by technology.

According to SEEDS (the Surplus Energy Economics Data System), worldwide trend ECoE has risen from 4% in 2001 to 7.5% last year. Put another way, this means that, in order to have access to 100 units of energy for all purposes other than energy supply itself, we needed 108.1 units in 2016, compared 104.2 units back in 2001. That number is projected to reach 110.1 units in 2020, 112.2 units in 2025, and 115.3 units by 2030.

In measuring this impact, the key metric is surplus (net-of-ECoE) energy availability. Whilst gross access increased by 40% between 2001 and 2016, the increase at the net (“surplus”) level was only 35%. In per capita terms, surplus energy was only 13% higher in 2016 than in 2001.

Most important of all, this per capita number has now started to decline. This is something which, almost certainly, is wholly unprecedented. Even more importantly, it is likely to be irreversible, because ECoE is now rising a lot more rapidly than we can hope to increase gross energy supply.

To understand the implications of this trend, we really need only two charts, which are set out below. If these are compared with the GDP and liabilities chart shown earlier, the role of energy in the paradigm-busting process becomes entirely clear.

The question now is whether economists, government and business can become aware of what has been destroying their certainties – and can find new paradigms to replace the old.

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#114: Déjà vu, all over again

THe REALITY BEHIND BRITAIN’S “PRODUCTIVITY PUZZLE”

Adjectives such as ‘shocking’ and ‘astonishing’ have been applied to the recognition, in Britain’s recent budget, that growth is going to be extremely weak well into the 2020s, and that real earnings will remain lower in 2022 than they were back in 2008.

The favoured explanation for this weakness is the so-called “puzzle” of poor productivity. Solving this mystery will, supposedly, restore robust growth and reverse the long years of deteriorating prosperity.

In fact, there’s nothing too ‘astonishing’ about any of this. For a start, productivity is really nothing more than economic output divided by hours worked. The calculation uses GVA (gross value added) rather than GDP (gross domestic product), but the former is a subset of the latter, differing only through some modest technical adjustments. Hours worked don’t oscillate dramatically over time. So saying that ‘productivity is poor’ is another way of saying that ‘economic performance is weak’.

The latest hand-wringing over prosperity really amounts to official recognition that the British economy is feeble. In the years prior to 2008, productivity grew at an average annual rate of 2.1%. Ever since its inception in 2010, the Office for Budget Responsibility (OBR), which advises government, has framed its forecasts on an assumed return to this previous rate.

In reality, trend growth in productivity since 2008 has been just 0.2%. The OBRs acceptance of this new reality was the cause of the sharp downgrades to growth assumptions announced by chancellor (finance minister) Philip Hammond in his budget.

If there’s a “puzzle” here at all, it is why the OBR has expected anything different, and why it has held to this assumption for so long. The shock and astonishment expressed about this by experts and the media is unlikely to be shared by the general public. They know all too well that prosperity has been deteriorating for a long time.

A second “puzzle”, far worthier of attention than the productivity conundrum, is why the-powers-that-be do not seem to understand the real issues involved. Essentially, the most constructive single thing that Britain could do would be to address serious imbalances in the economy.

And none of these is more important than the grave imbalance of incentives. Put another way, risk and return are extremely out-of-kilter, discouraging activities that would inject growth into the economy, and favouring those that do not.

Put yourself in the position of somebody with, say, £1m to invest. How does this person set out to increase this capital?

Essentially, there are two ways of doing this.

First, he or she can invest in an enterprise, bringing new goods or services to the market. This can be described as ‘innovation’, because the aim is to create value where it didn’t already exist.

The alternative is to buy existing assets, aiming to profit from a rise in their price. This can be termed ‘speculation’. This is not intended as a pejorative term. It simply means that anticipated rises in asset prices are speculative, because these increases might not happen, and prices might actually fall rather than rise.

For the investor, either strategy can prove equally efficacious. From a national, macroeconomic perspective, however, they are as different as chalk and cheese.

Investing in new goods and services adds value to the economy.

Investing in existing assets does not.

The trick for government is to favour the innovation route which delivers new streams of value, making it more attractive than the alternative, non-value-adding choice. By ‘more attractive’ is meant ‘offering a more favourable blend of risk and return’.

Britain, to a greater extent than most, has got this balance wrong. Moreover, successive governments, far from addressing this handicap, have gone to great efforts to make it even worse.

The person investing in a new enterprise necessarily faces significant risk. His new product might fail, or the economy might turn against him, making customers less willing or less able to buy his product. He might not have access to sufficient capital, at a low enough cost, to see him through the stages from research and development to marketing and impact. Competitors might undermine his efforts, perhaps through combination or predatory pricing, or perhaps simply by making a better offer to consumers.

Risk, then, is stacked against the innovator. It also requires a lot more effort than simply buying existing assets and hoping for a rise in prices.

Because of this, government needs to be pro-active in encouraging the innovative entrepreneur. This includes not making the alternative, speculative route too attractive.

This hardly describes British policy. The innovator faces hurdles at every stage of the process. He encounters a forest of regulation, some of which is necessary, a lot of which is simply gratuitous, and much of which bears proportionately more heavily on the entrepreneur than on larger, established competitors. Taxation is pretty onerous, including employment levies, the obligation to devote resources to collecting sales taxes, and the truly absurd Business Rates, absurd because it is unrelated even to turnover, let alone to profits.

The speculative route, on the other hand, gets a great deal of help from government. If asset prices, and most obviously those of property, threaten to fall, government will intervene with back-stops, most obviously with harmful gimmicks like “help to buy”, but more seriously with monetary policies calculated to inflate asset markets. No-one is going to back-stop the innovating entrepreneur in the same way. To cap it all, profits made on capital gains are taxed far more generously than income from creating new sources of value.

What successive British governments have said, in effect, is that ‘we favour speculative investment’. They have backstopped speculative activities, and have imposed low rates of tax, and pretty modest regulation, on those who want simply to buy existing assets and gain from increases in their price.

A more sensible route, surely, would be to redress the balance of incentives. This approach would favour innovation by granting some regulatory exemptions to small firms, removing some of the tax burdens imposed on them, perhaps providing advantageous lines of credit, and ensuring that bigger players do not act in ways detrimental to the small business, or otherwise benefit from a playing field that is far from level.

Complementary to this would be higher rates of tax on transactions and capital gains, combined with an avowed withdrawal from backstopping the prices of property and other assets.

These weaknesses are not unique to Britain, of course, but appear more serious there than in many comparable countries. Large allowances are given against taxes on capital gains, taxes which are often levied at rates lower anyway than on comparable amounts of income.

If a country sets out to favour the speculative over the innovative, it can hardly then complain if investors opt for speculation, and don’t put much effort into innovation.

The SEEDS model shows the real severity of the British economic malaise. Per capita prosperity, as measured by the system, has declined by 9.4% since it peaked in 2003, and continues to deteriorate. In the years since then, Britain has borrowed £5.50 for each £1 of recorded growth, and even the latter includes a sizeable component of simply boosting apparent output through the spending of borrowed money.

With energy costs rising, the crunch point of talks over post-“Brexit” trade looming, the currency at significant risk, and investors presumably questioning the wisdom of investing in an economy where customers are getting poorer, now is not the time to fiddle about with cosmetic incentives, and indulge in naval-gazing over a supposed “productivity puzzle” that is, in reality, no puzzle at all.

 

= = = =

Here’s how productivity looks on a basis adjusted for the “borrowed spending” impact on economic output:

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