#87: A world economy snapshot


Some readers have expressed interest in the data used in articles here and, as we have been discussing growth and borrowing on a global scale, this seems a good opportunity to make a SEEDS dataset available for download. You will find it at the end of this article.

First, some basics. There is nothing very mysterious about SEEDS (the Surplus Energy Economics Data System). As its name suggests, it’s a system designed to manage information from a surplus energy economics perspective. The database covers over fifty years, stretching back to 1980 and delivering projections out to 2030, though some classes of data go back well before 1980. In addition to aggregate global coverage, SEEDS operates at the regional and national level. When the 2017 version (“SEEDS 17”) is launched, coverage will increase from 19 countries to 21, with the addition of the Netherlands and Poland.

The cost of energy

The energy component of SEEDS contains data on consumption and production of primary energy, broken out nationally and by fuel type. To each series have been attached estimates of EROEI (Energy Return On Energy Invested) and ECoE (the Energy Cost of Energy). As you may know, data availability in these categories is patchy, so SEEDS uses a lot of estimates and cross-referencing, and results are not to be regarded as definitive. Rather, the aim is to provide an indicative guide to important trends.

This set of volume and cost numbers delivers global and national matrices. Put simply, if one knows the energy consumption by fuel of a given country in a specific year, one can calculate an estimated overall trend ECoE. This is known as the consumption ECoE. But what really matters is the overall ECoE, which adjusts the consumption calculation for net imports and exports. Thus, in 2000 the United Kingdom had an estimated consumption ECoE of 3.7%. The overall number was lower (2.8%), because Britain was a substantial net exporter of energy. By 2015, the consumption ECoE for the UK had risen to 7.5% (in line with a worldwide increase), but the overall number was now higher than this (at 12.2%) because Britain had become a big net importer of energy.

Globally, of course, there is only an overall ECoE number, and this is included in the dataset attached here. World trend ECoE is estimated at 7.8% in 2015 – up from 6.4% in 2010 – and is projected to rise to 10.0% by 2021. The latter corresponds to an EROEI of just 9:1 which, if you understand EROEI, spells very big trouble. ECoEs are already high enough to help explain why the world economy is now stuck in “secular stagnation”.

ECoE is best understood as an economic rent. It is a “cost”, but not in the conventional sense of that word because, of course, no money actually leaves the system. Rather, a rising ECoE compels us to spend more on energy and, therefore, less on everything else.

This shows up most obviously in household budgets as a rise in the cost of essentials, which leaves the individual or household less to spend on everything else. Again taking Britain as an example, the cost of household essentials rose by 48% between 2006 and 2016, far outstripping much smaller increases in wages (+21%) and general CPI inflation (+25%). At the level of national economies, much the same occurs, with the cost of essentials outpacing both income and broad inflation as ECoE increases.

This is one reason why seemingly-positive data on the economy as a whole increasingly clashes with individual experience – the data says the economy is growing, but the individual feels poorer, not wealthier. An increasing ECoE – and its transmission through the cost of essentials – helps explain this apparent contradiction. As neither conventional economics nor governments understand this mechanism, policymakers find themselves baffled by trends which do not seem to accord with the data available to them.

The economy – output and borrowing

As you will see from the first line of the datasheet, world GDP increased by 11% (to $114tn, from $102tn) between 2010 and 2015, and is projected to be 20% higher (at $136tn) by 2021. The latter number is essentially based on consensus estimates. It needs to be understood, first, that these are “constant” numbers, stated at 2015 values, adjusted for inflation. Second, non-American GDP has been converted into what are known as “international dollars” using the standard convention of “purchasing power parity”, or PPP.  The conventions of constant value and PPP conversion are used throughout the datasheet, for debt as well as GDP.

So global GDP increased by an aggregate of $20.1tn in the ten years culminating in 2015. But, as you will also see, world debt increased by far more – $76.5tn – over the same period. This means that, aggregated over a trailing ten-year (T10Y) period, $3.81 was borrowed for each $1 of reported growth in GDP.

Obviously, this trajectory is not sustainable – over ten years, economic growth of 22% was far exceeded by an increase of 45% in debt. If the projected increase of $23tn in GDP between 2015 and 2021 happens, and is accompanied by borrowing at the same ratio as the T10Y number (of $3.81 per growth dollar), debt would increase by $87tn, or 36%, over that period.

Ominously, the T10Y measure has been rising steadily – back in 2010, the T10Y ratio was only $2.84 of borrowing for each growth dollar. Even at the $3.81 multiple, however, the ratio of world debt-to-GDP would rise from 216% to 244% – and even this number requires acceptance that reported GDP numbers are an accurate reflection of underlying output.

Borrowed consumption and underlying growth

In fact, this assumption must be open to considerable question. It seems pretty clear that the enormous rate of borrowing in recent years has flattered GDP by creating “growth” that is really no more than the spending of borrowed money. This, of course, brings forward consumption at the cost of increased liabilities in the future.

SEEDS uses country-by-country estimates of what proportion of aggregate borrowing is used to inflate consumption in this way. For the period between 2005 and 2015, the global estimate is that, of the $76tn borrowed globally, $12tn (or 16% of all net borrowing) was used to fuel consumption. The remaining $64tn of borrowing was, therefore, used for purposes other than funding consumption.

On this basis, underlying world GDP in 2015 was $95tn, 17% below the reported $114tn. Just as important, trend growth is far lower when measured on an underlying basis, where world economic output is growing at about 1.2% annually.

This figure is nowhere near a consensus in the range 3-4%. That consensus rate of growth may be deliverable – but only if we carry on spending borrowed money.

A world in denial

Logically, the practice of inflating GDP by spending borrowed money cannot continue indefinitely. This is not a “new normal”, but a “new abnormal”. Most obviously, the aggregate amount of debt is rising much more rapidly than economic output, making the debt burden ever harder to support. Since the global financial crisis (GFC) of 2008, the economy has only managed to co-exist with this debt mountain at all thanks to the slashing of interest rates to near-zero levels.

ZIRP (meaning “zero interest rate policy”) has its own costs, some of which are only now gaining recognition. Savers have suffered very seriously from monetary policies designed to keep borrowers afloat, which, perhaps, is why the concept of “moral hazard” seems to have fallen out of the vocabulary. Last summer, after the most recent cut in interest rates, the deficit in British pension funds rose to £945bn, more than 50% of GDP, and evidence of pension value destruction has emerged on a worldwide basis. Ultra-cheap money keeps afloat businesses which in normal times would have gone under, creating space for new, vibrant enterprises – so the necessary process of “creative destruction” has been stymied by monetary manipulation.

In short, we are living in an unsustainable “never-never-land”, in which cheap debt both misrepresents and undermines real economic performance. It is hoped that this first dataset will help readers to see what is happening in an informative context.


#86. In pursuit of safety


Although I’ve committed myself to publishing a “rescue plan” for the British economy, I’m hoping that readers will accept, for now at least, a broader reading of the economic and political situation. Recent developments have yielded a specific point worth of discussion, and a general one as well.

The specific point is that extremely wealthy people, mainly from the United States, have been buying-up “survival properties” in New Zealand. Though billionaires as such are a small group, the number of American inquiries about emigration to New Zealand is running at 13,000 a month, which is six times the year-earlier level, and property prices in favoured parts of New Zealand are soaring. The most desirable properties are said to be those self-sufficient in food, water and energy, and the country is, of course, a long way from the places where nuclear war is likeliest to break out. The implication, not missed by observers such as The Financial Times, is that the rich are buying bolt-holes.

The general point is that the self-styled “liberal” elites are still in deep denial over what is happening politically. One reason for this is that the economic data available to decision-makers is disconnected from reality as it is experienced by the general public.

A key point made here is that the economy is a great deal weaker than conventional data suggests, which in turn makes public dissatisfaction that much more understandable.

As well as heaping derision (and more) on Brexiteers, Donald Trump and others castigated for “populism”, the mainstream media are also doing their best to convince us (or perhaps to convince themselves?) that Marine Le Pen cannot win the forthcoming presidential election in France. After that, they will doubtless turn their fire on Holland’s Geert Wilders.

Whilst I don’t feel qualified to comment on the electoral prospects of Ms Le Pen and Mr Wilders, I’m convinced that popular candidates (a term I prefer to the pejorative “populist”) are going to go on winning. The elites, who prefer denial and derision to self-examination, haven’t learned yet, and voters are going to carry on dishing out lessons until they do.

Together, these trends encapsulate what is happening. Whilst the public continues to vent its dissatisfaction, and whilst the elites as a whole continue to bury their heads in the sand, some amongst them are preparing for a future which, they feel, might not be very nice.

They are probably right, even if their preparations may be based on faulty logic.

The public are revolting

Though history never repeats itself, there are recurring patterns. One of the most striking is the way in which elites, whatever their initial merits, decay into unpopularity. “Familiarity breeds contempt”, it is said, and familiarity with power certainly has a history of breeding contempt for the general public. The tendency is for elites to become arrogant, greedy and corrupt, and, because they also become disconnected from reality, they are most unlikely to reform themselves unless forced to do so by popular pressure.

Leaving aside – for now – the military “wild card”, one of three things can happen from here. First, the ruling elites may bow to popular pressure, voluntarily yielding real (not cosmetic) reforms which salvage their leadership at a significant cost in terms of surrendered power, wealth and privilege. This is the best outcome, and worthy of further examination, but it does not look the likeliest.

Second, the general public may give up, accepting that they’ve made their point, and recognising the futility of trying to reform incorrigible elites. This is highly unlikely, again for reasons that merit consideration.

Third, the irresistible force of public anger may collide with the immovable object of elite intransigence, the result being social unrest. Those seeking refuge may believe this to be the likeliest outcome. They may well be right.

The “wild card”, of course, is global military conflict. There were at least two occasions during the Cold War when this came close to happening. The first was the 1962 Cuban Missile Crisis, and the second occurred in 1983 with the downing of a Korean airliner. On both occasions, the threat was averted. The danger of “third time unlucky” might be another reason for acquiring a bolt-hole in the Antipodes, though this precaution seems unlikely to prove successful.

A mass capitulation?

The cherished hope of the elites is that the tide of public anger may recede, leaving the elites in full control with their wealth and privileges unimpaired. This hope is futile, so much so that it is really an exercise in denial.

Though other issues are involved, the main cause of public dissatisfaction is widespread economic hardship, set alongside the conspicuous flaunting of wealth and power by a privileged minority. Economists who seem baffled by the weak performance of the world economy would be even more baffled if they were aware of what is really happening behind the published numbers.

Over the decade to 2015, official figures imply a 1.8% rate of compound growth, a figure which includes the post-2008 downturn and which, the consensus says, is likely to rise to an annual growth rate of between 3% and 4% going forward. Both of these readings are fallacious, because they take as reality GDP numbers inflated by the spending of borrowed money.

Revised numbers from SEEDS show that world GDP, measured at constant values and with non-US data converted into international dollars using PPP (purchasing power parity) exchange rates, grew by $20tn (21%) between 2005 and 2015. But world debt, similarly measured, increased by $76tn (45%) over the same period. This is a “trailing ten-year” (T10Y) rate of borrowing of $3.81 per dollar of growth. This T10Y number is lower than the provisional number ($4.50) published here previously, but has been rising relentlessly – back in 2009, the T10Y number was $2.89 per growth dollar.

A stumbling economy

Given that almost $4 has been borrowed for each $1 of growth, you could be forgiven for supposing that, over an extended period, there has been no “real” growth at all. This is likely to be an exaggeration, but not much of one. Stripped of debt-fuelled consumption, growth in world GDP between 2005 and 2015 was probably about $7.6tn (rather than the reported $20tn), and trend growth may have been as low as 0.5% over that period as a whole. This, of course, includes the post-2008 recession, and current underlying growth is probably about 1.5%.

On this basis, world GDP in 2015 was probably nearer $94tn than the reported $114tn, which would make the global debt-to-GDP ratio about 280%, rather than the published 216%.

All of this, of course, is before adjustment for the trend cost of energy (ECoE) to define what Surplus Energy Economics terms “the real economy” (as opposed to “the financial economy”). In 2015, underlying output was $87tn on this basis, and ongoing growth in “real”, ex-ECoE terms is about 1.0%. That is still a positive number, but it is dwarfed by the rate at which debt continues to be accumulated.

Real pain – the deterioration in living standards

The underlying weakness of the economy is already showing up in the day-to-day experience of the public. On an underlying, “real economy” basis, the countries whose economies are now ex-growth include Britain, France, Italy, Spain, Canada and Japan. The American economy may still be growing, but at a rate nowhere near official figures. China and India are probably the only major countries enjoying significant growth but, even in these instances, underlying growth is a great deal below the rates reported officially.

This deterioration can be expressed in per capita terms, but it shows up in the day-to-day lives of the public in two distinct ways. The first is that the rise in the cost of household essentials continues to out-strip growth in nominal incomes. This is happening, primarily, because these essentials are highly leveraged to energy prices, and to commodities which are traded on world markets. Economists tend to assume that such commodities are priced in the same way as internally-consumed services, but the reality is that there is a huge difference between local and global pricing pressures.

As well as the cost of essentials, the other way in which economic deterioration is showing up in the lives of the public is in deteriorating provision for the future. Ultra-low interest rate policies, adopted to enable the world economy to co-exist with its debt mountain, are keeping borrowing cheap (and asset prices inflated) whilst destroying returns on capital. This is becoming glaringly obvious in pension fund deficits, but is also showing up in the continued escalation of debt.

What happens next?

The elites’ fervent hope, which is that popular discontent dies down, looks increasingly like a pipe-dream. As we have seen, the public is suffering in ways which are very real, but are not readily apparent in the data used by policymakers. This is leading those who take the key decisions into a position of genuine bewilderment – the data at their disposal simply does not tally with the popular mood, leading them to the false assumption that it is the public (rather than the data) which are wrong.

If the public do not back down, the other way to restore smooth relations between governing and governed would be for the elites to reform themselves. Since this would require significant relinquishment of wealth and power, this seems an unlikely policy to be adopted by an incumbency whose principal characteristics include arrogance and greed. Reform is rendered even less likely by the false comfort that the establishment seems to derive from an over-optimistic reading of the economic situation.

Marie Antoinette’s famous remark – that, if people are without bread, “let them eat brioche” – is probably apocryphal. But the point of the anecdote is that she was wholly ignorant of the circumstances of ordinary people, and this does seem to have been the case.

Today’s policymakers seem to be being lulled into similar complacency by economic data flattered out of all reality by the practice of mortgaging the future in order to inflate the present.

If the public are not going to back down, and the elites are determined to hang on to all of their power, wealth and privileges, the odds on social unrest may be pretty high.

Ultimately, this never does anyone much good. The noble aims of the French Revolution led directly to the Committee for Public Safety and “the terror”, with a wrought-iron “tree of liberty” sitting in mute irony beside the guillotine in the centre of every sizeable town. The Russian Revolution led to Bolshevist rule and Stalinist purges.

The only way of averting unrest may be for the elites to awaken to the causes of popular discontent, and implement far-reaching reforms. This is not going to happen unless their complacency over the economy can be punctured. If that happens, then they might switch from denouncing “populism” and turn instead to tackling the root causes of popular discontent.