#87: A world economy snapshot

SEEDS STATISTICAL SUMMARY #1

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.

seeds-dataset-world-feb-2017

26 thoughts on “#87: A world economy snapshot

  1. Hi – The pitiful few people who are interested in all this can’t influence those with the power to effect any real change to remedy this looming crash, while most of the population don’t care.

    But has anything similar happened back in history that we can take lessons from? …..perhaps from when empires or other econo-political entities collapsed, like the Austro-Hungarian Empire. A simple solution would be to shuffle the deck & form new structures, conveniently disappearing the former debts – realistically this can probably only happen after a major war or series of wars though; so unfortunately it looks unlikely we’ll dodge the bullet.

    Maybe a world-wide debt forgiveness program for all countries, once it must have also been thought of as impossible for so many nations to get together to form entities like the UN…….

    • Yes, if there isn’t some kind of Great Unravelling (see my own post below), then one assumes that some sort of coordinated, global debt forgiveness programme is the alternative at the opposite end of the spectrum.

      However, I just fail to see how The Powers That Be would ever be able to plan and coordinate such a programme. God, just look at what happens when nations and quangos and NGOs and the like try to organise anything as it is. It seems to me that the prospects for a coordinated, international programme of debt forgiveness (would it include any debts that I might have?) ever working in practice are slim indeed. But you never know, I guess.

    • There’s a couple of big problems with debt forgiveness – it would destroy demand in the system – one mans debt is another’s asset. So pension funds would become worthless overnight for example.
      Two, it doesn’t solve the underlying energy and overshoot problem. Regardless of what financial shenanigans get conjured up, energy wise as stated by David Korowicz … “what’s potentially left, renewable or not, is less economy-adaptive, is of lower quality and lower energy return than what it’s replacing. So there is no magic way around our central predicament”

    • Where do you get the idea that debt forgiveness would destroy demand? Not forgiving debt is more likely to destroy demand as debt diminishes aggregate demand to eventually leave no one with spare capacity to spend.The economy would tank if few can afford to spend.
      This is happening already and we are effectively in deflation. Also paying debts drives money towards the top elite end of society[banks]
      The banks are awash with funds they can’t use productively.$US2.4 Trillion is sitting in bonds in the US fed basically withdrawn from circulation.
      Steve Keen has proposed a private debt jubilee. Here MS governments buy the debts. They give money to borrowers with the obligation to pay down their debts. To compensate the good guys with no debts, they would receive a cash injection. The economy can then reset.
      PS the government, being MS [monetary sovereign] cannot go broke in its own currency so they can spend whatever it takes.
      I feel confident something like this will have to happen.

    • @unravel. ‘doesn’t solve the underlying energy and overshoot problem’
      Agreed, I wasn’t ignoring this, just discussing the other point. Unlike a lot of others, I believe (wrongly or rightly) that the current economic system of full-speed, mass consumption – now globalised over most of the planet is almost designed for maximum waste.

      I’m not saying that this is intentional, just an inevitable consequence of optimising for profit vs sustainability. I have seen a lot of the 3rd world & that really shows how much 1st worlders waste. So between us re-designing our lifestyles to be less wanton, combined with fulfilling the planet’s full potential in renewables, I think we could do a lot better.

      Critics of that will say it wont be enough, fair point perhaps, most solutions to complex problems will have to be similarly multifaceted, so we probably have to have a massive reduction in population, between breeding restrictions (only 2 kids say) to more extreme options such as euthanasia. In more open-minded countries, (granted there are very few at this stage, but necessity might change that) the call for euthanasia as a voluntary option is increasing – it would certainly beat a miserable end when pensionless, sick & helplessly old. I’d take it …..what’s the point of living ever longer if that gain is only of poor quality life – balance is all.

    • How does Debt Forgiveness solve anything ?
      Will the debtors say, “Sorry, we were wrong to borrow and blow so much money, we are sorry we destroyed the retirement lives of so many people, we won’t do it again, we are so sorry.”
      Will letting them off the hook so easily make them change their ways ?
      No, The debtor nations must suffer the consequences of their actions, the whole cabal must implode in catastrophic failure. The worst offenders must hang from the neck from lampposts, their minions must be paraded naked through the streets and be pelted with rotten fruit and excrement.
      If we do not have a very painful re-set, then we will just make the same mistake again.
      This will end in war, and in the USA in Civil War.

    • If you look at history debt forgiveness is very common throughout so it’s not a new idea.

      However, Steve Keen’s idea would not in my view work. For a start MS buy the debts thus pushing up their own debts and thus potentially constraining them in future.

      Secondly, forgiveness that was sufficient to make a real difference to the indebted may cause inflation because of spending by the unindebted as well as pushing up the debt ratio of the MS to egregious levels.

      The obvious way of cancelling debts and savings won’t work morally or politically; I’m a saver and would not relish being told that my deposits had been reduced in order that someone else can stay in their mansion that they should never have bought in the first place. One should be reminded that the introduction of limited liability was resisted fiercely in the 19th century because people thought that you should pay your debts or go to prison.

      Debts that can’t be repaid won’t be but there are two classic methods: inflation and war.

      Inflation hasn’t worked in recent years due to globalization and may not work forte in future due to the spread of robotics.

      And that leaves the final depressing alternative – war.

    • Please be very clear on this fundamental issue. When an MS government spends, every single time it spends new money it creates, [by the act of spending] as a net credit into the economy. It does not use any taxpayer money, not even 1 cent!. So a debt jubilee is not going into debt. but countering debt, forcing it to zero.

      I personally don’t see why the banks should be reimbursed even with free money as they are the culprits in the debt catastrophe caused after going off the metal money stage in 1971. It is the banksters who got Glass-Steagal ,and now Dodd-Frank repealed. It is to them that all the wealth is accumulating. Let them wear the losses! Definitely do not bail them for their junk bonds etc and derivatives – a $555trillion sum.

    • ejhr2015

      You are right that the bankers should pay but, in terms of debt forgiveness, I doubt if they have the equity to withstand even a small jubilee. Even if we get away from the “privatising profits and socialising losses” meme – more difficult a second time around – this is not I fear a practical solution, as much as I might wish it otherwise.

    • “But has anything similar happened back in history that we can take lessons from?”

      Yes, read Peter Turchin: Secular cycles – it has happened several times during history, always as the effect of failing energy surplus:
      Secular Cycles elaborates and expands upon the demographic-structural theory first advanced by Jack Goldstone, which provides an explanation of long-term oscillations. This book tests that theory’s specific and quantitative predictions by tracing the dynamics of population numbers, prices and real wages, elite numbers and incomes, state finances, and sociopolitical instability. Turchin and Nefedov study societies in England, France, and Russia during the medieval and early modern periods, and look back at the Roman Republic and Empire. Incorporating theoretical and quantitative history, the authors examine a specific model of historical change and, more generally, investigate the utility of the dynamical systems approach in historical applications.

    • Savant

      This is a fascinating area. One example that might interest you is Spain, which was the great power in the sixteenth century. Spain was effectively laid low by its gold and silver wealth from the Americas. Spain didn’t need to make anything – it just bought what it needed. This stunted development. The government became spendthrift – and who wouldn’t, with gold flowing in? – and took on trying to reverse the Reformation in northern Europe, single-handedly, by force. Government borrowed against future bullion shipments – which sometimes failed to turn up when intercepted by English seafarers.

      Some studies have illustrated EROEI as the cause of the collapse of the western Roman Empire. That collapse included a 95% decline in population numbers.

    • Yes, truely interesting, I read an interesting archaeological article which stated that the evidence suggests there’s no civilisation yet discovered that recovered from the elite wasting available resources past the sustainable point of balance….. This doesn’t bode well what with our current elites seemingly doubling down by reversing even the hugely inadequate attempts to stop the bank(er)s trying to crash the economy again.

      I wonder though if some solution might be possible this time that wouldn’t in the past on the basis that the world has never been this globalised? In the past a whole empire could go down & while its people might implode locally, the neighbours wouldn’t necessarily be hurt. Perhaps a sense of us all being in it together at some level would spur common sense co-operation to mutually survive ……..as in 2008?

      Finally, some people get very upset with the idea of debt forgiveness, whether for reasons of morality or fairness, but most people aren’t aware that often the overwhelming majority of entire countries had no say in the acquisition of those debts. Not only is a hell of a lot of debt non-personal, but that portion’s almost always accrued through corruption & incompetence by nominal rulers on behalf of the elites they serve. Even in the UK for example, the most vulnerable in society are mostly paying for bailing out the bankers’ excesses, yet far from being curbed, let alone paying for those deeds, they’re still living lives everyone else can only dream of. (White elephant projects don’t bear close examination either) So where’s the justice &/or morality in this current situation then?

    • Hi Tim you may be interested to know that a few years ago – after reading your book – Life after growth – I wrote to my local MP – Gareth Johnson – and asked him to comment on EROEI. He wrote back and told me he had referred it to the Treasury. He then contacted me to say the Treasury did not know what the acronym EROEI stood for. I wrote back with an explanation but after about a year during which I was informed the Treasury had been chased – I still hadn’t received any official comment on EROEI. I then gave up sending my reminders. I wonder of the Treasury were actually ignorant of the significance of EROEI or perhaps too afraid to answer.

  2. Great stuff as usual, Tim. I’ve posed this question before, time and again, but one wonders what it is that will eventually trigger The Great Unravelling? For example, if interest rates were to rise – not even hugely significantly I suppose – presumably defaults would start creeping into the system. Would there then come a time when the default quotient would be sufficiently significant to trigger some sort of positive feedback loop which becomes, by definition, uncontrollable? And what does pandemic, uncontrollable debt default look like all around us if/when it happens? We should be told.

    If not that scenario, then what? A currency collapse somewhere? Surely, the fate of the euro is now starting to look more dodgy than ever. What happens, if say, Le Pen clinches it and starts the process of pulling France out of the euro and the EU? For her even to signal such a seismic course of action would cause mayhem, I assume. Again, would that trigger a wave of debt-related unforeseen consequences?

    It just seems extraordinary to me that there is no obvious end-game in sight here, notwithstanding your observations about the innate madness of the pervasive phoney ‘economic growth’ which you describe – and which must surely represent a plague on all our houses.

    Nurse! Nurse!

    • Thanks, MM. You raise a critical question to which I devote a lot of thinking-time.

      To a certain extent, the unravelling is already happening. Taking the UK just as an example, government puts up NHS spending, but it’s never enough; defence spending rises but again it’s not enough; I take it roads are still the same mess as when I was last there. Wages rise a bit, but the cost of essentials keeps taking a bigger slice of incomes. Energy prices are rising One household in three has financial difficulties. The real value of future pensions diminishes. Debt has risen to £4.9tn, but on top of this there are public sector (£1.4tn) and private sector (£1.0tn) pension deficits, financial sector debt (£3.35tn)……yet we’re told the economy is growing?

      In summary, and worldwide, already things don’t add up – economists and politicians are genuinely baffled. One of my aims here is to make sense of this.

      There is anger, reflected in “Brexit”, Trump, the Italian referendum….. and next, perhaps, in France and Holland. If Le Pen wins and talks about taking France out of the Euro, French bond yields will soar, which France cannot afford. If France actually leaves the Euro, default looks unavoidable. But staying in the Euro locks France into “growth” which, in underlying terms, is already +/- 0%. During 2005-15, Germany borrowed Eur 1.50 for each Eur 1.00 of growth – but France borrowed Eur 13.30 per Eur 1.00, Spain even more, and Italy has negative growth. The whole Euro system is dysfunctional.

      What we need to think here is “interconnection” and “fragility”. Our system is interlocked – so what happens to Germany (and others) if France defaults? Our system is predicted on growth, and capacity utilisation of 90%+. You can’t run a railway or an airline at even 80% capacity, nor a power grid for that matter – central costs become too high on a unit basis. Fragility is evident in power systems, distribution and payment systems. We came within 36 hours of payment system collapse in 2008 – and nothing can function without it.

      So really it’s a domino set up – knock down a single big one and the rest tip over in a cascade.

    • Fascinating if rather scary stuff. Alistair Darling claimed the Uk was ‘3 hours from disaster’ in 2008. I suspect the next event will be an order of magnitude more serious knowing that the fed and BOE are now tapped out.

      http://www.bp.com/en/global/corporate/energy-economics/energy-outlook/oil-supplies-and-abundance.html

      I would be interested to hear Dr Morgan’s view of BP (which I find surprising) – they point to a world of ‘abundance’ of oil supply with high cost producers being ‘crowded out’ to 2050 and beyond… This doesn’t seem to fit in with rising EROEI ?

      http://www.thisismoney.co.uk/money/news/article-2415003/ALISTAIR-DARLING-INTERVIEW-Britain-hours-away-total-social-collapse–Former-Chancellor-crisis-erupted-FIVE-years-ago-week.html

    • Governments and central banks have several plans on their shelves. Introduce the DM again, or the Franc. Backed by gold if necessary. Close borders if necessary. They don’t talk about it too much, that would trigger “events”. Everything is awesome, there’s growth, stocks go up bla bla…

      German government advised its population to have food and water for a a few weeks. Countries repatriate their physical gold holdings. Implementing a new DM would take a few weeks, prepare yourself with some basic stuff for at least a month. He who panics first, panics best. They will print until they can’t.

    • Who ever gave you that news doesn’t understand economics. Mind you..Few do! The mainstream is hopelessly off target and yet politicians and the media carelessly spout their nonsense. First you can’t go back to gold. Most gold today is paper gold [75%] so it’s fiat as well. For physical gold to be worth what the economy produces it would have to be astronomically more expensive. Nixon went off the gold standard because they didn’t have enough to do its backing currency job. Gold is artificially priced. Just as with any currency it can be manipulated by the governments. It’s not a safe investment.
      Put cash under your mattress is the better option. Once the SHTF moment crashes the grid all bank accounts will be lost, so there will be NO Money. It’s only numbers in accounts after all.

    • As soon as things blow up, trillions in paper promises will not be fullfilled. Where does that leave us?
      A physical, local economy is the next step, if we’re lucky. Very lucky.

  3. I am shocked……..
    In an e-mail to my business partners 24 hours ago I asked:
    “Do we have another 6 years and $90 Trillion available?”
    Very close to Tim’s numbers……………
    I say…..we do not……….and hence………we will get what is coming our way- WAR.

    • Let’s just hope that the government sees the error of its way in letting the UK milk producers suffer. The UK lamb producers are worried about EU tariffs affecting their exports when we leave but I think in the very near future we’ll want to keep all our food and will eat carrots potatoes apples whatever their size or shape. I think we’ll look back on the days when supermarkets used to throw fresh food away if it was the wrong shape in amazement.

  4. Can I make plea for order, please could we put replies at the bottom of the whole thread and, if necessary reference the person we’re replying to. I’m getting very confused trying to find new posts. Just a thought!

  5. This means that, aggregated over a trailing ten-year (T10Y) period, $3.81 was borrowed for each $1 of reported growth in GDP.

    Once again, how much was borrowed for each $1 of reported growth in produced assets, land and consumer durables? The stock-to-stock analysis. My guess is that the U.S. borrowed slightly less and China borrowed substantially less than $1.

    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%).

    Isn’t the Essentials Index torturing the data? Housing is excluded but alcohol and tobacco account for 22% of the compositional weight. The Cleveland Fed did an analysis by income quintile of necessaries/luxuries.

    http://preview.tinyurl.com/gwzngsz

    Thus, in 2000 the United Kingdom had an estimated consumption ECoE of 3.7%.

    I still don’t get ECoE. What are the formulae for the numerator and denominator?

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