#94: Spring has sprung……a leak


I’m a cheerful person – really, I am – and with the sun shining on a shimmering sea outside my window, who wouldn’t be? But there’s a big difference between reasonable optimism and outright delusion, and the latter, it seems, has been taking a big hold over many of those whose job it is to forecast our economic weather.

This week, we’ve seen a pretty upbeat set of forecasts from the IMF (the International Monetary Fund), which has predicted that growth in world GDP (measured in international dollars at PPP rates of conversion) will improve this year, from 3.1% to 3.46%, rising steadily thereafter, to 3.7% by 2019, and nearer 3.8% by 2022. This seems to have reinforced an optimism percolating through the forecasting community, with some even opining that we may be approaching a nirvana known as “take-off velocity”.

In fact, and if the IMF is right, global economic output will be 24% bigger in 2022 than it was in 2016. To find a six-year growth record as good as this, you have to go back to the period from 2002 to 2008, when world GDP grew by 29%, and that ended well, didn’t it?


The trouble with “take-off velocity”, you see, is that, if the aeroplane is carrying too much weight, it can fly straight into a brick wall. “Weight”, in this context, means debt. The SEEDS database shows that the 29% growth achieved between 2002 and 2008, whilst adding $21.5 trillion to GDP, was accompanied by $44.7tn in net new borrowing. In other words, world debt grew by twice as much as GDP (if you’re a stickler for detail, the ratio was 2.09:1).

This couldn’t happen again, could it? Surely we’ve learned from the shock effect of the 2008 global financial crisis (GFC), haven’t we?

Well, no.

In 2016, global GDP grew by 3.4%, adding $3.9tn to GDP. Where debt is concerned, we do not yet have comprehensive data for the whole of the year, but we do know that world debt increased by over $11.4tn in the first three quarters of 2016.

In that nine-month period, governments borrowed more than $5.5tn, households $2.3tn, and non-financial businesses $3.5tn. That stacks up to $3.90 of borrowing for each $1 of reported growth, even if we assume that prudence reigned supreme, such that nobody borrowed at all in the three months running up to Christmas.

To be sure, we cannot make a one-for-one comparison between borrowing and growth. But we do know that a lot of this credit expansion went into consumption expenditures, not least because that’s what governments spend most of their money on. The calculations made by SEEDS suggest that, stripped of the spending of borrowed money, reported growth of 3.4% falls to an underlying level of just 1.2% – and even that probably makes some pretty generous judgments on the validity of a very big pile of borrowing.

Nor is that all – because debt is not the only hostage that current practices are handing to posterity. Debt, though it adds to the burdens of futurity, can at least be managed, if we let inflation accelerate, essentially bilking lenders by paying them back in devalued money.

This cannot work with other forms of futurity, most obviously pensions, where the same inflation that devalues debt simultaneously increases the burden of future payments, not just of pension commitments but also of welfare. It should come as no surprise whatsoever that pension deficits are continuing to widen alarmingly.

In short, claims that we are nearing “take off velocity” should be taken with a huge pinch of salt.

Indeed, we’d do better to steer very well clear of any kind of take-off – until the pilots on the flight-deck of the world economic aeroplane have sobered up.

#93: The prosperity equation


In the previous article, we looked at some fundamental principles which belong in the realms of philosophy and ideals. Such discussions are valuable, and are all too often neglected in a world seemingly obsessed with immediacy. But we do also need to focus on the tangibles – and nothing is more tangible than prosperity.

Strange though it may seem, conventional economics is really pretty weak on this fundamental matter of prosperity. The claim put forward here is that the surplus energy economics approach can provide unique insights into prosperity. What follows is an explanation of how the SEEDS system measures prosperity, together with some conclusions which might be surprising.

Prosperity isn’t assets

Let’s start by noting that the link between assets and prosperity is far weaker than we might assume. If you buy a house for £100,000, and its value doubles to £200,000, that sounds like an increase in prosperity which, superficially, it is. It’s certainly possible for you to sell the property and pocket the gain (always assuming that you don’t need, as most people do, to buy another house to live in, which will have risen in price by just as much).

But this process does not add to the aggregate wealth of the economy – it would not be possible for all homeowners, or most of them, or even a sizeable minority of them, to monetize these gains. If huge numbers of properties were put on the market, prices would slump, which is a simple example of supply and demand. But the really fundamental point is that the housing stock cannot be monetized because the only people who can buy that stock are the same people who already own it.

What this really means is that transactions at the margin do not value the aggregate in any meaningful way. Likewise, the aggregate value of, say, all the equities or all the bonds traded on a market is meaningless, because that value simply cannot be monetized.

Prosperity and income

Financial assets, such as houses or investment instruments, then, are not the same thing as “prosperity”, though cash in the bank comes nearer to it.

Rather, real prosperity depends on incomes, provided that we qualify this statement in some critical ways. First, if an extra £10,000 comes into your hands because your pay has risen, or even because you backed the right horse at Cheltenham, your prosperity has increased. But this is not the case if you have an extra £10,000 to spend because you have taken out a loan of that amount – in this instance, your prosperity has neither increased nor decreased.

Second, even incomes do not correlate directly to prosperity. Let’s say that someone’s employer raises his pay by 5%. If, at the same time, the cost of all the things he has to spend money on – things like fuel, food, water and so on – has risen by 10%, this person’s prosperity has diminished, not increased.

This gets us to a definition of prosperity, something mentioned here before but so important that it bears repetition. Prosperity is “discretionary” income.

To measure it, we start with income. From this, we deduct the cost of essential or “non-discretionary” expenses. What remains is “discretionary” income, meaning the amount that the recipient can choose to spend in whatever way he or she chooses. Put simply, if the money in your pocket after essential spending increases, you are more prosperous.

Measuring prosperity

Surplus energy economics provides unique insights into prosperity because the trend cost of energy is the principle driver of non-discretionary costs. The cost of essentials is massively linked to the cost of energy. Fuel, power and light are themselves significant components of the non-discretionary spend. But energy also drives the cost of water, minerals, food and the various manufactured goods which need to be acquired and replaced over time.

Let’s illustrate this taking China as an example, and making a ten-year comparison between 2006 and 2016. Over that period, and stated at constant 2016 values, China’s reported GDP increased by 134%. This does not, however, make the average Chinese citizen better off by 134%. For a start, the population of China increased by almost 16% over that period. This dilutes the per capita share of GDP, so that the increase thus measured is 123%, not 134%.

Then there’s the question of debt, remembering that adding to your overdraft does not increase your prosperity. Between 2006 and 2016, China’s inflation-adjusted GDP increased by RMB 42 trillion, but debt increased by RMB 141tn, or RMB 3.37 for each RMB of growth. Clearly, some of that borrowing was used to fund consumption expenditure, thus inflating reported growth to levels higher than the “organic” or “underlying” situation.

The SEEDS calculation is that, of the total RMB 141tn borrowed, nearly RMB 23tn (16% of all net borrowing) inflated GDP by financing debt-funded consumption. Adjusting for this, underlying GDP growth over the decade wasn’t 134%, but 87%. Underlying per capita GDP, meanwhile, didn’t rise by 123%, but by 65%.

Lastly, we come to the cost of essentials, which SEEDS measures using the trend ECoE (Energy Cost of Energy). This, as outlined in previous articles, is an “economic rent”. As such, it does not diminish GDP or the income of the average person, but it does increase “non-discretionary” costs, so the effect is to reduce “discretionary” incomes and, hence, prosperity. According to SEEDS, the trend ECoE of China increased from 10.3% in 2006 to 14.3% in 2016. The effect of this was to reduce growth in the real economy over that decade to 71%. The per-capita equivalent of this was 58% – and that’s the real extent by which prosperity per person increased over that period.

To sum up, then, we can list the sequence for China like this:

  • GDP: +134%
  • Population change effect: -11% (growth now 134% – 11% = 123%)
  • Adjustment for debt-funded consumption: -58% (growth now 123% – 58% = 65%)
  • Increased ECoE, increasing non-discretionary spend: -7% (growth now 65% – 7% = 58%)

International prosperity – an overview

That the average Chinese person saw his prosperity increase by “only” 58% over a decade remains pretty impressive. But the same adjustments, when applied to less vibrant economies, have some very adverse implications for prosperity.

Here is a league-table showing the itemised path from growth to prosperity for the SEEDS universe of 21 economies. Its implications are far-reaching.

Fig. 1: Prosperity per capita, 2016 vs 2006


In the United States, growth of 14.6% in GDP translates into a decrease of 7.0% in prosperity, which might go a long way to help explain why Donald Trump was able to wrest the White House out of the clutches of the political establishment.

In Britain, GDP growth of 12.2% translates into a slump of 13.8% in prosperity, which might likewise help explain “Brexit”. Italian prosperity fell by 9.7% between 2006 and 2016 – a worse fall than any other country except Britain – which no doubt influenced the resounding voter rejection of Matteo Renzi’s reform proposals.

More positively, personal prosperity over that decade increased by 48% in India, 18% in Russia and 12% in Poland.

The French conundrum

All of which brings us, topically, to the situation in France. Until recently, it was generally assumed that, after the first round of voting on 23rd April, the second and decisive round on 7th May would pitch the anti-establishment Marine Le Pen against a “centrist” (meaning “pro-establishment”) contender, presumably Emmanuel Macron.

Latterly, however, the meteoric rise in the popularity of far-left candidate Jean-Luc Mélenchon has created, for the establishment, the potential nightmare scenario of the nationalist Ms Le Pen confronting Mr Mélenchon, whose policies include a marginal tax rate of 100% on incomes over €360,000.

As well as vanquishing the incumbent elite, this outcome would ensure an anti-EU occupant of the Elysée because, whilst Ms Le Pen takes a nationalist view of the EU, Mr Mélenchon seems to see the whole thing as a neoliberal cabal. The view expressed here is that leaving the EU would almost certainly push France into default, something which would terrify the country’s creditors (most obviously Germany) and have knock-on effects throughout the world. The viability of the Euro, and even of the EU itself, could be fatally undermined by the reintroduction of the Franc, “Frexit”, or both.

What part might prosperity (or the lack of it) play in the voters’ decision? According to SEEDS, per capita prosperity in France declined by 6.6% between 2006 and 2016 and, looking ahead, is projected to carry on deteriorating, albeit at pretty modest rates.

Of course, the average voter, in France or anywhere else, does not spend his or her time studying economic indicators. But voters do have a very immediate sense of prosperity, because they know how far their money goes after essentials have been paid for.

It’s impossible to say whether the 6.6% ten-year deterioration in French prosperity will be enough to oust the establishment from power – but a not-dissimilar deterioration (of 7%) was followed by the election of Mr Trump, whilst Italy’s 9.7% decline was more than enough to see off Mr Renzi.

If France does elect Ms Le Pen or Mr Mélenchon, the consequences could be drastic – and not just for France herself.



#92: Pianists in a brothel


There is a story (which may well be apocryphal) about an Italian politician who took a friend home to meet his mother. On the way, he warned his friend that his mother was a rather grand old lady, with high notions of decency and respectability. For this reason, he had not informed her that he was in politics, and asked his friend to keep his secret. “If she knew I was a minister in the government”, he said, “she would be appalled”.

His friend asked him what his mother thought he did do for a living. “She thinks I play the piano in a brothel”, replied the politician. “That’s far more respectable”.

This story is a reminder that politicians as a genus have never topped the public popularity stakes. Some very decent men and women do go into politics, but the system seems (and probably is) designed to prevent them from getting to the top. Ideally, our leaders would be taking a strategic view. All too often, however, they are too mired in trench-warfare to do this.

This means that we need to rely on ourselves, not wait for government to find solutions.

The need for solutions seems particularly imperative now. Even those who don’t subscribe to the interpretation of economics along surplus energy lines would find it hard to deny that there are strange tendencies afoot, not just in the world economy but in the social and political spheres as well.

It has been well said that “a country is more an idea than a place” – and much the same can be said of the world itself. Ideas are perhaps the most important influence of the lot. Politicians, theories, and even prosperity, come and go, but the fundamentals remain the same – how do we best manage the issues of getting along with those around us, balancing security with individual freedom, and combining prosperity with both harmony and sustainability?

At times, we have seemed tantalisingly close to success, only to slip off the rails, temporarily at least. Great thinkers – amongst them Smith, Voltaire, Gandhi and Mandela – have carried us forward, but never far enough, it can seem, to put the demons of greed, brutality and unreason finally behind us. We seem to have to endure recurrent periods of madness, examples in modern history including the First World War and the rise and fall of murderous regimes in Nazi Germany and Soviet Russia.

Solid evidence suggests that material conditions have a very significant bearing on the swings between enlightenment and darkness. Prosperity seemingly gives us the leisure to think, and the security to interact more constructively with others.

This linkage is particularly disturbing at a time when the established (though historically recent) expectation of continuous material advancement faces grave challenges. The danger is that a climate of unreason may advance hand-in-hand with a deterioration in prosperity. Indeed, it seems that this may already be happening.

This being so, preparations for new era of straitened material circumstances need to go far beyond practical preparations, such as learning new skills or stockpiling tools or food. I for one have never believed in the practicality of survivalist solutions, accepting instead that we need to do as much as we can to shore up civilization (which means reforming it), in order to depend less on prosperity, and more on reason.

I am reminded of the imperative of reason by the rapidity with which, in some situations at least, rationality appears to be breaking down. Nowhere does this seem more obvious at this moment than in Britain and America, though I should make it clear that my fear for the role of reason in both countries is not – repeat, not – based on the political choices that have been made.

Some have described the election of Donald Trump as an insane choice by American voters. Whilst I am not an admirer of Mr Trump, I do find this reaction unduly extreme. For starters, the alternative, Hillary Clinton, was an unappetising choice, less perhaps in herself than in what she represented. For good reasons, millions of Americans wanted something different, which was exactly what they would not have got from the Democrats’ archetypal establishment candidate. Some of the anti-Trump rhetoric seems strangely intense – and anyone painting Mr Trump as the most dangerous man ever to occupy the Oval Office must be suffering from convenient amnesia about the Iraq war.

Similarly, Britain’s “Brexit” decision to withdraw from the European Union (EU) was always going to prove divisive. But the debate, both before the referendum and since, has moved far beyond “divisive” and into “thoroughly nasty”. Perhaps because they lost, the Remain side seem the angrier, sneering at opponents whom they deride as stupid (and much worse). If the Leave camp had lost, we would probably have been hearing similar nastiness from them, whilst there does seem to be a link between nationalism and attacks (both metaphorical and literal) on EU citizens living in Britain. Neither side seems able to accept that the other side might have a scrap of logic or integrity – but experience surely teaches us that things are never, ever really as black and white as this.

What surely matters, in America as in Britain, is not why people take the positions that they do, but why they hold them with such intensity, and with such intemperate hostility towards those who disagree. There is a flavour of selfishness and arrogance in this, probably underpinned both by fear and by insecurity. In Britain, tub-thumping over Gibraltar is the most recent example of irrational hysteria – the future of the territory is a subject for negotiation, but not for threats or intemperate language.

It seems to me that a common strand which links intemperance, intolerance and unreason in Britain and America is the set of shared attitudes to which both have been subjected. The catch-word we can use for this is “neoliberalism”, though labels matter far less than substance. If the vast majority of Britons and Americans are to become more at ease with themselves and others, they need to start by challenging the thinking (as well as the economic quackery) of neoliberalism.

If one stands back and thinks about it, the intellectual case for neoliberalism is extraordinarily threadbare and tawdry, and about as rational as Soviet communism. Where the Communists made “profit” a dirty word, the neoliberals have elevated it to the status of Holy Writ. Both attitudes are idiotic. To make a profit is not automatically wrong, but neither is profit a mantra which can justify everything.

According to neoliberals, the profit motive is supreme, triumphing over all other values. Human beings, then, are portrayed by neoliberals as motivated almost entirely by personal greed. This is a puerile argument, because there are many values of comparable, indeed of far greater, importance, values which include compassion, co-operation and culture. To be dominated by the pursuit of material gain, or for that matter by a craving for celebrity, is to become mentally stunted. In a sane society, these incentives have their place, but should not reign supreme. Thus elevated, they lead to the nastiness of unfettered selfishness.

A balanced observation of where this has led surely underlines this point. Advertising, for example, has become a vast propaganda machine proselytizing material values over all else. Our happiness, this argument runs, can be gauged, and our worth measured, by our comparative success in accumulating money and possessions.

The sheer banality of this sometimes beggars belief. If one buys a certain beer, or so the ads imply, one will instantly be partying with sports stars and celebrities. The purchase of a particular car will place you on a winding mountain road, or on strangely depopulated city streets, in both instances magically freed from the daily reality of traffic jams, speed limits and the police. Buying the right fragrance will make you instantly irresistible to members of the opposite sex. A particularly nasty subtext here is that these things will put you ahead of others – this is life lived purely comparatively, not by any real sense of self-worth.

The motives behind this are as transparent as the argument is banal. Many big corporates subjugate all else to the pursuit of sales and profit. This is not done to advance the interests of shareholders (who bear the burdens when things go wrong), let alone of workers, as the outsourcing of jobs and the casualization of employment surely attest.

Moreover, if profit and personal gain justify everything, cheating and dishonesty lose any moral dimension, and penalties become merely snakes on a board dominated by ladders. Such is the grip that this thinking has exerted that shareholders, not decision-makers, are punished for corporate misbehaviour, whilst the politicians who should challenge this equation seem happier instead to pass on by, on their journey to retirement into the materialist nirvana of “consultancies” and “the lecture circuit”.

Even by its own lights, this neoliberal orthodoxy has failed, becoming progressively more economically destructive. Outsourcing skilled, well-paid jobs whilst maintaining the relentless adulation of consumption has driven debt sharply upwards, such that ten-year growth of £215bn in British GDP has been accompanied by a £1,370bn escalation in debt. Undermining the tax base has undercut the provision of public services, whilst monetary policies geared towards co-existence with debt have created huge deficits in pension provision. The emphasis on the pursuit of quick material gain has favoured speculation whilst undermining the patient creation of value through innovation and initiative. The uncomfortable suspicion lurks that, when the economy slumps, pension provision collapses and the debt burden becomes overwhelming, the masterminds of this state of affairs will already have departed to pastures new.

Of course, there are policy initiatives that the public could pursue to improve the situation, most obviously by capping the earnings of politicians and administrators in retirement, and by legislating to make executives accountable for corporate misbehaviour. Both would help. But such initiatives would be purely cosmetic if they fail to address fundamental patterns of thought.

Rather, what we surely need to do is to enlist reason to make pragmatic choices. Has the neoliberal formula made most of us more prosperous, or happier? Since it clearly has not done these things, we should repudiate it, not just through the ballot box but by promoting intellectual resistance. Pragmatism seems to tell us that the “mixed economy” works best, combining both private enterprise and public provision where each is most effective. If that is so, we should demand it.

Happiness is not promoted by material prosperity alone, but by security and a sense of worth at work, and by solidarity and co-operation more generally. We need to develop a mental toughness which rejects the blandishments of the most blatantly commercial, and a reason-based balance which prevents us from thinking that anything, ever, is either totally right or totally wrong.

Had I been writing this in a Soviet bloc country in the 1980s, I would have been concluding that communism was a bad idea, damaging to society as well as economically inept. As it is, the detrimental tendency today is towards self-serving neoliberalism, with its cult of selfish materialism and its willingness to subjugate all other values to this tawdry doctrine.

We are better than neoliberalism portrays us. We need to remind ourselves of this, and enlist reason to assert it.