#95: Exponentials unravelled


Just occasionally, when conducting research for a project, one can stumble – almost accidentally, as it were – upon something which is really important.

During preparatory research for a discussion of “chaos theory” – my shorthand term for the various doomsday scenarios which purport to predict the collapse of Western civilization – I happened to notice that the trajectories of world debt and GDP seem to be following an internal mathematical logic of their own.  More specifically, each seems to be subject to exponential progression at remarkably consistent rates.

If this is indeed the case, its implications could be far-reaching, which is the reason for sharing this with you here.

I assume that readers are conversant with exponential progression but, just in case, here’s the gist. Essentially, a numerical series can adopt a “j-curve” or “hockey-stick” shape even though the annual rate of change remains the same. Imagine a $1,000 investment, increasing by 5% per year. In the first year, the extra 5% increases the total by $50, to $1,050. By year 17, however, the total has reached over $2,000, so that year’s increase is more than $100, even though the rate of change is still 5%. Each year, then, the quantity added becomes bigger despite the rate of growth being constant.

The first chart applies a constant rate of progression to total world debt. Let’s be clear about the conventions used in this and subsequent charts. All numbers are expressed in international dollars, converted using the PPP (purchasing power parity) method. In all cases, values are stated in constant 2016 dollars. The blue columns on the chart are historic numbers since 1999, with the 2016 data-point being the end of September, since year-end debt figures are not yet available. The red columns are SEEDS projections out to 2022, and the superimposed black line is an exponential progression at a constant rate of change.

95 1 debtjpg_Page1

Where debt is concerned, the exponential rate which produces a remarkably close fit is 5.2%. In fact, annual variations from this rate have been strikingly small – and, for each of these charts, a close-up version at the end of this article shows quite how exact the correlation has been.

In 2009, and for wholly understandable reasons, total debt did exceed the 5.2% trend-line, but the very modest deleveraging which occurred in the following year restored the relationship.

Let’s be clear about the implications of this. What this chart is telling us is that global debt is growing by a constant 5.2% annually, and has been doing so for more than fifteen years. Come hell or high water – or their economic equivalents of boom and bust – this progression hardly varies at all. Neither, of course, does inflation enter into this, because these are constant-value numbers.

The suggestion, then, is that global credit expansion is subject to some internal mathematical logic of its own. This, in  turn, would help to explain why there has been no retreat from borrowing despite the shock effect of the GFC (global financial crisis) of 2008.

The next chart applies the same methods to GDP (gross domestic product), again in constant (2016) PPP-converted dollars.

95 2 GDPjpg_Page1

Once again, the correlation is very close – had the constant rate curve been followed exactly, GDP would have been $92 trillion (rather than the actual $94tn) in 2010, and $107tn (rather than $111tn) in 2015, but these are very minor divergences.

The big difference this time, though, is that the annual rate of compound expansion is 3.2%, rather than the 5.2% revealed by the progression of debt. (Please note that the first three charts used here have proportionate vertical axes, enabling an undistorted visual appreciation of comparisons).

Strikingly, GDP is growing at a trend rate (3.2%) which is significantly lower than the rate (5.2%) at which debt is increasing. And, since the debt number has been bigger than the GDP number from the outset, the quantity of debt being added each year is bigger than the annual amount of growth.

Moreover, the gap between the annual increments of debt and growth is widening – as, of course, mathematically it must.

This largely explains why the ratio of global debt to global GDP has increased from 163% in 1999 to 221% at the end of September last year. It further suggests that, if the incremental rates of change identified here remain in place – and there seems no reason why they shouldn’t – then the debt ratio will reach 246% by 2020 and 272% by 2025. Neither ratio is impossible – after all, debt to GDP is already higher than 272% in countries such as Japan and the United Kingdom.

Again, a fascinating implication of this finding is that GDP, like debt, rises at a constant rate seemingly dictated by internal mathematical logic. To be sure, GDP got ahead of this rate in the years immediately preceding 2008, but then fell back to trend. Once again, the close-up charts at the end of this discussion show how the trend was first exceeded, and then restored, by the boom-and-bust cycle around the GFC.

This, of course, refers to GDP as the authorities measure it, and regular readers will know my view that recorded GDP has been inflated by the spending of borrowed money. The logic here is that, just as investment relinquishes current in favour of future consumption, the spending of borrowed money, since it does the opposite, is a form of negative investment. In fact, debt is simply one component of futurity, which also embraces, most obviously, pension provision. Just as debt has expanded, pension provision has weakened, because both are components of our financial relationship with futurity.

Therefore, the SEEDS system produces estimates of how much borrowed money is used to inflate current consumption at the expense of the future. This creates estimates of underlying GDP, and this series is the subject of the next chart.

95 3 UL GDPjpg_Page1

As you can see, there is, once again, a remarkably close fit between actual numbers and a compounding rate of change, which in this instance is 1.8%. Because it excludes the estimated impact of spending borrowed money – of mortgaging futurity, that is – the trend rate of expansion is a lot lower than the rate applicable to GDP as recorded officially.

It is, of course, up to you whether you agree, or not, with my view that, by ramping up debt and using a lot of it to fund consumption, we are boosting today’s consumption at the expense of tomorrow’s. This interpretation seems to me to be reinforced by the opening up of enormous shortfalls in provision for futurity, most visibly in pension deficits.

In short, if pension funding is deficient, the amount available to all of us as pensioners in the future will be smaller than it would otherwise have been. This in turn suggests that we are “pillaging the future” to increase current consumption. Of course, the reason why pension deficits are ballooning, ultimately, is that returns on invested assets have collapsed – and this is a direct consequence of cheap money policies, essentially imposed on central banks by the sheer impossibility of servicing today’s debt mountain at historic (higher) rates of interest.

Wherever you stand on this “mortgaging the future” question, the key point to emerge here is surely that both debt and GDP seem to be subject to rates of change which correlate so closely as to suggest that an internal mathematical dynamic is operating.

The immediate conclusions seem to be that:

  • World debt is growing at a compound annual rate of 5.2%.
  • GDP is growing at a compounding rate of 3.2%.
  • Adjusted for the effects of passing off the spending of borrowed money as “growth”, underlying economic output is growing at a trend rate of 1.8% annually.

All of these numbers exclude two factors which are further undermining prosperity at the individual level. The first of these is population growth, which dilutes per capita shares of economic output. The second is the rising trend in the Energy Cost of Energy (ECoE) – by driving up the cost of household essentials, rising ECoEs act as an expanding “economic rent”, undermining prosperity as this is experienced as “discretionary” (ex-essentials) spending capability.

The findings presented here, of course, are global aggregates, and individual countries’ experiences and prospects vary very significantly around these central trends. India, for instance, could go on growing at current underlying rates for several more decades, whilst the British economy could fall apart within five years.

The general conclusion, however, has to be that, because internal rates of growth are pushing up debt much more rapidly than GDP, there will in due course have to be a reset, most probably through the “soft default” process where the real value of accumulated debt is destroyed by a sharply higher inflation.

What this will not do, however, is reset broader futurity as typified by pension deficits – so we will still need to readdress how we allocate resources between the present and the future.

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62 thoughts on “#95: Exponentials unravelled

  1. Hi Tim
    I’ve been following your thoughts for about five years now but, having a low level understanding of economics, one thing I don’t understand is this. If all the economies are running up huge debts, who is in surplus? I always thought that Japan and then China had huge surpluses and kept the USA afloat by buying their debt but now it seems that Japan, China and the OPEC nations are all in debt as well.

    Someone must be massively in surplus. Please explain !!

    • my simple answer is The Future is in surplus….
      Everyone is borrowing off the future. The debt (represented by ongoing current account deficits) is a promise to service (not repay) the debt “indefinitely”. The hope is that inflation will deflate these promises away. The kicker is that the promise/s mandate an ever increasing Energy burn to service old debts.

    • It’s impossible to answer this briefly, but money (and therefore credit) was examined here in February 2015 in an article entitled #45. On the money.

    • unravel:

      Yes, debt is in a sense “owed to futurity”. For instance, debt owned by (and therefore owed to) pension funds is intended to be drawn upon in the future to pay pensions. The fund doesn’t need the money now – but it will need it in the future – and it needs the total to grow over that time interval, meaning it can get more out later than it puts in today. This is how pension funding works – it relies on growth or “returns”. Without these returns, or if they are low, more money has to be put in today to produce the required amount in the future.

      Another way to look at this is “time phasing”. The financial system enables you to forego some consumption now, in exchange for consumption, hopefully increased, in the future. So, in agrarian times, someone might go without a loaf of bread today, buying instead a plough which will increase his future income, i.e. give him more loaves in the future than the one he’s giving up today. This is what investment really is – relinquishing consumption today, in favour of consumption at a later date. A usefull way to think of “futurity” is as positive or negative investment. Debt, and other commitments, are “negative investment”.

  2. Two comments/questions:

    1) “the reason why pension deficits are ballooning, ultimately, is that returns on invested assets have collapsed – and this is a direct consequence of cheap money policies”

    My understanding is that limits to growth have reduced real GDP growth (as you show) to 1.8% and that interest rates were adjusted down in response. In other words, pension returns are lower because of limits to growth, not cheap money policies. Am I wrong?

    2) Can you please explain how we might have a “soft reset” via inflation, without higher interest rates that would cause a “hard reset”.

    • Returns on investment are linked to interest rates. These in turn are linked to market bond yields.

      Normal rates give the investor a reasonably predictable income which, if reinvested, adds to the capital value of the investment over time. Pension funds use this in actuarial projections. On the one hand, they know how much they’re likely to have to pay out in the future. On the other, they make assumptions about future rates of return. If they apply this rate of return “backwards”, they know how much needs to be invested today, in order to meet their future obligations.

      Now, if rates of return are lower than they’d assumed, then the sum they need to have invested today (to meet the same required sum in the future) rises. This means that, when rates of return decline, a deficit arises, because sums invested in the past can no longer meet the required future amount.

      Clearly, therefore, interest rates drive rates of return. Take a bond, traded on the market, paying a $5 “coupon” each year. If that bond is priced at $100, the current yield is 5%. If the same bond’s price were to fall to $50, the current yield is now 10%. But if the price of the bond rises to $200, the current yield is now only 2.5%.

      Now, as a pension fund, I know in year X how many annual $5 increments I need to meet my obligations in year Y. Say I need 100 incremehts, or $500, over ten years. If bonds are priced at $100, I need to buy ten of them, so invest $1000, to get the return I need. But, if the bond is priced at $200, then my $1000 now only buys me five bonds, not ten – and my future income is not enough. I now need to buy twenty bonds, so i need to invest $2000, to get my $500 increment over ten years. But I don’t have $2000 – contributors are only putting in $1000 to the fund, remember. So I have a deficit. This means I either have to reduce pension benefits promised for the future – or ask contributors to put in more money today for the same pension in the future.

      I hope this helps?

    • On your second question, we can’t – there is no painless way out of this. I’m saying that the authorities are likely to try inflationary “soft default”, but I don’t expect it to work.

      Debt that cannot be repaid will not be repaid, making some form of default unavoidable. Governments probably think (rightly or not) that excessive debt is limiting growth, as explained by Rogoff and Rinehart. History shows that the authorities almost always prefer “soft” default through inflation over “hard” default. So my feeling is they’ll try it.

      Of course, higher inflation will push rates higher, though we should note that real rates have now been negative for almost a decade.

      It’s quite possible to follow how this will unfold in a single economy – but understanding it as a global process is much harder, I find.

  3. Looking at your SEEDS list, you have included certain countries. You have included none of the countries on this list:


    My question is, did all the countries in your SEEDs list do QE? Did any in the 50 poorest list do QE? If QE is a form of cheating, then did the “rich” countries allow only themselves to do QE? In effect, have the “rich” countries fixed the game – even if only to their future detriment?

    • Barry:

      This article is about global numbers, so all countries, not just the SEEDS list of 21, are included.

      Of course, individual countries vary a lot. My “universe” isn’t entirely rich developed economies, though these do predominate. Brazil, Mexico, India and South Africa are included, and how one classifies say, Russia, China or Saudi is a matter of opinion.

      QE has been run by the Bank of Japan, the Fed, the European Central Bank, the Bank of England, and a few smaller equivalents. It’s a developed world phenomenon, or “gimmick” if you prefer. Poorer countries probably couldn’t get away with it – they’d be accused of printing money, or monetizing debt; their exchange rates would fall; their cost of borrowing would rise; so QE wouldn’t work.

      Like so much else in finance, it’s reputational. The ECB can and has run QE – a sovereign Bank of Greece probably couldn’t, without crashing the drachma if they still had it. The ECB is considered “safe” – Greece alone wouldn’t be.

      The irony, of course, is that reputations can become out-dated, or can be simply wrong. Japan is monetizing debt – the BoJ has already bought getting on for half of all JGBs outstanding, using money newly created for that purpose. If an emerging world country tried that, it’s currency would be trashed. Likewise, GBP is still regarded as a blue-chip currency – but my reading of the UK fundamentals is so bad that I wouldn’t touch GBP investments with a barge-pole.

  4. Certainly interesting. I see you mention the collapse of WESTERN civilization. So the curves above just apply to the western nations? IMO there can be no doubt we will collapse our techno industrial dynasty so these curves will soon reach the point of logical impossibility, since they represent real goods and services, not hypotheticals.

    • Well, “Western” civilization collapsing is what people are debating – and the Western nations have been dominant economically (and hence politically and culturally) since the 1700s, and arguably back as far as the 1500s. The question now is whether Western dominance is weakening – it is, proportionately at least – and whether this presages collapse. My view is that it probably does.

      I was part-way through an article on this when I discovered the internal mathematical logic that seems to drive debt and GDP. If true, this has profound implications – which is why I have published it.

      If we know where debt and GDP are going – and if, as it seems, booms and busts are just “noise” around trends – then we know very much more than we thought we did.

  5. Hi Dr T. This guy is saying much the same as you & it’s even in a mainstream news portal – http://www.thisismoney.co.uk/money/bigmoneyquestions/article-4474014/Can-avoid-financial-crisis-STEVE-KEEN-answers.html (unfortunately, due to a lack of interest, at least 99% of the population here in the UK probably don’t know it even exists) I thought he really explained what can often be a confusing subject quite well.

    I reckon, as the ‘old Western’ countries continue to lose their competitive advantages vis-a-vis the rest of the world, all this voodoo economics will only delay the inevitable. As you say, by selling off our assets, we’re effectively stealing off our future selves & this is accelerating because the diminishing returns are also compounding; our quality of life will visibly plummet once the fig-leaf of borrowing that hides it today is no longer available.

    As Asia continues it’s ascendancy, Europe (the UK at least geographically included whether it likes it or not) will be reduced to a series of historical theme parks showcasing bygone civilisations & cultures. The economy will then be mainly dependent on tourism, like Africa with it’s game parks. That will be a massive irony, given the visitors will be paying back the neocolonialism we inflicted on them and often still do today. Once our elites have finished the firesales of national assets going on now & there’s nothing left for foreign debt-holders to strip, we will be a nation of glorified servants surviving by entertaining tourists – as Mark Carney pointed out, we already rely on the unwitting kindness of strangers. There must be a limit even to the number of empty shoddy new-build apartments that can be thrown up in the main cities to sell to the new Asian middle-classes & when they find better ways of storing their savings, we’ll all be Greeks. An important distinction though is that many more Greeks own their own homes, whereas here a serious % of the population will be jobless, homeless & by then have no social safety net in their own country.

    • I go along with a lot of this, except in one respect. What your scenario implies (unless I’m mistaken) is a gradual decline, and I can think of several reasons why this might not be the case.

      Take a country that runs a perennial current account deficit, and habitually covers this deficit by borrowing, and/or selling off assets. Each new debt creates outward streams of interest, and each asset sale creates outward flows of profits, to the extent that the profits are not retained for reinvestment. So the current account deficit is self-propelling, and all the while the debt ratio keeps rising.

      Then, probably quite quickly, overseas investor attitudes change. They’re not willing to go on lending – or, at least, demand higher interest rates which the massively indebted borrower cannot afford. The inward flow of investment capital becomes an outflow. The currency goes through crisis devaluation – this ought to make exports more competitive, but won’t unless you’ve something you can export more of, but it certainly makes both essential imports and component imports much costlier.

      At this point, the economy falls apart – and, whilst a country controlling its own currency cannot “go bankrupt” in that currency, the currency itself can crash, having much the same effect. The name of this process is “currency crisis” – and, this time, neither a multinational rescue nor raising interest rates is going to work.

      Once this has happened in one large Western economy, creditors lose heavily, and the general climate sets towards higher rates, which heavily indebted countries cannot afford. So what happens is a domino effect. This is how I see this unfolding, if one major Western economy, depending on continuous capital infusions, loses the trust of international investors.

    • Doc, could you please give your opinion on why central banks are buying stocks on exchanges in other countries? The SNB buys Apple stocks, the BoJ buys ETF’s for example. In my opinion they do this so other central banks have to step in to save the SWF or the Yen when the time comes. Making themselves TBTF in the proces, more interconnected. If i am correct, they too know what’s coming. Thanks.

  6. In answer to keepingitrealfornow’s question (about world debt), I suppose the simple answer is that it seems like a Ponzi Scheme, but no one seems to recognise it as such.

    • Yes – I’ve called it a global financial Ponzi before, and that’s what it’s become. Ponzi schemes only ever end in one way.

  7. @ Dr T – I fully agree with you – actually, believe it or not, I toned down my scenario because I felt what I saw as the reality was so extreme that it wouldn’t be taken seriously. Also daily existence seems to be defying gravity – who would have bet Japan would be heading into a 3rd lost decade & none the wiser on economic policy, yet still be one of the best rated credit risks in the world?

    The rentierism in the UK currently seems so precarious that it has to collapse soon, but there’s a lapse period (I think we’re still in now) that is due to human cognitive bias in acceptance of change. For example, take the train from London to Oxford & it’s full of the Asian elite’s kids studying there because their parents are still under the impression that the education here’s the best in the world. Once they die off, this colonial mentality will no longer save the UK, aspiring Asians will realise that their kids will have a better quality of life closer in Oz, even ignoring the insult of the current rabid xenophobic climate here.

    I have relatives in the Antipodean & when you go there for the first time it’s shocking how Asian it now feels there, so whatever your background, I would put my money on there being the future.

    • I remember someone telling me that, in order to get a loan from a bank, “you have to prove to the bank that you don’t need it”. The truism there is that there are many good reasons for borrowing – but borrowing just to carry on living beyond one’s means is not one of them.

      Where the UK is now is that it needs c£100bn of foreign capital inflows per year. To get this, it has to prove that it’s a safe borrower. This is becoming an ever harder sell – debt rose sharply last year, productivity is weak, manufacturing and other “internationally marketable” output keeps declining (in absolute, not just in relative terms), prosperity is under severe downwards pressure (with one in three households now struggling to make ends meet), and the much-needed rebalancing of the economy from speculative to creative output isn’t happening. I keep waiting for these issues to be tackled, but short-term profit considerations remain dominant. My big hope now is that the penny will drop that the additional independence (of mind, at least) implicit in “Brexit” will drive a change of approach – but I simply see no sign of it yet.

      Theresa May is a big improvement on Cameron, whose idea of squaring the current account circle seemed to be limiteed to putting out the red carpet for China.

  8. A current craze in the economic sections of the media at the moment seems to be debate on the cause(s) of the low productivity in the UK relative to our peers with respect to business in general.

    Perhaps this anecdote is illuminatory with respect to that point: a guy from my local/obligatory water company came to unblock my drain, he was here for half an hour in total solving the problem, but their current procedure gives an insight as to why productivity in the UK is so poor. What needed doing was just lifting a couple of manhole covers to locate the blockage, then pushing a rod down the pipe to break it up, which took only seconds – seriously, I’ve had longer sneezes. Yet to cover his arse, he had to spend the other 29 minutes, however many seconds, putting up protective barriers around the holes, (there was nobody around except him the entire time !) taking photos to prove it, then immediately removing them to get access to do the actual job. That was topped off by the bureaucratic piece-de-resistance: sitting in the van afterwards on a laptop filling in a form/report about the whole experience. You have to see this to believe it.

    I don’t understand how T. May is an improvement on Cameron, the only significant difference discernable to date is a hatred of foreigners; looks like just another facet of the neoliberal prism?

    • Yes, this kind of thing is all too typical – though the private sector does it as well.

      The suggestion that Mrs M is better than David C is more hope than observation so far.

      His only solution to the really big problem – relying on overseas investors to finance a lifestyle that Britain isn’t earning, to the tune of £100bn annually and rising – was to grovel to the Chinese. They were polite, of course, but probably contemptuous. Then he annoyed the Europeans by hijacking a summit that really needed to discuss migration, and forcing it to discuss a selfish list of “reforms” instead – they didn’t even bother to be polite about it. Before that, he angered the Americans by breaking ranks and signing up to the AIIB, against the express wishes of the United States.

      Let me put it this way – when you have a £35bn trade deficit, a net income outflow of £60bn on top of that, and a level debt now comparable to that of Greece (indeed, very arguably higher), it is not a good idea to go round annoying people…

  9. I thought all water companies in the UK were privatised decades ago?

    Also, please explain what you mean by we could be in a worse debt state than Greece – private (household) debt, state or total …..& if so, why aren’t we also on the rack being flayed slowly by the German-led, Austerity Inquisitors? [ the current day equivalent of pound o’ flesh bailiffs ]

    Is it because UK govt. bonds are still selling out there on the world marketplace for now?

    • According to the BIS, as at end-September 2016, UK debt was 283% of GDP (government 119%, households 88% and private non-financial corporations 77%). This was up sharply, from 265% at end-2015.

      The number for Greece remains higher than this, though not by much – 296% of GDP, slightly down from end-2015 (298%) and end-2014 (300%).

      But the UK has a big inter-bank or “financial” sector, not included in these BIS numbers. The latest number I have for UK financial sector debt is 183% of GDP in 2014. This would put the total UK number at around 465% of GDP.

      A debt ratio (ex-financials) of 283% is not in itself lethal. The rate of increase during the first nine months of 2016 – an increase of 18% of GDP – is worrying, but may be accounted for by the slump in the exchange rate, pushing up the GBP value of non-GBP debt.

      But the UK has a serious current account deficit – last year, £85bn, or 4.4% of GDP – which makes balancing foreign capital inflows (of equity or debt) imperative. This is what Mark Carney meant about dependency on “the kindness of strangers”, though of course it is really calculation, not “kindness”, that determines investor decisions. The C/A deficit is no longer a trade deficit offset by a positive balance of income – the net income account, too, has turned sharply negative, reflecting prior borrowing and asset sales, which create outward flows of interest and profits. Last year’s C/A deficit was trade -£37bn, income -£48bn.

      Taking this, plus overseas investors’ forex losses (almost 20% on GBP investments during 2015), plus weak productivity, plus “Brexit”, a risk exists of foreign investors confidence eroding.

    • P.S. Before anyone asks, the BIS number for UK government debt, at 119% of GDP, is significantly higher than the government’s published number.

      But the UK has always published two definitions of government debt – its own, and a higher number “on the Maastricht Treaty defiinition”. The latter is the internationally-comparable number.

  10. “Again, a fascinating implication of this finding is that GDP, like debt, rises at a constant rate seemingly dictated by internal mathematical logic.”
    I read somewhere about this long term trend – i believe it goes back a long way. The explanation suggested was that this is the rate of human learning & inventiveness – we can achieve a 3% p/a increase improvement, in the efficiency, quality, desirability, of all our technologies, taken together.

  11. The red columns are SEEDS projections out to 2022, and the superimposed black line is an exponential progression at a constant rate of change.

    So you are estimating that the credit impulse from China over the last 7 years will continue for the next 5 years? There have been little credit impulses (stable debt/GDP ratio) in the U.S. or U.K. since ~2010.


    • Well, it’s quite normal – certainly for an analyst – to make forward projections, and these are not extrapolations but are based on a mix of trends. These are projections, not forecasts – and I do question whether China can go on borrowing at anything like recent rates, these being questions that projections are designed to pose. The US ratio is essentially flat, but UK indebtedness is rising rapidly, from 265% to 283% of GDP in the first nine months of 2016 alone.

  12. Hi Tim

    Thanks for yet another very interesting article.

    A couple of points occur to me. Firstly your projection of GDP at 3.2% is little more than stall speed (3%) assumed by the IMF; it shows growth very anemic indeed so this is not good news in itself.

    The second point is about your “internal mathematical logic” which I struggle with a little. Are you saying that this is an exogenous factor? As I see it it is rather an endogenous factor; debt is one of the independent variables which drives the dependent variable of GDP. Is this rather what you mean or have I got this wrong?

    I agree with your point about futurity but there has to be a point at which we cannot bring forward spending any more or we reach some form of satiety. At this point I can’t see that the Ponzi can stay aloft any more and must collapse.

    • Thanks Bob

      First, on GDP, and of course you’re right. The IMF (which pretty much speaks for the consensus) is looking at growth of roughly 3.4% going forward, but of course population is growing at around 1% annually. Then, of course, projected growth is after adjustment for inflation – and, even if inflation is recorded and projected accurately (a big “if”), some costs rise faster than inflation, and are further influenced by the ageing society. This certainly hasn’t, in any way, been the rebound recovery which normally follows a recession.

      By “internal mathematical logic”, I’m wondering whether some equation, or simply trend, pushes debt upwards. It might not, as of course these are global numbers, assembled from national figures – but this does not rule out some internal process, as debt flows between countries. It needs further examination – but it is interesting, at the very least, that this rate of expansion is so consistent, even through cycles like slump-and-recovery.

      Yes, the mortgaging of futurity must snap at some point. For one thing, is is creating internal tensions, such as the disadvantaging of the young.

      (Note: debt is reflected in asset values, so where debt rises, market asset values, such as property, rise too – and this obviously favours those who already own assets, at the expense of the [generally younger] people who do not).

    • Hi Tim

      Thanks for that.

      I’ve now watched the video posted by Savant and Steve Keen may provide a possible explanation.

      Debt expands most during a boom and on the basis that the good times continue. When the boom turns to bust debtors struggle to repay. When the next boom takes off there is still a residual debt from the previous boom that has not been paid off. Therefore each boom tends to start off with a higher initial platform of debt and this is what causes the ratcheting up of the debt level over time.

  13. Well, it’s quite normal – certainly for an analyst – to make forward projections,

    OK. But don’t take your forward projections too seriously. The first decline marker of the January 2013 Perfect Storm:

    – Energy price escalation. The inflation-adjusted market prices of energy (and, most importantly, of oil) move up sharply, albeit in a zig-zag fashion as price escalation chokes off economic growth and imposes short-term reverses in demand.

    Failed forward projection.

    Do you want to mark to market the second decline marker, agricultural stress, next?

    • Obviously, these are long-term projections, which cannot possibly be assessed on a three-year sample. Weak energy prices are wholly consistent with a floundering economy.

  14. Hello Tim,

    I’m interested to know how a soft default, and if that fails a hard default, will affect people at the individual level?

    Also, what could someone do to reduce their risk to a nationwide default? I’m based in the UK and am currently a young professional with no assets. Is it worth parking my savings in foreign currency or assets? Is it worth putting off purchasing a UK house? From what you write it seems the whole western civilization is rather shaky so some clarity on what suitable choices individuals should make would be greatly appreciated.

    Thanks, Andrew

    • Hello Andrew

      Thanks. You’ll appreciate, I’m sure, that I can’t give specific advice, and so much depends upon individual circumstances. But I can give you some general things to think about.

      First, diversification is a good idea, meaning that holdings in more than one currency make sense. My personal view is that the UK is heading for a “sterling crisis” – this has happened before, in the late-60s and mid-70s, though at neither time were the relevant figures as bad as they are now. So holding other currencies is a good idea. Banks offer foreign currency accounts, which seem the best way to manage this.

      As for house prices, these often defy all logic – for instance, why have UK house prices remained so high, with real wages falling since 2009, and one household in three now struggling to make ends meet? Early indications seem to be that house prices may have peaked. We live in an era where asset prices generally have been inflated by cheap credit.

      As a young person, the best investment you can make is in education, and specifically in skills that are recognized and marketable internationally. Society is dividing, into a minority that can gain from globalization and its demands for skills, and a minority left behind by change – so the focus needs to be on getting yourself into the favoured, skilled minority. These are sometimes called “the anywheres” (because they have transferable skills) and “the somewheres” (who pretty much have to stay put).

  15. Hello Dr Morgan,

    According to journalist Ambrose Evans-Pritchard of the Daily Telegraph (15 May 2017) our energy problems have been solved by modern battery technology. He asserts that “Petrol will vanish in eight years” according to recent research.

    All our problems will be solved and diesel/petrol cars given up for good!!!

    The cost of oil and fossil fuels will plummet!!

    • I’ve not read this – could you supply a link? – and have the highest regard for AEP. But is this his opinion, or others’? It seems pretty unlikely to happen in anything like that time-scale.

    • http://www.telegraph.co.uk/business/2017/05/14/petrol-cars-will-vanish-2025-says-us-report/
      It’s premium content in the DT, but the report that AEP comments on is available here:
      https://www.rethinkx.com/transportation ( report by a Dr. Seba, Univ. Stanford )

      For my tuppenceworth, I am not convinced. The report starts off :
      ” Savings on transportation costs will result in a permanent boost in
      annual disposable income for U.S. households, totaling $1 trillion by
      2030. Consumer spending is by far the largest driver of the economy,
      comprising about 71% of total GDP and driving business and job growth
      throughout the economy “.

      In order to swallow that, I need to get my prescrption of red pills renewed.

    • Batteries are not energy sources. Conventional Oil extraction peaked in 2006 so there is pressure to replace diesel/petrol cars with electric cars. However virtually all the electricity needed for this transition will be generated by gas, coal and nuclear power stations with only a tiny proportion coming from renewables. I give electric vehicles 20 years at most before gas and coal extraction also peak.

  16. Obviously, these are long-term projections, which cannot possibly be assessed on a three-year sample. Weak energy prices are wholly consistent with a floundering economy.

    Obviously, your “city” clients long oil and aggies got clobbered without stop losses. What is the “floundering” of a 3.2% exponential growth economy?

  17. Growth adjusted for borrowing of 1.8% pa. Global population growth of 1.1% pa. Roughly how much of a per annum effect is there from Energy Costs increasing? Assuming 1% per annum and the would is heading backwards for the first time since the Industrial Revolution…

  18. the would (sic) is heading backwards for the first time since the Industrial Revolution…

    That’s BS not a fair reading. 2016 growth of 3.2% less population growth of 1.1% equals 2.1% per capita growth. 2000 growth of 3.2% less population growth of 1.3% equals 1.9% per capita growth. The 2016 economy is growing faster per person than the 2000 economy. Then you can join Morgan’s make believe world of GDP-adjusted growth .

    It is silly not to analyze balance sheets. For instance, US households have just as many dollars in savings accounts as is owed in mortgage debt. Does that change your opinion about GDP-adjusted growth?


    What’s the equivalent UK data?

  19. Hello Dr Morgan,

    Further to your request on Ambrose Evans-Pritchard’s article on the predicted transport revolution, I can confirm that it appeared in the business supplement of the Daily Telegraph on Monday 15 May 2017. His report claims that petrol and diesel vehicles will vanish in eight years time. He claims that the transition will be quicker than the transition of horse drawn vehicle to petrol driven transport in the 1930’s. Unfortunately I do not have a web link to this report.

    However, If you type Dr Seba into Google it will give you video presentations of hi work.

    Ambrose Evans-Pritchard is quoting heavily from work carried out by Professor Tony Seba of Stanford University. The reasoning behind their argument is recent developments in battery power which make driverless, electrical vehicles more efficient. He claims that shortly a rapid transition will occur that will surprise us all.

    Do you or anyone else have any knowledge of recent improvements in battery life and cost?

    • Thank you. Obviously it’s difficult to comment having not (yet, anyway), read Dr Seba’s book. Moreover, and as I always do, I respect his opinions even if I don’t necessarily agree with them.

      This does put me in mind of a tech presentation a few years ago when someone from the tech industry said that, if cars had progressed as rapidly as computers, we’d be able to drive as far as the moon on a single gallon of gasoline – to which a wag replied by asking “and crashing how many times on the way?”

      This isn’t the first such prediction. My take on it is different. To be sure, vehicle technology has pretty much ossified – an i/c engine with four wheels on rubber tyres is a basic format contemporary with the biplane, so change is overdue. But I wonder whether ‘ultra-quick transition’ is a view based on technology and mathematics rather than physics. In mathematics, extrapolation can be seductive, and assumptions for technology often make linear assumptions.

      As an illustration of technology within physics, take warship radar – there has been huge progress in sensor technology and processing, but radar scanners still have to be as big (or bigger) than before, and sited as high (or even higher) than ever, because scanner size and height are governed by physics, not technology. I learned this from meeting the people who actually design these things, and the lesson about technology within physics made a deep impression.

      Something similar is likely to apply to batteries (and, for that matter, to renewable energy). Technology progresses within an envelope set by physics – so, in one sense, what tech progress does is reach the physical limits more quickly. So, here, I’d point out that moving a given weight a given distance has a minimum energy requirement. I can readily accept that we can reduce the energy function in this equation through tech progress and efficiency – but the scope for achieving this has limits in the laws of physics, so is not infinite.

      We’ve always had these enthusiasms – back in the 1960s, many believed that future trains, ships, aircraft and even trucks would be powered by little nuclear reactors. In reality, this never got beyond the storylines of Thunderbirds.

      Then there is the question of scale – the thesis about phasing out oil-driven vehicles predicates a vast expansion in electricity supply and, apparently, without using nuclear or fossil fuels to generate it. The energy used in transport (aircraft as well as vehicles) is huge – for example, the energy contained in the full tanks of a single 747 equates to the totality of electricity output from Sizewell B for 90 minutes – and how many 747-equivalent fuel loads are needed each day?

      Extending this to the world vehicle fleet would require a truly gigantic expansion in (presumably) solar and/or wind power – which would in turn require huge quantities of resources, including metals, plastics and chemicals, all of which require energy inputs (often very intensive) to get them to where they’re needed. Copper, for instance, is typically extracted at 0.2% concentrations, so you have to shift 500 tonnes of rock for 1 tonne of copper, and this is extremely energy-dependent.

      Renewables have made huge strides, but still account for barely 3% of global primary energy consumption. Growth rates as percentages are impressive, but growth from a low base often is – as the base number expands, rates of progress necessarily diminish. Others have said that ‘nobody has yet made a solar panel or a wind turbine without using fossil fuel energy in the process’ – there may be exceptions, but the basic principle still applies.

      So, whilst I don’t doubt that this kind of transition will happen – and has to – I question some of the more enthusiastic claims for how quickly, and at what cost, it can take place.

    • If you apply a little common sense to that … you would realize that is impossible.

      Pritchard is just regurgitating a press release from the Ministry of Truth — which is tasked with getting hopium into the brains of the people to prevent them from panicking over the fact that we have run out of cheap to extract oil

    • Renewable energy ‘simply won’t work’: Top Google engineers

      Two highly qualified Google engineers who have spent years studying and trying to improve renewable energy technology have stated quite bluntly that whatever the future holds, it is not a renewables-powered civilisation: such a thing is impossible.

      Both men are Stanford PhDs, Ross Koningstein having trained in aerospace engineering and David Fork in applied physics. These aren’t guys who fiddle about with websites or data analytics or “technology” of that sort: they are real engineers who understand difficult maths and physics, and top-bracket even among that distinguished company.

      Even if one were to electrify all of transport, industry, heating and so on, so much renewable generation and balancing/storage equipment would be needed to power it that astronomical new requirements for steel, concrete, copper, glass, carbon fibre, neodymium, shipping and haulage etc etc would appear.

      All these things are made using mammoth amounts of energy: far from achieving massive energy savings, which most plans for a renewables future rely on implicitly, we would wind up needing far more energy, which would mean even more vast renewables farms – and even more materials and energy to make and maintain them and so on. The scale of the building would be like nothing ever attempted by the human race.

      In reality, well before any such stage was reached, energy would become horrifyingly expensive – which means that everything would become horrifyingly expensive (even the present well-under-one-per-cent renewables level in the UK has pushed up utility bills very considerably).

    • The same utter rubbish was touted about hydrogen cars. Complete tosh. Electricity, like hydrogen is NOT a primary energy source. Electricity like hydrogen need to be created first. How do you create electricity or hydrogen in the first place? The answer is by burning oil, gas or coal; nuclear fission, geothermal or from the sun directly like wind, solar,

      Therefore comparing a petrol engine to an electric motor is complete false because it deliberately ignores how the electricity was created in the first place.

    • Ed

      Indeed. The appropriate measurement is primary energy, which forms the basis of my models and commentaries. Everything else is conversion chains.

      So, burning petroleum in a vehicle engine, or burning it (or otherwise generating electricity) in a power station and using it to drive the vehicle, all need to be traced back to the primary source for purposes of comparison. At that level, we have (a) fossil fuels, (b) nuclear, (c) hydroelectric and (d) renewables – and that’s it.

  20. Hello Dr Morgan,

    Thank you for your detailed and thorough analysis of the situation regarding electric vehicles and the rate of progress in which they may replace deisel and petrol vehicles. I fully understand your view and think it is correct.

    My consideration was based on your book regarding energy usage and my experience with which the steel industry has been devastated.

    I was employed for 30 years in the South Wales steel industry and the speed at which it was closed down has been breathtaking.

    Twenty years ago experienced steel experts would not have believed that such changes would take place. The same economic forces have caused similar results in the USA and Europe.

    Economic forces have a will of their own.

    • I think it’s important to realise that electric cars have nothing to do with renewable energy sources. The point being made in Dr Seba’s video is that, with our current energy sources as they stand, large economic and energy savings can be made by converting to electric vehicles.

      The Government’s plan to electrify the London to South Wales railway is an example of this. Rail systems in Europe rely extensively on electric power and are far more efficient.

      The key issue here is whether batteries can be improved to such an extent that they hold sufficient power for long journeys. What Dr Seba is saying is that if this is possible the future for diesel and petrol is bleak.

    • Kiwirail to dump electric trains and replace with diesel on North Island main trunk line

      Kiwirail has announced plans to ditch its North Island electric rail fleet and replace with diesel freight engines – a decision derided by environmentalist and Opposition MPs.

      But chief executive Peter Reidy says the switch will improve reliability and efficiency for Kiwirail’s customers.

      Plans to replace 16 electric trains – each about 30 years old – which operated between Hamilton and Palmerston North would see diesel locomotives begin operating in phases over the next two years.

      Reidy said KiwiRail was essentially running “a railway within a railway” by having the electric section.

      “Imagine having to change planes at Hamilton and again at Palmerston North, just to fly from Auckland to Wellington. That’s not efficient, it’s more costly and ultimately delivers a less reliable service.

      “The doubling up of service facilities, inventory, training and maintenance required with two separate systems on the line adds to the inefficiencies and unreliability,” he said.

      The trains were breaking down on average every 30,000 kilometres, he said. It was well below the target of every 50,000km.

      “This is an important move for New Zealand as without a reliable and efficient service, our customers will not move freight on rail and every tonne of freight moved by rail delivers a 66 per cent reduction in carbon emissions from road. That’s critical for our customers, and for the country,” he said.


  21. UK’s GDP is certainly not growing exponentially. If you download the official GDP numbers for the UK into a spreadsheet and plot a trend line you will notice a downward pointing line which crosses the zero line within 20 or so years. If you do the same with the shadow GDP numbers it is even worse.

    • The UK economy is in real trouble, and now depends on foreign capital inflows to stay afloat. Almost one third of the population (19 million people) are struggling to get by, and real wages have been falling since 2009. Debt is now 283% of GDP – up from 265% in nine months – or about 465% if the inter-bank or “financial” sector is included. On top of this, private sector pension funds have a deficit of £975bn, and public sector pensions are unfunded to the tune of about £1,500bn. The most immediate problem is the current account deficit, at 4.4% of GDP, which has to be financed by asset sales and/or overseas loans.

  22. Tim – although there is in effect nowhere to hide – I am slowly moving funds out of the banks and into savings accounts run by the NS&I.

    Despite their fully Government guaranteed status they could be easily seized in the event of a crisis- but at least I won’t be rushing to get my money out of a failing bank.

    I’m hoping to have nearly all of the funds out – barring small balances – by the end of this year. I hope that there’s no collapse before then.

    I was actually wondering where else I could put some of the funds – but even if I bought a house for rental the Government could seize it. Perhaps place it in Switzerland. My Dad left an estate which I control which is needed provide care for my mentally disabled sister.

    I’m not sure how we’d cope if the Government took it all. I would expect many are in the same position.

    • Obviously, I cannot go beyond general principles here, but thinking through the overall picture might help.

      Taking together trade (£37bn) and net income (£48bn), the UK has a deficit of £85bn (4.4% of GDP) on the current account, and this has to be covered by capital inflows, either investment (including reinvested profits) or debt. Individual years needn’t match, but, over time, they must. The 10-year total, at constant 2016 values, has been £630bn, and outflows of income on this cumulative capital inflow have, obviously, worsened net financial income. Now David Cameron’s “grovel-fest” for the Chinese starts to make sense!

      So the big risk is loss of foreign investor confidence. They might decide that the current account deficit is simply too big, or that the UK has too much debt, or that consumers aren’t going to be able to buy enough of what is produced by businesses they own in Britain. Either way, the risk is that GBP slumps. This is called “a Sterling crisis”, and happened in 1967 and 1976, the latter requiring an IMF rescue. If this happens, interest rates might have to rise (bad news for property), and the GBP value of foreign loans will rise, worsening the debt position. Import prices would increase, pushing up inflation.

      On the optimistic side, anything denominated in, say, EUR or USD would rise in Sterling value. The banking sector should be OK, except where excessively leveraged to the UK mortgage market. NSI should be safe – it must be honoured, if the UK is to retain credibility.

      So, if it was me, I’d think about NSI, and a foreign currency fund in a big and strong international bank (HSBC comes to mind). For GBP deposits in UK banks, I’d expect the guarantee to be honoured. Companies producing things that people need (like food) should be much safer than those producing things that people merely want. Property prices would be at risk, not surprisingly, if you compare house price rises to incomes in recent years – and it seems that the rise in house prices has peaked, though 2 months’ evidence isn’t much.

      Finally, taking professional advice could be a good idea.

  23. Thanks Tim. I have mentioned the perilous state we’re in on posts in the Guardian – but I often just get a rude replies.

    A couple of days ago I stated that our economic problems transcend any electioneering – bickering by our politicians – but I only got around 5 thumbs up plus some disparaging comments. Perhaps Guardian readers ain’t what they used to be (excuse the grammar)

    I am of course lucky to have some assets – but they’ll be needed long into the future as I can only see the cost of care rising.

    • Well, I think it’s fair to say that the general public don’t understand the economy, and politicians are doing nothing to enlighten them. What is more worrying is my suspicion that the economy is not understood even in government.

      When you think about it, Britain has had two decades of economic idiocy. First there was Blair and Brown, committed to “light-touch regulation”, unable to grasp the concept of a debt-fuelled bubble, spending all and more of the tax proceeds of the bubble as though it was permanent, then thrown into (understandable) panic by the banking crash.

      Then there was the coalition, whose only ideas were spending cuts, and opening up public services to private profit.

      In fairness to Cameron, he only had a slender majority, but his ideas of economics seemed to go no further than grovelling to the Chinese, whilst annoying the Europeans and the Americans, and he was too busy mishandling referenda anyway. So the British economy has been on autopilot for twenty years.

      British citizens will have to hope that Theresa May is prepared to ditch the wilder excesses of neoliberalism – and hope, also, that it’s not too late.

      Finally, don’t be too surprised if Corbyn does a lot better than the opinion pollsters expect – Corbyn supporters don’t tend to respond to polls – though I still think he’ll lose. He’s right about many of the questions – but, I think, wildly wrong with many of his answers.

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