#108: SEEDS goes public

Dear reader

As you will know if you are a regular visitor, surplus energy economics is an interpretation which says that the economy is, fundamentally, an energy system, not a financial one. More specifically, it is a surplus energy system, because, whenever energy is accessed, some energy is always consumed in the access process. Our prosperity is the surplus, or difference, between the amount of energy accessed and the quantity used up in getting it.

Where the surplus energy approach differs most fundamentally from ‘conventional’ economics is in its recognition that there are two economies, not one.

The first of these is the ‘real’ economy of goods and services, labour and resources, and this is an energy system.

In parallel with it is a second or ‘financial’ economy of money and credit.

Conventional economics goes wrong in thinking that this ‘financial’ economy is the entirety of our economic system. In fact, it is in a subservient relationship with the energy economy. This ought to be obvious. After all, money has no intrinsic worth. It commands value only as a “claim” on the output of the real economy.

Back in 2013, when Life After Growth was first published, I was uncomfortably aware that it would be hard to put numbers on this relationship. This is where the SEEDS project – the Surplus Energy Economics Data System – began. One of the biggest challenges has been to use monetary units to calibrate the ‘real’ economy which is the substance behind the ‘financial’ economy with which we are all familiar. This is one of the reasons why developing SEEDS has taken so long.

During this period, I have become ever more aware of a striking and dangerous reality in our situation. This is the way in which the ‘financial’ economy has become estranged from the ‘real’ economy which it is supposed to represent.

The real economy began to decelerate in or around 2000, but we have been unable or unwilling to accept this. Instead, we’ve sought to fake a “normality” of growth by ‘mortgaging the future’.

At first, we did this by creating an ever larger mountain of debt. This led to the global financial crisis (GFC) of 2008.

So large had debt become by then that the only way in which we could co-exist with it was to make it cheap to service. This is where “monetary adventurism” began.

We have toyed with some extremely silly ideas since then, such as ‘helicopter drops’ of money, negative interest rates, and the banning of cash.

The powers that be haven’t been sufficiently irresponsible to adopt some of the more extreme expedients. But what they have done has been bad enough. Ultimately, we have adopted a policy of ultra-cheap money, slashing policy interest rates to all-but-zero, and using vast amounts of newly-created money to drive asset values up, and yields down.

Only now are we becoming aware of quite how disastrous this policy of ultra-cheap money really is. Naturally, it has accelerated the pace at which we borrow – after all, why would you not borrow, when you are being paid to do so by interest rates which are negative (they are less than inflation)? And why would you save, when the real value of your savings falls year on year?

But the downsides of monetary adventurism don’t end there. I’ll pick just one of these downsides for special mention here. It is pensions. By driving returns on capital down into negative territory, we have destroyed returns on capital and, with them, our ability to provide for retirement. For all but a tiny minority of the very wealthiest, it has become impossible to save enough to give us a decent income in retirement.

The naïve answer to this is that we needn’t worry about pensions, or other future issues like paying back debts, because we have the comfort of the hugely inflated values of assets such as stocks, bonds and property.

This ‘comfort blanket’ is foolish in the extreme – because the only way we can turn these assets into money is by selling them to each other.

In politics and society, there are two things which we must hope that the general public never finds out. The first is what has happened to their ability to provide for retirement. The second is that selling houses to each other cannot get them out of this predicament.

The SEEDS system – in its SEEDS Snapshots version, freely available to the public – can now be downloaded from the resources page. The SEEDS Professional version will be announced at a later date.

We will doubtless have many discussions here about what SEEDS does, how it does it, and what it can tell us.

For now, though, such discussions can wait. Please download the very first published version – and enjoy it.

 

Yours,

 

Tim Morgan

 

 

 

20 thoughts on “#108: SEEDS goes public

  1. Excellent work , Dr Tim,
    Excellent.
    I can see that there are many, many, man hours of preparation have gone into this.
    Your hard work is appreciated. Thank you for sharing.
    It will take me some time to go through this and to digest it all.

  2. Good stuff, Tim! However you are still in the dark regarding true [vs mainstream] economics. According to Steve Keen the mainstream doesn’t even consider money, let alone resources, in its theories. He is now on board with factoring in resources as are the most recent ideas from MMT proponents [which includes me]
    Your remarks about pensions leaves out the fact that the national governments, bring monetary sovereign, can spend without risk of bankruptcy, in theory. Private pension schemes are badly hurt by our deflationary environment, but Federal pensions are not at all affected, and each payment can be made indefinitely into the future. The Fed will probably be called upon to bail out failing private pensions or risk armed rebellion. I think even if such news is perilous if the public becomes aware, the politicians need to understand enough to get them to act. Self preservation will be a big motivator here!
    Here’s Steve’s latest talk, to the Greens:
    http://www.patreon.com/posts/green-party-in-14754913
    I believe you will mostly agree with him.
    John

  3. The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated. Growing the debt in the economy significantly faster than the economy itself grows seems to have developed into a way of life in Canada.

    Canadian total (household, business, and all levels of government) debt numbers as of the end of June, 2017

    https://owecanada.blogspot.ca/2017/09/canadian-total-household-business-and_19.html

    • Indeed so. This addiction to borrowing has become almost universal. Low interest rates are doing enormous damage, but the authorities are reluctant to raise rates for fear of the other forms of damage that would ensue.

      You (and others) might find this link useful. It is the BIS page from which you can download quarterly debt data for all countries:

      Credit to the non-financial sector

      Please note that the headline number – for Canada, 296% of GDP – includes government at market value. This is 79%.

      But this is what bonds trade at – it is not what the government owes. For that, you need the nominal figure, which is 72%.

      So the ratio of debt owed by Canadians isn’t 296%, but 289% (=296% + 72% – 79%).

      I mention this because amounts owed are used in SEEDS.

    • You are very welcome, Bob

      I can tell you that, when using the system, it is proving to be very powerful. I will aim to demonstrate this with some single-country studies.

      Also, I’m pretty sure that SEEDS is unique. If this is so, those of us who use it have insights and forecasts denied to those who do not.

  4. A lot of people know it, or think they know it. Putting a finger on it was, and still is, a lot of work. May your message spread and help people prepare for what is coming, whatever that is. I’m buying physical gold and silver, for many years now. Thanks for all your work doc.

  5. Wow, this is a datafest!

    Do you have the intention to publish metadata definitions for the snapshots?

    In 2.2 Energy Economics, can you describe the derivations of
    1. EROEI consumption
    2. ECoE consumption
    3. Net trade effect
    4. ECoE overall

    I’m guessing 2 is derived from 1 (or vice-versa) by some kind of reciprocal?

    A suggestion: some of your terms (I refer to the cells of column A for each country) are derived purely from others within the same sheet; the complement have some dependency on data external to the sheet. Some demarcation of those two term-types could be useful.
    E.g. On my own comparatively simple spreadsheets, I embolden those figures which are dependent on external figures.

    • I’ll be publishing a lot more data-based discussion in forthcoming articles.

      I hope you will understand if I am a bit cagey about what is published – I think SEEDS may be the only system that really interprets what is happening, and I don’t want to gift the methodology to for-profit organisations.

    • One understands the amount of work, knowledge and uniqueness in this and that the IP is not to be given away tooo freely…

  6. Great Work as usual Tim. It is quite a conundrum we find ourselves in. I often wonder the mechanism behind overshoot and why it wouldn’t be recognized but here it is.

    • Thank you, JT

      I think I should tell you that my views on the situation have firmed up lately. I think we are near the end of what I now call “phase 4” in the process:

      – Phase 1 – deceleration of growth (c 2000)
      – Phase 2 – using cheap & easy credit to “fake” ‘business as usual’ (2000-08)
      – Phase 3 – crash, caused by inability to service excessive debt at ‘normal’ rates of interest (2008) (mechanism: loss of trust in banks)
      – Phase 4 – ‘monetary adventurism’ – policy of cheap money to co-exist with excessive debt (2009- )
      – Phase 5 – crash, created by ‘monetary adventurism’ (mechanism: loss of trust in currencies?)

      This is one reason for getting SEEDS on line now – because my hunch is that the current situation is running out of time.

  7. I agree Tim things are much more tenuous then people realize. Recently reports are saying China will be in peak energy this year or next. That is critical to global growth. The bubbles are a reflection of low to no growth. When organic real growth fails capital markets start inflating. Everything now is a speculative asset bubble trying to replace economic growth.

  8. Pingback: #108: SEEDS goes public | softwaremechanic

  9. Tim, it’s been one heck of a journey. Your original thinking and sheer hard graft in creating SEEDS leaves me in awe. I’m very glad that I read your book ‘Life After Growth’ when it was first published in 2013. It kinda rocked-me! And I’ve been following you ever since! Over the last twenty five years I have read a handful of books that proved to be remarkable prescient – ‘Life After Growth’ is one of them!

  10. Tim
    I congratulate your on your SEEDS accomplishment.

    I looked in some detail at China. The way I read your numbers for 2016, China’s real output is not growing at all, but their debt is skyrocketing, which leads to a GDP growth of around 7 percent. In other words, the only growth they are getting is from leverage, which has a sell-by date.

    You mentioned that you might do a few country level analyses. I nominate China.

    Thanks….Don Stewart

  11. Seconded: China, then UK please.

    Tim, could you sketch the meaning of the following (without being too explicit!) from 1.1

    Constant GDP 74,540
    Underlying GDP 46,204
    Real economy 39,548
    Constant debt 190,924

    For convenience of comparison, the figures at right are those for 2016 China (billions of RMB)

    Obviously the smaller “Real Economy” figure leads to a correspondingly scary Debt Ratio of 483%.

  12. Right, China it is. The SEEDS system makes this pretty straightforward. The only delay right now is that I’m updating for the latest IMF forecasts, and catching up on a few corrections.

    The numbers you cite are all in billion RMB. They are all ‘constant’, meaning they are at 2016 values, adjusted for inflation, so they are directly comparable with earlier and later years.

    Debt has grown very much more rapidly than GDP. Since 2006, debt has increased by RMB 3.4 for each RMB 1.0 of GDP growth. A lot of this debt boosts current activity, but at the expense of the future. Underlying GDP takes out the “borrowing boost” – this is what, SEEDS says, output would have been, or would revert to, absent the borrowing effect.

    The real economy further adjusts for ECoE – the trend Energy Cost of Energy.

    For 2016, rates of growth were:

    GDP: +6.7%
    Underlying: +3.1%
    Real economy: +2.4%
    Real economy per capita (“prosperity”): +1.8%

    You’re right about the real debt ratio. Please note, though, that debt of RMB 191tn is government + households + non-financial businesses. Inter-bank debt is additional to this – and in China is about RMB 64tn.

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