#110: Diverging fortunes


Now that SEEDS – the Surplus Energy Economics Data System – is fully functional, it is possible to review prosperity in what may be the first of a series of regular reports.

The general conclusion, which is unlikely to surprise anyone, is that the emerging market economies (EMEs) are performing far better than the developed Western nations where prosperity is concerned. What might surprise you is quite how marked some of these differences are.

SEEDS defines prosperity as ‘real discretionary incomes’, a term which requires some explanation. The starting point is GDP per capita, but two critical adjustments are then made.

First, GDP data is adjusted to eliminate ‘borrowed consumption’. Anyone can have a lavish lifestyle if he or she is prepared to go ever deeper into debt, and has a bank sufficiently accommodative to let them do so. This is precisely what many countries have been doing. The accommodative suppliers of credit have been the authorities. They started by making debt easily accessible and comparatively cheap, and have (since 2008) been even more obliging, by making credit even cheaper.

Second, the resulting ‘ex-borrowing’ numbers are further adjusted for the trend cost of energy. This cost acts as an economic rent, which means that it diminishes the incomes over which we can exercise choice (‘discretion’).  Where the individual or household is concerned, this shows up primarily in above-inflation increases in the cost of essential (‘non-discretionary’) expenditures.

The results are summarised in the table, in which the eagle-eyed will spot the first appearance of Russia in SEEDS data.

 Prosperity data, October 2017SEEDS PROsperityjpg_Page1

The table shows per capita prosperity, in local currency and at constant (2016) values, for the years 2006, 2016 and 2025. There are three columns of percentage comparisons, with results ranked by the third of these columns, which compare projections for 2025 with calculations for 2006.

Some of the results have obvious explanations. Prosperity in the United Kingdom is in relentless decline because the economy is in very deep trouble. Through-period comparisons for Australia, Norway and Canada are adverse because commodity prices, important to these economies, were close to extreme cyclical highs back in the start year of 2006.

Greece, obviously, has had a severe decline in prosperity over the past decade, but can now anticipate a very gradual recovery, albeit reversing only a very small proportion of the preceding decrease in prosperity.

At the other extreme, citizens of India continue to enjoy rapid improvement. The average Indian was 58% better off in 2016 than he or she had been in 2006, but we do need to note relative values here – in 2016, per capita prosperity (at PPP rates of conversion) was only $4,820 in India, compared with $43,700 in the United States.

China, too, continues to deliver impressive growth in prosperity, but there is a caveat here – per-capita debt is rising a lot more rapidly than prosperity. In 2016, the average Chinese citizen was 58% more prosperous than in 2006, but China also had four times as much per capita debt than a decade earlier.

The robust performance of Russia needs to be seen in context. In 2006, the Russian economy was still showing the ravages of the 1990s, and progress from here on is likely to be much more sedate.




20 thoughts on “#110: Diverging fortunes

  1. Another very interesting analysis, although I’m suffering analysis paralysis in term of knowing how to invest as a result. I am really interested to know how others are changing their investment strategies based on this work.

    • Thank you.

      You raise two issues. First, ‘analysis paralysis’. Actually, this can be simplified by division into two broad ‘camps’.

      The minority camp – to which I belong – says that the economy is really an energy system, including labour and resources, to which the ‘financial economy’ of money and credit is subservient and a proxy. If this is so, then the only value that money has is a ‘claim‘ value on the output of the ‘real’ economy. This, in turn, means that increasing claims – creating money, issuing debt, etc – in excess of real output just renders those claims destined for dilution (i.e. inflation) or outright destruction (default, market crashes, etc).

      The majority view is that the economy really is a financial system, so there’s nothing wrong with manipulating the monetary system. My only ‘health warning’ here is that this majority camp saw nothing wrong with debt acceleration (2000-08), just as it now sees no harm in money acceleration.

      On investment, sorry, but I don’t give advice. In any case, investment depends very much on the person’sd circumstances, needs, resources, responsibilities and so on, so has to be one-on-one.

    • I suppose the obvious investment strategy is to focus on oil (which must surely be due a rebound) and stuff people actually need rather than just want ..food…bricks.
      I’m just waiting on the shorts to one particular beleaguered oil company tha piled on debt in the good times…
      I’m nervous holding my money in sterling so I’m looking at changing some to a foreign currency account probably euros and I keep a bit back in gold and gold mining shares. My 1/2p worth.

    • Ken

      It may not be quite so obvious about oil, as I see it, because there is more than one factor in play.

      The most obvious one is scarcity, normally suggestive of higher prices. That scarcity is likely to make itself felt by 2020 at the latest, I suspect. The implication, then, is higher prices.

      But factor #2 is hardship. This might make it impossible to pass on higher prices. People may have to simply go without, instead. We always assume that, with items with low price elasticity (as has energy), customers grumble, but pay. But ideas on elasticity were formulated during an era of steady growth. It might be different now.

      Take airlines. Now that Monarch has gone, prices seem to have shot up. A friend was looking to book a return flight to Spain, and – with Monarch still around – found a best price of £30 return (plus extras, inevitably), with a different airline. A few days post-Monarch, the price with that same airline was now £150 (plus the same extras). Now, my friend had to travel, so he paid up. But, if he hadn’t had to travel, and was hard up, he might simply not have travelled.

      So the airlines will doubtless put prices up, and probably need to. But, will customers pay up, or not? Not, is my guess, so the higher prices might not stick.

      It could be the same with oil. If you look around at debt (and possibly rising rates), and the financial precariousness of millions, it’s by no means obvious that higher prices can be passed on without consumption falling.

      Factor #3 is costs. The trend is sharply upwards, especially capex rather than opex.

      In short, the risk factors for the oil industry – apart from cost pressures – might not be over/under supply at all, but impoverished customers.

  2. I’m glad that you have included Russia. I find Russia interesting because it is the only Nation in the top five that is a net exporter of fossil fuels. How significant this is, is not entirely clear to me at the moment but my initial thoughts are that they will be the last Nation to go into the red on your chart by virtue that they are energy independent.

    • Russia has been tricky to analyse, mainly because of past troubles. Inflation peaked at 73% in 1999, is much lower now, but the RUB has still lost 60% of its purchasing power over a decade. One can see how stability in more recent times has made VP so popular! Of course, higher oil prices from 2000 to 2014 helped, too.

      Then, FX. At market rates, a dollar cost 5.1 roubles in 1996, 28.1 in 2000 and 67 last year (it has improved of late, to about 57 RUB/$1).

      These events play havoc with modelling – let alone converting into USD for comparisons. At market rates, Russia’s GDP was $1.28tn last year – but on PPP conversion was $3.86tn. I almost always use PPP, but some of the historic numbers look bizarre if one does this.

      Still, modelling in local currency is OK so long as we do not go back too far. Russian prosperity is improving, but from an extremely low base. Net energy exports may be a huge plus for Russia. But there are plenty of negatives as well – not least low oil prices (please see my reply to Ken, above).

    • Thanks, Rob.

      You might like to know that, with SEEDS now operational, thoughts are turning to how best to present it.

      The theme is likely to be prosperity. I envisage periodic reports, each having an overview, a discussion of a SEEDS topic, and a focus on a selected country.

  3. Dear Dr. Morgan
    ‘with SEEDS now operational’
    I hate to sound like one of those ‘what have you done for me lately’ guys, but I don’t know any other way to explain my concerns. You treat energy as a rent, which is to be deducted to deduce the ‘real’ situation. A similar argument might be made for health care. For example, in the US, health care costs have increased from around 4 percent of GDP to around 18 percent of GDP over the last decades. But we have little to show for the increased expenditure. We have improved the survival rate from chronic diseases, but have not lowered the incidence of chronic diseases. And we have picked up epidemics such as the current trend toward depression. One of the doctor architects of Obamacare said he didn’t want to live beyond 75 because of the quality of life issues.

    Several MD’s and scientists in the US have recently published books which seem to me to undermine most of the supposed health benefits of our civilization. One of the doctors is Dr. John Day, the author of The Longevity Plan: Seven Life-Transforming Lessons from Ancient China. The Seven Lessons Are:
    *Eat Good Food
    *Master Your Mindset
    *Build Your Place in a Positive Community
    *Be in Motion
    *Find Your Rhythm
    *Make the Most of Your Environment
    *Proceed With Purpose
    Day became interested in the rural community when, at age 45, a relatively famous and well-to-do cardiologist, he found his health deteriorating and burn-out in his job. He was in China for a medical conference, when he heard about the village. Six percent of the inhabitants were centenarians, many of whom had never seen a doctor, and who had zero chronic diseases. The doctor worked all day in the field with a woman who was 103.

    It’s not like these people had had no stress in their lives. The oldest had been born in the time of warlords and family arranged marriages, had been oppressed by both Communists and Nationalists, and had seen some of the young people leave for the big cities. But over their century of life, they had had an annual income of about 20 dollars. They ate what they grew or caught in the river, drank water from the river, had no electricity, had no access to the outside world except for a rickety suspension bridge, and built their houses out of traditional materials.

    Dr Day’s book attempts to apply the lessons in the context of a modern economy. So for example, he recommends walking everywhere we can reasonably walk, rather than taking a car. He recommends gardening, even if it is a little container on an apartment roof. And so forth.

    My observation, from a SEEDS perspective, is that health is our birthright. We have sold it for a mess of pottage. A considerable part of what we consider ‘virtuous’ GDP is actually spent trying to deal with the fallout of a poor lifestyle.

    I don’t know exactly how to deal with this issue in a SEEDS perspective. Would we be close enough if we used 4 percent of GDP as a baseline ‘health care’ cost and anything over that as ‘dealing with collateral damage’?

    Please perform another miracle….Don Stewart

    • Measures of GDP don’t make value judgements, so a dollar spent on, say, arms counts the same as a dollar spent on medicines. It wouldn’t be practical to do otherwise.

      But SEEDS does have an approach to such issues, albeit somewhat oblique. The economy divides into two categories – ‘non-discretionary’ (essential) and ‘disctretionary’ (“want, not need”).

      Health care is a non-discretionary. As the energy cost (ECoE) squeeze intensifies, there will be an over-leveraged decline in discretionaries, so NDs become a higher proportion of the diminished cake. This will happen the more rapidly because NDs (i.e. food) are more energy-intensive than Ds.

      Impoverishment will intensify debate over many issues, not least over inequality. As economic resources diminish, the efficiency with which we do things becomes ever more important. I believe in the mixed economy, where private and state sector are used on a ‘horses for courses’ basis. Personally, I think state-provided health care is more efficient than the American version. From a market perspective, what Obama should have done is increase the supply of doctors – increasing supply drives down costs. Increasing demand, on the other hand, pushes costs upwards.

  4. Regarding the previous article in which comments are closed….

    We don’t have to worry about climate change as the trigger:… there is no way we will burn another 500 billion tonnes of carbon … because there is nowhere near that amount remaining that can be extracted at a tolerable price.

    Climate countdown: Half a trillion tonnes of carbon left to burn

    To avoid dangerous climate change of 2C, the world can only burn another half a trillion tonnes of carbon, climate change experts warn


  5. Once again nice post Tim.

    I’ve been doing a little reading and stumbled on this statement.

    “Many have pointed to energy efficiency as an escape from resource constraints, arguing that we can get more economic output with less consumption. This is true, but only locally. What arises from the constant λ is a seeming paradox: improving global energy efficiency benefits prosperity so that through a positive feedback, efficiency promotes faster global growth into the reserves that sustain us. With higher accessibility of these reserves, what follows is faster consumption of energy and raw materials.”


    What’s interesting is it basically answers Jevons paradox. Or at least compliments it.


  6. Tim, given your belief that we live in an energy based world/economy, do you think it would make sense for a government to borrow and print up to the hilt (I mean go absolutely mad) to create as much renewable energy as possible before a financial reckoning?

    And if so, how well would the country that did that cope with any financial reckoning?

    • Thanks for the reminder about that website, superb on China.

      My data for China (in RMB tn at constant 2016 values) is as follows:

      2016: 74.6 (+22.2 = +42%)
      2011: 95.3
      2016: 190.9 (+95.6 = +100%)
      GDP adjusted for borrowing effect:
      2011: 38.1
      2016: 46.2

      So SEEDS estimates of underlying GDP are already very far below reported GDP.

      Incidentally, each RMB 1 of growth between 2011 and 2016 came at a cost of RMB 4.31 of net new debt.

      But all these numbers are based on BIS debt stats, which do NOT include interbank lending. Prior to reading the linked article, the SEEDS estimate of this interbank component was RMB 64.3 tn. So that makes end-2016 debt RMB 255tn, instead of 191 tn.

      The China situation is looking pretty lethal – comparable with the UK, except that China is a lot bigger and a lot more important.

      One could almost flip a coin as to which of these two triggers the next crisis…..

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