#119: A predicament in pictures

MAPPING THE ENERGY ECONOMY

A picture may or may not be (as the old saying has it) “worth a thousand words”, but what follows is a story told in eight pictures. Essentially, it’s a by-product of work on Energy and Prosperity, the planned guide to Surplus Energy Economics.

Before we start, a word about the charts. Though all start in 1965, the first four finish in 2016 whilst the latter four include projections out to 2030. All are global numbers and, with two exceptions, are expressed in trillions of dollars at constant 2016 values, with non-American amounts converted using the purchasing power parity (PPP) convention. The exceptions are the final pair of charts, which show global per capita equivalents in thousands of dollars.

The charts may be hard to read in the blog format, so a downloadable PDF version can be found at the end of this article. It’s hoped that the commentary will make the charts easier to understand.

Fig. 1 shows GDP (in blue) for the period between 1965 and 2016. Superimposed on it, in black, is what GDP would have looked like if it had simply tracked world energy consumption. Essentially, GDP in 2016 is depicted 3.6x what it was in 1965, because that’s the increase in primary energy consumption over the same period.

As you’ll see, GDP and energy consumption tracked very closely until the late 1990s. Since then, however, the two have diverged. Between 1997 and 2016, GDP increased by 91%, which is a lot faster than the expansion in energy consumption (+49%) between those years.

Of course, this divergence might simply be a matter of getting more value out of each tonne of energy consumed. Fig. 2, though, suggests that something very different might have been going on.

In this chart, two new elements are superimposed. The first, shown in red, is annual net borrowing. The second, in orange, adds the estimated annual under-provision of pensions, an issue addressed here before on a number of occasions. The huge leap shown after the global financial crisis (GFC) of 2008 is the massive one-off impairment to pension provision created by the collapse of returns on investment, when central banks slashed interest rates to all-but-zero, creating an escalation in capital values and a corresponding slump in returns.

What this second chart seems to be telling us, then, is that we didn’t, from the late 1990s, suddenly discover new ways of getting more economic activity out of each tonne of energy. Rather, what happened was that we started juicing GDP by running up ever bigger debts, a process described here as credit adventurism.

After 2008, we added monetary adventurism to the mix, adopting policies which boosted apparent activity by destroying pension provision. This is why, as a recent WEF report showed, pension provision in an eight-country group had soared to an estimated $67 trillion by 2015, and is likely reach $428tn by 2050, a number which dwarfs any conceivable level of world GDP at that date.

This interpretation is supported by fig.3. This differs from the previous chart, because it shows debt, and the estimated shortfall in pension provision, as end-of-year totals, rather than annual increments. The post-GFC leap in pension deficiencies is again visible, where the onset of monetary adventurism crushed future returns on existing investments.

Fig. 4 again shows GDP (in blue), and an equivalent of GDP tracking energy volumes (black), but adds a third series. Shown in red, this deducts the trend energy cost of energy (ECoE) from the energy-based line. This adjustment expresses trend-energy GDP for the cost of energy supply, so the red line is indicative of the resources available for all purposes other than energy supply.

Essentially, this is an indicator of aggregate prosperity. Because these two charts are side by side, what can be seen here is the divergence between prosperity, on the one hand, and the aggregates of debt and pension deficiency, on the other.

The insight here is that we are deluding ourselves about economic output, using the proceeds of borrowing and pensions erosion to create a GDP number increasingly out of kilter with reality.

This helps explain why typical wages aren’t keeping up with GDP, and why incomes are being eroded by the rising cost of household essentials, most of which are energy-intensive. It also helps explain why an increasing proportion of recorded GDP consists of residual, locally-priced services of questionable real value, whilst output in solid, globally-priced activities such as manufacturing and construction keeping shrinking as a share of GDP.

The bottom line is that prosperity and GDP are diverging, with results which are showing up both structurally and in on-going balance sheet impairment.

It should be added that the inflated values of assets (such as stocks, bonds and property) do not offset these trends – these values cannot be monetised by their owners selling assets to each other. Any significant attempt to monetise them – and a panic rush to do exactly that can’t be ruled out – would cause values to collapse.

The obvious question arising from this is “what happens next?” – and this is addressed in the next pair of charts, which extend these data series out to 2030. Fig. 5 shows how reported GDP (in blue) looks set to go-on outpacing core activity (black), whilst prosperity (red) drifts ever further away from trend activity as ECoEs carry on increasing. In fig. 6, the much larger vertical scale should be noted. Unless there is a fundamental change of tack, the massive miss-match between income and liabilities is set to balloon exponentially.

 

If you think that the progression pictured in fig. 6 can’t happen, by the way, then you’re almost certainly right. According to the projections used in this chart, the aggregate of debt and pension shortfalls by 2030 will be close to $800tn (at 2016 values), dwarfing even claimed GDP ($193tn), let alone trend output ($100tn) or underlying prosperity ($89tn).

The only realistic conclusion which can be drawn from fig. 6 is that a very serious crash is extremely likely to occur at some point well before 2030.

The final pair of charts converts these numbers into their per-capita equivalents. The takeaway from figs. 7 and 8 is that, if we go on deluding ourselves about economic output, we’re going to travel ever further into a world in which smoke and mirrors can no longer disguise the difference between GDP and prosperity, and cannot reconcile the triangle of consumption, output and the destruction of the balance sheet.

#119 charts set