SEEDS IS COMPLETE – IN TIME FOR GFC II
More than four years in the making, SEEDS – the Surplus Energy Economics Data System – is complete.
Though geographical coverage may be extended further (with Indonesia, Iran and Turkey as possible additions), the system itself is complete. This, under the circumstances, is just as well, because evidence is mounting that GFC II, the sequel to the global financial crisis of 2008 (GFC I), is drawing nearer. So we’re likely to need whatever insights SEEDS may provide.
This discussion sets the scene for what SEEDS can tell us about risk. Future articles will investigate national economies in groups, with the Euro Area countries likely to be addressed first. Each of the succeeding articles is likely to include downloadable summaries of the most important data.
SEEDS – capturing the surplus energy dimension
For those unfamiliar with the project, the ambition for SEEDS was to recalibrate economic measurement – and interpretation and forecasting, too – on the understanding that the real economy of goods and services is an energy system, and not, primarily, a financial one.
For practical purposes, achieving this means that we can use prosperity, instead of GDP, as the denominator for calibrating risk.
Aside from purely methodological issues, GDP has two grave handicaps where economic interpretation and prediction are concerned.
First, it fails to discriminate between organic growth, on the one hand, and, on the other, the simple spending of borrowed money. Though a very important recent report, by BIS luminaries Hervé Hannoun and Peter Dittus, highlights precisely this issue in its description of “the debt driven growth model”, conventional economics still fails to connect debt (stock) and GDP (flow) to the point where the effects of artificial, debt-induced activity can be factored in to interpretations.
For reference, and expressed in PPP-converted dollars at constant 2017 values, SEEDS puts world GDP growth since 2007 at $29.8 trillion, but notes that this was accompanied by a $103tn increase in debt, meaning that $3.50 was borrowed for each dollar of “growth”.
In the absence of this simple spending of borrowed money, growth over the decade since 2007 is estimated by SEEDS at just $10.3tn, with the remaining $19.5tn of reported increments to GDP ascribed to the debt effect.
Moreover, the debt-growth sleight of hand did not begin in 2007. Over time, the gap between GDP and prosperity has widened markedly. Last year, according to SEEDS, ‘clean’ GDP was $90.4tn, a long way (29%) below the reported $127tn.
Second, conventional economics ignores the energy basis of all economic activity. The reality is that everything we do requires energy, and energy can never be accessed free of charge – whenever we tap any form of energy, we always consume energy in the process.
In SEEDS, this cost is known as ECoE (the energy cost of energy), which is measured as a trend, and applied as an economic rent. For reasons discussed here, trend ECoE is rising exponentially, and is acting as an increasingly important obstacle to growth.
The British experience – prosperity versus GDP
Here’s a simple worked example of how SEEDS calibrates prosperity. Between 2007 and 2017, the GDP of the United Kingdom increased from £1.83tn to £2.0tn, a rise of 11%, or 3.3% in per capita terms.
But the increase in GDP between those years (of £206bn) was far exceeded by a £1.13tn surge in aggregate debt. Adjustment for this reduces growth to just £30bn, and puts clean GDP for 2017 at £1.6tn.
Over the same period, according to SEEDS, the UK’s overall ECoE increased from 4.8% to 8.6%, a sharp rise which, in part, reflects energy issues specific to Britain.
Aggregate prosperity, therefore, was barely changed in 2017 (£1,462bn) from 2007 (£1,494bn). But the population did increase between those years, by 7.7%.
In per capita terms, then, the average British citizen was 9.2% less prosperous in 2017 (at £22,300) than he or she had been back in 2007 (£24,370). Apparent growth in GDP per capita was much more than cancelled out by higher debt, and by the rising trend cost of energy.
This is why people feel poorer – whatever assurances they are given to the contrary.
Prosperity, policy and risk
This deterioration in prosperity is by no means unique to the United Kingdom, of course – Greece and Italy have fared worse, and prosperity has eroded since 2007 in every major developed economy with the solitary exception of Germany (+1.0%).
There are three main ways in which the divergence between GDP and prosperity is highly relevant to GFC II.
First, measurement of aggregate prosperity can be used to recalibrate ratios around risk categories such as debt, and exposure to financial asset toxicity. Debt may be ‘only’ 218% of world GDP, but it’s 336% of global prosperity, compared with 236% at the start of GFC I.
Second, prosperity analysis identifies dependency on incremental borrowing going forward, an extremely important consideration if there is any likelihood of access to new credit drying up.
Third, trends in individual prosperity have important implications for politics, and the scope for policy.
On this latter point, it’s worth noting what SEEDS can tell us about recent political trends.
When Donald Trump was elected in 2016, the average American was already 7.2% less prosperous than he or she had been ten years earlier. Also in 2016, the “Brexit” vote in Britain might have come as less of a shock to the “experts” if they’d known that voters were, on average, 8% poorer than they had been back in 2007.
The rejection of all established parties in the first round of the French presidential election might not have been unrelated to a peaking of per capita prosperity in France as long ago as 2000.
The high point of prosperity was more recent in Italy (2007) than in France, but the decline since then has been particularly pronounced (-10%), helping to explain the appeal of populism to Italian voters.
Looking ahead, then, one of the criteria SEEDS can help us to measure is the likelihood, or otherwise, of voters acquiescing in any repeat ‘rescue plan’ along the lines of the response to GFC I.
For most Western countries, the conclusion from SEEDS analysis is that any government which tries to repeat the 2008 combination – rescues for the banks, monetary inflation for the owners of assets, and austerity for everyone else – is going to get short shrift from the voters.
And, given the outcome of the post-2008 policy prescription, this might be just as well…………