#91: SEEDS goes live!


Those of us who see the economy primarily as an energy system rather than a financial one are very much in the minority. Most policymakers and commentators cling to conventional interpretations, even as real events refuse to conform to their world-view. We’re not going to argue our case successfully on theoretical grounds alone, but need evidence to back up our interpretations.

This is what SEEDS – the Surplus Energy Economics Data System – is all about.

The development of SEEDS has been a very big project, almost dauntingly so at times. Now, though, it has reached the point where its output can be made generally available. The aim has been to provide those interested with sufficient data in free-to-download form, whilst not handing comprehensive data free-of-charge to commercial organisations.

Accordingly, SEEDS data has been divided into two products. SEEDS Snapshots are freely available in PDF format, whilst a modest charge will be made for the more comprehensive SEEDS Pro datasets.

I am delighted to inform readers that twenty (out of 22) SEEDS Snapshots are now available for download. You can find them on the resources page newly added for this purpose. This means that you can now access data for Australia, Brazil, Canada, China, France, Germany, Greece, India, Italy, Japan, Mexico, the Netherlands, Norway, Poland, Portugal, Russia, South Africa, Spain, the United Kingdom and the United States. The sets remaining to be added are Saudi Arabia, and the world overview.

After summaries in local currencies and US dollars, the data sheets look first at the energy “mix” for each country – primary energy consumption is broken out into fossil fuels, renewables and an “other” category comprising nuclear and hydroelectricity, whilst production of energy is stated in aggregate.

Next comes a summary of energy economics, including the estimated trend ECoE (energy cost of energy) and EROEI (energy return on energy invested).

Economic output is divided into three categories. The first of these is GDP, stated at constant values. The second, “underlying output”, adjusts GDP for the estimated extent to which borrowed consumption has inflated the headline number. The “real” economy further adjusts the latter for the economic rent exacted by the energy cost of energy. Each of these numbers is then expressed in per capita terms, and rates of growth are stated both in aggregate and at the per capita level.

Further financial data is set out in the remaining tables. Debt at current values is broken out, where possible, into government, household and PNFC (private non-financial corporate) sectors, and the total is also stated in constant, inflation-adjusted terms. Debt is then expressed as a percentage both of GDP and of the borrowing-adjusted underlying equivalent.

Annual growth and borrowing are then compared, in constant terms. Thus, Australian GDP increased by A$39bn in 2015, of which it is estimated that A$30bn was debt-fuelled consumption. Also in 2015, Australia borrowed a net A$284bn, using A$254bn for purposes other than boosting consumption. Over the ten years from 2005 to 2015, each A$1 addition to GDP was accompanied by A$4.35 in net new debt.

The penultimate table summarises government finances in both current and constant values. This is broken out into government revenue, interest paid on government debt, and all other public expenditures, resulting in a surplus or deficit. All of this is set out in current, constant and percentage terms. Thus, Australia’s government deficit in 1995 was A$18bn, equivalent to A$30bn in constant 2015 values, and also equivalent to 3.4% of GDP.

Finally, a similar summary is provided for the external sector. This shows net exports, and the aggregate of current income, which notably includes returns on investments and interest paid on debt. These sum to the current account, a critical indicator of a country’s financial relationship with the rest of the world.

In future articles, we can explore the methods and conclusions of the SEEDS system in depth. For now, though, do download some of these data sheets, and explore what you can get from them.


#90: After peak prosperity


As readers will recall from a previous article, SEEDS – the Surplus Energy Economics Data System – will soon cease to be a purely internal tool, and will be made available to those interested in using it.

As things stand, the intention is to make a summary version (SEEDS Snapshots) available for free download here in PDF format. Professional and business users will be offered a more detailed spreadsheet version (SEEDS Pro) at a modest price. In all, there will be 22 of each – 21 covering individual economies, plus a world economy version.

Rather than issue a technical user manual (though this may yet be necessary), it seems better to introduce the system here using a real example. The balance of reader comments suggests that the subject of this “worked example” should be the United Kingdom. It is hoped that even those readers who are not particularly interested in the UK will find this an interesting example of the economic decline phase after “peak prosperity”.

What follows here, then, is a comprehensive analysis of the British economy, conducted using SEEDS. Conclusions are left to the end, so that readers can follow the process of analysis through from start to finish. Here, for download, is the SEEDS Pro dataset for the United Kingdom. This is the premium version that will be available for purchase after SEEDS goes “live”. It is recommended that you download this now, in order to refer to it during the commentary that follows.

SEEDS 2.15 UK dataset March 2017


Let’s get a couple of technical points clear before we start. First, most economic data is presented in GBP, and the majority of this is expressed at constant values, so that the effects of inflation are excluded. Current data is converted to constant values using the broad-basis GDP deflator index, the base year being 100. (Pending the availability of complete data for last year, 2015 is the base year throughout SEEDS).

Second, where stated in US dollars for comparison, conversion is undertaken using the PPP (purchasing power parity) convention. This is generally superior to conversion using market average exchange rates, though some market-rate data is supplied as well, for those who find it useful.


After some summary tables, the SEEDS analysis begins with two tables related to energy. The first of these (starting at line 44 in the data sheet) is volumetric, and analyses the primary energy position expressed in million tonnes of oil equivalent (mmtoe). Like all tables in SEEDS, this runs from 1980 to 2030, and further amplification is provided by the first chart.

Peak energy production in the UK occurred in 2003, at 272 mmtoe, a number which declined by 59% to just 112 mmtoe in 2015. Against this, consumption has also declined, from 229 mmtoe in 2005 to 188 mmtoe in 2015. This decline reflects a number of factors, including greater energy efficiency, but also the ongoing shrinkage in manufacturing output.

As of 2015, fossil fuels accounted for 83% of British energy consumption, and renewables for 7.6%, which is far higher than the global average for the same year (2.7%). By 2030, the share of UK energy use provided by renewables is projected to reach almost 19%, though this rising share reflects, in part, the downwards trend in aggregate consumption.

The United Kingdom: energy balances


Whether the shift towards renewables has been cost effective is, of course, another question, and plays its part in the table of energy economics (starting at line 56). Obviously, the sharp decline in primary energy production has had a major effect on materials flows and costs. Back in 1999, the UK was a net exporter of 50 mmtoe, or 23% of demand at that time. By 2015, net imports totalled 76 mmtoe, or 40% of consumption.

This changing material balance has necessarily impacted the UK’s energy costs, measured in the data sheet both as ECoE (the energy cost of energy) and as EROEI (the energy return on energy invested). Reflecting global trends, the estimated ECoE of consumption (line 61) has risen from 3.8% in 2000 to 7.8% in 2015, which is not significantly different from a world average of 7.0%.

But the swing from net exporter to net importer has had a dramatic effect on the overall ECoE of the economy (line 62). Being a net exporter is advantageous, mainly because costs and taxes (which, of course, are revenues for suppliers and the government) are incurred at home rather than overseas. Accordingly, Britain’s overall ECoE is estimated to have soared from just 0.9% in 2005 to 10.3% in 2015. As we shall see, this has had a major adverse effect on prosperity.

For those who prefer EROEI measures, that of the UK in 2015 is put at 10.7:1, and is projected to fall to just 6.6:1 by 2025. Readers who understand EROEI will appreciate that a ratio this low poses a dire threat, not just to prosperity but to economic viability itself.

The United Kingdom: energy economics


The role of borrowing

The next table to look at in the data sheet considers growth and borrowing, and starts at line 125. Expressed at constant 2015 values, annual growth in GDP ranged between +£48bn and -£72bn between 2005 and 2015. The total of growth over this period was £215bn, which lifted GDP (line 69) from £1,649bn in 2005 to £1,864bn in 2015.

Over the same period, however, total debt (line 114) increased from £3,580bn to £4,950bn, a rise of £1,369bn. The trailing ten-year (T10Y) relationship between borrowing and growth was, therefore, 6.37:1, meaning that £6.37 of borrowing accompanied each £1 of recorded growth in GDP.

The relationship between annual growth and borrowing can be seen in the next chart.

The United Kingdom: growth and borrowing


Clearly, borrowing on this scale is likely to have inflated GDP, by funding present consumption at the expense of future liabilities. What this really means is that, without this borrowing, growth would have been lower.

But how much lower? According to the formula used by SEEDS to measure this effect, £182bn of borrowed money was used to finance consumption between 2005 and 2015.

Though this estimate equates to just 13% of total borrowing (of £1,369bn) over that period, and is probably conservative, it accounts for most (85%) of growth recorded between 2005 and 2015. Reference to line 70 of the datasheet shows that, adjusted for the effect of borrowed consumption, underlying GDP in 2015 is estimated at £1,467bn.

This in turn means that, without borrowed consumption, GDP in 2015 would have been 21% lower than the reported number. It also indicates that trend growth is just 0.4% (line 79) rather than the generally-assumed c2%. On a per-capita basis, underlying growth is negative 0.3% (line 94), because the population is growing more rapidly than underlying (borrowing-adjusted) GDP. Even this, of course, is before we take trend ECoE into account.

The next chart shows these trends at a glance. The blue line is reported GDP, including consensus expectations out to 2021. The black line is GDP adjusted to exclude the impact of debt-funded consumption. The red line is the real economy on an ex-ECoE basis, and is closely analogous to prosperity as individuals experience it.

The United Kingdom: economic output


Debt dangers

If we now turn to debt aggregates (starting at line 105), it will be seen that constant, inflation-adjusted debt increased from £3,580bn in 2005 to £4,950bn in 2015 (line 114). Debt trajectories after 2015 are projected using an algorithm, and this estimates end-2016 debt at £5,196bn.

This is almost certainly a serious under-statement, as data for the first nine months of 2016 show that debt actually climbed to £5,408bn in that period, a far larger increase (of £458bn) than the SEEDS algorithm estimates for the whole of the year (£247bn).

If something like this is confirmed by final data, future debt projections will need to be revised upwards. Even as things stand, the ratio of debt to GDP, having risen from 209% in 2005 to 265% in 2015 (line 122), is projected to reach 300% by the end of 2019.

Of course, this ratio refers to reported GDP – were the underlying (ex-borrowing number) used instead, the ratio already exceeds 330%, and will be well over 400% by the end of the decade (line 123).

The United Kingdom: debt


The table of external flows (starting at line 157) reflects a steady deterioration in the current account, from a deficit of 1.2% of GDP in 2005 to 4.3% in 2015. This is not a reflection of net trade, which has in fact been on an improving trend. Rather, income (which primarily comprises net returns on equity and debt capital) has swung from +2.1% of GDP in 2005 to -3.3% in 2015. At constant values, this swing equates to £96bn (from +£35bn to -£61bn) (line 169), or 5.1% of current GDP, over a ten-year period.

Finally, we need to factor ECoE into the equation in order to measure “real” or “discretionary” income. This measure which has a direct impact on perceived prosperity, because it impacts the income that households have left after the cost of essentials.

On an aggregate basis, the real economy was 7% smaller in 2015 than in 2005, and SEEDS indicates that Britain hit “peak prosperity” back in 2003 (line 71). On a per-capita basis, discretionary income declined by 13% between 2005 and 2015 (line 87), and is falling at a trend rate of about 1.4% annually.


Overall, then, the SEEDS assessment of the British economy is very bearish. Individual prosperity is deteriorating – as is the aggregate, once the effect of “borrowed consumption” is adjusted out – whilst debt continues to rise markedly. Dependency on overseas creditors has become acute, mainly because income flows have been impaired by past patterns of asset sales and borrowing from abroad.

Looking ahead, the deterioration in British economic performance is starting to look irreversible, and certainly cannot be halted, let alone reversed, without wholesale changes in policy.

* * *

Here is the new PDF for Canada:

2.02317 Canada

#89: Chinese whispers


Which is the world’s largest economy? Converted at market exchange rates, China ($11tn) is smaller than the United States ($18tn) but, on the PPP (purchasing power parity) basis of conversion widely regarded as superior, China (at $21tn) now takes the top spot.

Be that as it may, there can be little doubt that the economy of China is second to none in terms of its importance to global growth. In local currency, Chinese GDP was RMB 68tn in 2015, four times larger in inflation-adjusted terms than it was in 2000. China has been the primary engine of world growth since the millennium, and most observers, it seems, expect it to remain so for the foreseeable future.

In short, if the Chinese economy were to catch a cold, the world economy would be in for a bout of influenza at best, and could well face the economic equivalent of pneumonia. This is as true of debt as it is of growth – wobbles in China would trigger shock-waves around the world.

There could not, then, be a more important subject than China for evaluation using the Surplus Energy Economics Data System (SEEDS).

Readers will find a downloadable PDF of SEEDS statistics for China at the end of this article.


For China’s army of Western admirers, the conclusions set out here are disturbing.

Most strikingly, Chinese economic growth has, over the last decade, become a hostage to borrowing on a gigantic scale. Though used primarily for capacity expansion rather than for fuelling consumption, this borrowing has had a hugely distorting effect on growth. Were China to cease borrowing about 20% of GDP annually, as she does at the moment, growth would fall back from 6.5% to a trend rate of 3.4%.

There must be limits to quite how long China can go on using borrowing to create growth. Based on reported GDP, debt already stands at 246% of reported GDP, up from 141% just seven years ago. When measured against an underlying GDP figure stripped of estimated debt-funded consumption, the ratio climbs to 384%. On this underlying basis of measurement, the ratio could hit 500% within just five years.

In short, the Chinese economy is following the tried-and-failed Western policy of using debt to manufacture “growth”.

There are clear limits to how much longer she can go on doing this.

GDP and debt

It must be understood from the outset that the reliability of much Chinese data seems questionable. At the simplest level, key metrics like growth and unemployment appear not only remarkably unvarying but are, equally remarkably, always exactly in line with official expectations. Some economic numbers seem hard to reconcile with non-financial, volume indicators.

There are also issues of discontinuity, where methods of calculation seem to change without the data for prior years being restated to match. It should also be understood that international data sources largely replicate these issues, since they are necessarily based on Chinese official statistics.

Let’s start with an indicator always regarded as pivotal in SEEDS analysis – the relationship between GDP and growth on the one hand and, on the other, debt and borrowing. The first chart compares GDP and debt in local currency at constant (2015) values. (Debt numbers used throughout this analysis exclude the inter-bank or “financial” sector which, were it included, would probably lift total debt from RMB 168tn to somewhere nearer RMB 200tn).

1. China: GDP and debt, 1995-2021F

China bespoke 1 GDP & debtjpg_Page1

As the chart shows, a remarkable divergence has emerged between debt and GDP in the years since the global financial crisis (GFC). Between 2007 and 2015, and expressed at constant 2015 values, debt increased by 228%, from RMB 51tn to RMB 169tn. This far outpaced expansion in output, where reported GDP grew by 154%, to RMB 68tn in 2015 from RMB 35tn in 2007.

Borrowing and growth

Of course, percentage changes are important, but what really matters is the relationship between borrowing and growth. This is summarised in the next chart, which shows annual borrowing and growth as percentages of GDP.

2. China – borrowing and growth, 2000-2021F

China bespoke 2 B & Gjpg_Page1

The picture that emerges is quite extraordinary. Over the ten years between 2005 and 2015, GDP grew at rates of between 9% and 14% annually, not even stumbling materially during the 2009 global downturn. But debt has grown by between 17% and 35% of GDP each year, with the exception of 2009, when debt increased by 47% of GDP.

What this means is that, over a period in which reported GDP increased by RMB 40tn, debt expanded by RMB 129tn. This is a borrowing-to-growth ratio of 3.2:1, still reasonably modest by Western standards, but a far cry from past Chinese practice – back in 2005, the trailing ten-year (T10Y) ratio was only 1.67:1.

The Chinese debt model

This pace of change in the trailing average means that the relationship between borrowing and growth merits close consideration. China retains comparatively low levels of household indebtedness, which stood at 39% of GDP in 2015, compared with 79% in the United States, 87% in the United Kingdom and 104% in the Euro area. Households accounted for a modest 18% of all net borrowing in China between 2005 and 2015. Government debt, too, remains low by world standards, at 44% of GDP. Neither households nor the state, then, are bingeing on borrowed money.

But the biggest share of Chinese borrowing by a wide margin is the PNFC (private non-financial corporate) sector, which borrowed RMB 83tn in the decade to 2015, or 64% of all borrowing. This increased total PNFC debt to RMB 112bn in 2015, from about RMB 29tn in 2005, an increase so huge that readers should be reminded that these are constant numbers, adjusted to exclude inflation.

Unlike the Western economies, whose vice-of-choice is to use debt to fund consumption and inflate property markets, the Chinese bias is towards using debt for investment in capacity. In theory, capacity investment should be “self-liquidating”, because capacity increases should increase income, and thus fund the paying off of the initial debt. (This is contradistinction to consumer borrowing, which is “non-self-liquidating”).

But the self-liquidating characteristic of business investment depends on capacity expanding without depressing margins, something which happens when expansion creates major capacity surpluses. It is abundantly clear that Chinese PNFC borrowing has followed the course of excess, depressing returns in the process.

As a result, much of the Chinese business sector earns returns which appear to be well below the cost of debt capital. In this situation, an obvious remedy is to convert debt into equity. This, however, seems to have been tried, and failed, because it showed clear tendencies to crash the equity market.

Of course, PNFC borrowing differs from consumer borrowing, but it nevertheless finds its way into consumption and economic activity. If a business invests in new capacity, much of that investment finds its way into the pockets of households, either directly, through employment, or via suppliers. High investment helps diminish unemployment but, where this investment is non-self-liquidating, the effect is “borrowing to employ”, and this has parallels with Western-style “borrowing to consume”.

The judgment call here is this – how much Chinese borrowing has inflated consumption (and broader activity) artificially, meaning that this activity would disappear were borrowing to cease? The calculation made by SEEDS ascribes only 16% of all borrowing between 2005 and 2015 to consumption, probably a conservative estimate of how much net new debt has been used to inflate activity. Even so, this amounts to RMB 20.8tn, equivalent to slightly more than half of all growth (of RMB 41tn) in GDP over that period.

If that estimate is correct, underlying growth in Chinese GDP over the last decade and more has been far lower than the reported numbers.

As the next chart shows, this calculation puts Chinese aggregate growth since 2000 at 160% (RMB 27tnb) – still impressive, but nowhere near the reported 295% (RMB 51tn). It indicates that underlying GDP in 2015 was around RMB 44tn, a very long way adrift of the reported RMB 68tn.

3. China – reported and underlying GDP, 1980 – 2030F

China bespoke 3 GDP % ULjpg_Page1

For how much longer?

The implications of this assessment are stark.

First, SEEDS estimates current trend growth at around 3.4%, far below official rates of 6.5%. It also trims per capita trend growth to 2.9% from 6.0%.

Of course, China can still record growth rates at or above 6% – but only if the country continues to borrow at recent levels. That would mean adding yet more surplus capacity, and depressing margins still further.

The final sting in the tail of this analysis is that, if underlying GDP is a lot lower when stripped of the borrowing effect, debt ratios are correspondingly higher. On the SEEDS basis of computation, aggregate debt already stands at 385% of GDP (rather than the reported 246%), and is growing a lot more quickly than publicly available numbers indicate, adding around 43% of GDP (rather than 20%) annually.

With the export-based model faltering, and with a great deal of economic activity dependent on borrowing, China may have ceased to be the powerful engine of growth that is so customarily assumed.

4.China – debt/GDP ratios, 1995-2021F

China bespoke 4 debt ratiosjpg_Page1

China PDF

#88: SEEDS to go live?


In recent times, it’s fair to say that three broad themes have dominated discussion here.

The first of these, of course, is surplus energy economics – the philosophy which says that the economy is an energy system, not a financial one. Money may be the map of the territory, but the territory itself is energy.

The second “hot” topic is Ponzi finance. In the early years after the millennium – and for reasons which the surplus energy interpretation can alone explain – real economic growth petered out. Since then we’ve been faking it, spending borrowed money and calling this “growth”. All the while, of course, debt (and informal “quasi-debt”) has escalated. Essentially, the powers that be have been busy destroying the future, not just by accumulating debt but also by crippling other forms of provision for the future, most obviously pension funds and other forms of saving.

Third, the general public has started to smell a rat. I don’t mean that the public understand surplus energy theory, or spend their time comparing growth with borrowing. But the public does have an intuitive sense of when things are going wrong, and this is one of the reasons why they are busy repudiating the “liberal” elites, along with much of what these elites stand for.

The bottom line of these three themes is that policymakers and economists – as some of the latter, to their credit, acknowledge – don’t understand what is happening. To tackle this, we are in urgent need of new economic understanding.

This is urgent, because what the authorities have been doing for a decade and more has been akin to carrying out brain surgery with carpenters’ tools. They can’t fix the economy because they don’t really understand how it works.

And this is where SEEDS comes in. To explain why, I need to digress a bit.


After publishing Perfect Storm (when I was head of research at Tullett Prebon), I embarked on writing what was to become Life After Growth. Throughout that project, I realised that there was a glaring need for a comprehensive mathematical insight into the energy economy. For the book, I was able to include general trends in ECoE (the energy cost of energy), and had data to illustrate, for example, the progression of energy, population and economic output over time. What I did not have, however, was a level of granularity enabling evaluation of individual economies – and the world economy as a whole – with any level of detail.

This was why SEEDS – the Surplus Energy Economics Data System – was developed. Initially, the aim was to estimate ECoEs across fuel sources and economies. At first, SEEDS simply provided estimates of ECoEs on a country-by-country basis over time. The thinking was that, once we had a grasp of ECoEs, we could deduct them from GDP to work out what the “real” economy of goods and services was really doing behind the public facade of recorded output. This has been developed to the point where twenty-one countries are covered by the system – these are the United States, Canada, Mexico, Brazil, France, Germany, Greece, Italy, the Netherlands, Norway, Poland, Portugal, Russia, Spain, the United Kingdom, Australia, China, India, Japan, Saudi Arabia and South Africa.

At the same time, it became apparent that a lot more economic content was required. The “wish list” at this point included debt and borrowing, trade and external flows, government finances, and measures on a per capita basis. Above all, the aim was to get into the dynamics of borrowing and growth, and pull all of these together with the fundamentals of ECoE and surplus energy.

With all of this accomplished and just a few tweaks remaining after several years of effort, the latest version – SEEDS 17 – has become an extremely valuable interpretive tool. To use a motoring analogy, SEEDS has evolved from a Morris Minor into something reasonably akin to Mercedes.

But even the best car achieves nothing whilst it remains in the garage.

Going public?

The next objective, logically, is to make SEEDS generally available.

Broadly, there are two main “audiences” for SEEDS. The first are individuals concerned about what is happening, and keen to further their understanding. The second are professionals, engaged either in making decisions or in providing advice. (There is actually a third category, comprising academics and non-profit organisations, but how to meet their requirements remains to be decided).

This argues for two kinds of product. The current plan is that, for the general public, comprehensive data will be available as PDFs which can be downloaded free of charge. The working name for these is SEEDS Snapshots. For professionals, a more detailed data package (known as SEEDS Pro) will be made available at what I hope will be a pretty reasonable price.

This project is still under development, and it may be some while before SEEDS Snapshots and SEEDS Pro go live. Also, as you may know, I’m planning a sequel to Life After Growth.

Meanwhile, of course, I’ll continue to post articles here – and please do keep making your very helpful comments.




#87: A world economy snapshot


Some readers have expressed interest in the data used in articles here and, as we have been discussing growth and borrowing on a global scale, this seems a good opportunity to make a SEEDS dataset available for download. You will find it at the end of this article.

First, some basics. There is nothing very mysterious about SEEDS (the Surplus Energy Economics Data System). As its name suggests, it’s a system designed to manage information from a surplus energy economics perspective. The database covers over fifty years, stretching back to 1980 and delivering projections out to 2030, though some classes of data go back well before 1980. In addition to aggregate global coverage, SEEDS operates at the regional and national level. When the 2017 version (“SEEDS 17”) is launched, coverage will increase from 19 countries to 21, with the addition of the Netherlands and Poland.

The cost of energy

The energy component of SEEDS contains data on consumption and production of primary energy, broken out nationally and by fuel type. To each series have been attached estimates of EROEI (Energy Return On Energy Invested) and ECoE (the Energy Cost of Energy). As you may know, data availability in these categories is patchy, so SEEDS uses a lot of estimates and cross-referencing, and results are not to be regarded as definitive. Rather, the aim is to provide an indicative guide to important trends.

This set of volume and cost numbers delivers global and national matrices. Put simply, if one knows the energy consumption by fuel of a given country in a specific year, one can calculate an estimated overall trend ECoE. This is known as the consumption ECoE. But what really matters is the overall ECoE, which adjusts the consumption calculation for net imports and exports. Thus, in 2000 the United Kingdom had an estimated consumption ECoE of 3.7%. The overall number was lower (2.8%), because Britain was a substantial net exporter of energy. By 2015, the consumption ECoE for the UK had risen to 7.5% (in line with a worldwide increase), but the overall number was now higher than this (at 12.2%) because Britain had become a big net importer of energy.

Globally, of course, there is only an overall ECoE number, and this is included in the dataset attached here. World trend ECoE is estimated at 7.8% in 2015 – up from 6.4% in 2010 – and is projected to rise to 10.0% by 2021. The latter corresponds to an EROEI of just 9:1 which, if you understand EROEI, spells very big trouble. ECoEs are already high enough to help explain why the world economy is now stuck in “secular stagnation”.

ECoE is best understood as an economic rent. It is a “cost”, but not in the conventional sense of that word because, of course, no money actually leaves the system. Rather, a rising ECoE compels us to spend more on energy and, therefore, less on everything else.

This shows up most obviously in household budgets as a rise in the cost of essentials, which leaves the individual or household less to spend on everything else. Again taking Britain as an example, the cost of household essentials rose by 48% between 2006 and 2016, far outstripping much smaller increases in wages (+21%) and general CPI inflation (+25%). At the level of national economies, much the same occurs, with the cost of essentials outpacing both income and broad inflation as ECoE increases.

This is one reason why seemingly-positive data on the economy as a whole increasingly clashes with individual experience – the data says the economy is growing, but the individual feels poorer, not wealthier. An increasing ECoE – and its transmission through the cost of essentials – helps explain this apparent contradiction. As neither conventional economics nor governments understand this mechanism, policymakers find themselves baffled by trends which do not seem to accord with the data available to them.

The economy – output and borrowing

As you will see from the first line of the datasheet, world GDP increased by 11% (to $114tn, from $102tn) between 2010 and 2015, and is projected to be 20% higher (at $136tn) by 2021. The latter number is essentially based on consensus estimates. It needs to be understood, first, that these are “constant” numbers, stated at 2015 values, adjusted for inflation. Second, non-American GDP has been converted into what are known as “international dollars” using the standard convention of “purchasing power parity”, or PPP.  The conventions of constant value and PPP conversion are used throughout the datasheet, for debt as well as GDP.

So global GDP increased by an aggregate of $20.1tn in the ten years culminating in 2015. But, as you will also see, world debt increased by far more – $76.5tn – over the same period. This means that, aggregated over a trailing ten-year (T10Y) period, $3.81 was borrowed for each $1 of reported growth in GDP.

Obviously, this trajectory is not sustainable – over ten years, economic growth of 22% was far exceeded by an increase of 45% in debt. If the projected increase of $23tn in GDP between 2015 and 2021 happens, and is accompanied by borrowing at the same ratio as the T10Y number (of $3.81 per growth dollar), debt would increase by $87tn, or 36%, over that period.

Ominously, the T10Y measure has been rising steadily – back in 2010, the T10Y ratio was only $2.84 of borrowing for each growth dollar. Even at the $3.81 multiple, however, the ratio of world debt-to-GDP would rise from 216% to 244% – and even this number requires acceptance that reported GDP numbers are an accurate reflection of underlying output.

Borrowed consumption and underlying growth

In fact, this assumption must be open to considerable question. It seems pretty clear that the enormous rate of borrowing in recent years has flattered GDP by creating “growth” that is really no more than the spending of borrowed money. This, of course, brings forward consumption at the cost of increased liabilities in the future.

SEEDS uses country-by-country estimates of what proportion of aggregate borrowing is used to inflate consumption in this way. For the period between 2005 and 2015, the global estimate is that, of the $76tn borrowed globally, $12tn (or 16% of all net borrowing) was used to fuel consumption. The remaining $64tn of borrowing was, therefore, used for purposes other than funding consumption.

On this basis, underlying world GDP in 2015 was $95tn, 17% below the reported $114tn. Just as important, trend growth is far lower when measured on an underlying basis, where world economic output is growing at about 1.2% annually.

This figure is nowhere near a consensus in the range 3-4%. That consensus rate of growth may be deliverable – but only if we carry on spending borrowed money.

A world in denial

Logically, the practice of inflating GDP by spending borrowed money cannot continue indefinitely. This is not a “new normal”, but a “new abnormal”. Most obviously, the aggregate amount of debt is rising much more rapidly than economic output, making the debt burden ever harder to support. Since the global financial crisis (GFC) of 2008, the economy has only managed to co-exist with this debt mountain at all thanks to the slashing of interest rates to near-zero levels.

ZIRP (meaning “zero interest rate policy”) has its own costs, some of which are only now gaining recognition. Savers have suffered very seriously from monetary policies designed to keep borrowers afloat, which, perhaps, is why the concept of “moral hazard” seems to have fallen out of the vocabulary. Last summer, after the most recent cut in interest rates, the deficit in British pension funds rose to £945bn, more than 50% of GDP, and evidence of pension value destruction has emerged on a worldwide basis. Ultra-cheap money keeps afloat businesses which in normal times would have gone under, creating space for new, vibrant enterprises – so the necessary process of “creative destruction” has been stymied by monetary manipulation.

In short, we are living in an unsustainable “never-never-land”, in which cheap debt both misrepresents and undermines real economic performance. It is hoped that this first dataset will help readers to see what is happening in an informative context.


#86. In pursuit of safety


Although I’ve committed myself to publishing a “rescue plan” for the British economy, I’m hoping that readers will accept, for now at least, a broader reading of the economic and political situation. Recent developments have yielded a specific point worth of discussion, and a general one as well.

The specific point is that extremely wealthy people, mainly from the United States, have been buying-up “survival properties” in New Zealand. Though billionaires as such are a small group, the number of American inquiries about emigration to New Zealand is running at 13,000 a month, which is six times the year-earlier level, and property prices in favoured parts of New Zealand are soaring. The most desirable properties are said to be those self-sufficient in food, water and energy, and the country is, of course, a long way from the places where nuclear war is likeliest to break out. The implication, not missed by observers such as The Financial Times, is that the rich are buying bolt-holes.

The general point is that the self-styled “liberal” elites are still in deep denial over what is happening politically. One reason for this is that the economic data available to decision-makers is disconnected from reality as it is experienced by the general public.

A key point made here is that the economy is a great deal weaker than conventional data suggests, which in turn makes public dissatisfaction that much more understandable.

As well as heaping derision (and more) on Brexiteers, Donald Trump and others castigated for “populism”, the mainstream media are also doing their best to convince us (or perhaps to convince themselves?) that Marine Le Pen cannot win the forthcoming presidential election in France. After that, they will doubtless turn their fire on Holland’s Geert Wilders.

Whilst I don’t feel qualified to comment on the electoral prospects of Ms Le Pen and Mr Wilders, I’m convinced that popular candidates (a term I prefer to the pejorative “populist”) are going to go on winning. The elites, who prefer denial and derision to self-examination, haven’t learned yet, and voters are going to carry on dishing out lessons until they do.

Together, these trends encapsulate what is happening. Whilst the public continues to vent its dissatisfaction, and whilst the elites as a whole continue to bury their heads in the sand, some amongst them are preparing for a future which, they feel, might not be very nice.

They are probably right, even if their preparations may be based on faulty logic.

The public are revolting

Though history never repeats itself, there are recurring patterns. One of the most striking is the way in which elites, whatever their initial merits, decay into unpopularity. “Familiarity breeds contempt”, it is said, and familiarity with power certainly has a history of breeding contempt for the general public. The tendency is for elites to become arrogant, greedy and corrupt, and, because they also become disconnected from reality, they are most unlikely to reform themselves unless forced to do so by popular pressure.

Leaving aside – for now – the military “wild card”, one of three things can happen from here. First, the ruling elites may bow to popular pressure, voluntarily yielding real (not cosmetic) reforms which salvage their leadership at a significant cost in terms of surrendered power, wealth and privilege. This is the best outcome, and worthy of further examination, but it does not look the likeliest.

Second, the general public may give up, accepting that they’ve made their point, and recognising the futility of trying to reform incorrigible elites. This is highly unlikely, again for reasons that merit consideration.

Third, the irresistible force of public anger may collide with the immovable object of elite intransigence, the result being social unrest. Those seeking refuge may believe this to be the likeliest outcome. They may well be right.

The “wild card”, of course, is global military conflict. There were at least two occasions during the Cold War when this came close to happening. The first was the 1962 Cuban Missile Crisis, and the second occurred in 1983 with the downing of a Korean airliner. On both occasions, the threat was averted. The danger of “third time unlucky” might be another reason for acquiring a bolt-hole in the Antipodes, though this precaution seems unlikely to prove successful.

A mass capitulation?

The cherished hope of the elites is that the tide of public anger may recede, leaving the elites in full control with their wealth and privileges unimpaired. This hope is futile, so much so that it is really an exercise in denial.

Though other issues are involved, the main cause of public dissatisfaction is widespread economic hardship, set alongside the conspicuous flaunting of wealth and power by a privileged minority. Economists who seem baffled by the weak performance of the world economy would be even more baffled if they were aware of what is really happening behind the published numbers.

Over the decade to 2015, official figures imply a 1.8% rate of compound growth, a figure which includes the post-2008 downturn and which, the consensus says, is likely to rise to an annual growth rate of between 3% and 4% going forward. Both of these readings are fallacious, because they take as reality GDP numbers inflated by the spending of borrowed money.

Revised numbers from SEEDS show that world GDP, measured at constant values and with non-US data converted into international dollars using PPP (purchasing power parity) exchange rates, grew by $20tn (21%) between 2005 and 2015. But world debt, similarly measured, increased by $76tn (45%) over the same period. This is a “trailing ten-year” (T10Y) rate of borrowing of $3.81 per dollar of growth. This T10Y number is lower than the provisional number ($4.50) published here previously, but has been rising relentlessly – back in 2009, the T10Y number was $2.89 per growth dollar.

A stumbling economy

Given that almost $4 has been borrowed for each $1 of growth, you could be forgiven for supposing that, over an extended period, there has been no “real” growth at all. This is likely to be an exaggeration, but not much of one. Stripped of debt-fuelled consumption, growth in world GDP between 2005 and 2015 was probably about $7.6tn (rather than the reported $20tn), and trend growth may have been as low as 0.5% over that period as a whole. This, of course, includes the post-2008 recession, and current underlying growth is probably about 1.5%.

On this basis, world GDP in 2015 was probably nearer $94tn than the reported $114tn, which would make the global debt-to-GDP ratio about 280%, rather than the published 216%.

All of this, of course, is before adjustment for the trend cost of energy (ECoE) to define what Surplus Energy Economics terms “the real economy” (as opposed to “the financial economy”). In 2015, underlying output was $87tn on this basis, and ongoing growth in “real”, ex-ECoE terms is about 1.0%. That is still a positive number, but it is dwarfed by the rate at which debt continues to be accumulated.

Real pain – the deterioration in living standards

The underlying weakness of the economy is already showing up in the day-to-day experience of the public. On an underlying, “real economy” basis, the countries whose economies are now ex-growth include Britain, France, Italy, Spain, Canada and Japan. The American economy may still be growing, but at a rate nowhere near official figures. China and India are probably the only major countries enjoying significant growth but, even in these instances, underlying growth is a great deal below the rates reported officially.

This deterioration can be expressed in per capita terms, but it shows up in the day-to-day lives of the public in two distinct ways. The first is that the rise in the cost of household essentials continues to out-strip growth in nominal incomes. This is happening, primarily, because these essentials are highly leveraged to energy prices, and to commodities which are traded on world markets. Economists tend to assume that such commodities are priced in the same way as internally-consumed services, but the reality is that there is a huge difference between local and global pricing pressures.

As well as the cost of essentials, the other way in which economic deterioration is showing up in the lives of the public is in deteriorating provision for the future. Ultra-low interest rate policies, adopted to enable the world economy to co-exist with its debt mountain, are keeping borrowing cheap (and asset prices inflated) whilst destroying returns on capital. This is becoming glaringly obvious in pension fund deficits, but is also showing up in the continued escalation of debt.

What happens next?

The elites’ fervent hope, which is that popular discontent dies down, looks increasingly like a pipe-dream. As we have seen, the public is suffering in ways which are very real, but are not readily apparent in the data used by policymakers. This is leading those who take the key decisions into a position of genuine bewilderment – the data at their disposal simply does not tally with the popular mood, leading them to the false assumption that it is the public (rather than the data) which are wrong.

If the public do not back down, the other way to restore smooth relations between governing and governed would be for the elites to reform themselves. Since this would require significant relinquishment of wealth and power, this seems an unlikely policy to be adopted by an incumbency whose principal characteristics include arrogance and greed. Reform is rendered even less likely by the false comfort that the establishment seems to derive from an over-optimistic reading of the economic situation.

Marie Antoinette’s famous remark – that, if people are without bread, “let them eat brioche” – is probably apocryphal. But the point of the anecdote is that she was wholly ignorant of the circumstances of ordinary people, and this does seem to have been the case.

Today’s policymakers seem to be being lulled into similar complacency by economic data flattered out of all reality by the practice of mortgaging the future in order to inflate the present.

If the public are not going to back down, and the elites are determined to hang on to all of their power, wealth and privileges, the odds on social unrest may be pretty high.

Ultimately, this never does anyone much good. The noble aims of the French Revolution led directly to the Committee for Public Safety and “the terror”, with a wrought-iron “tree of liberty” sitting in mute irony beside the guillotine in the centre of every sizeable town. The Russian Revolution led to Bolshevist rule and Stalinist purges.

The only way of averting unrest may be for the elites to awaken to the causes of popular discontent, and implement far-reaching reforms. This is not going to happen unless their complacency over the economy can be punctured. If that happens, then they might switch from denouncing “populism” and turn instead to tackling the root causes of popular discontent.


#85. Perfect Storm gets nearer


If you have read Life After Growth (2013 and 2016), or before it Perfect Storm (2011), you will be familiar with the thinking on which the theory of surplus energy economics is based. Though the next article here was to have been a rescue plan for the British economy, it seems more important to update you on surplus energy economics.

My perception is that things are starting to stir, and that the climate is becoming much more receptive to ideas which challenge the traditional interpretation of economics.

What’s happening now?

Though less than six years have elapsed since Perfect Storm, a great deal has changed. Back in 2011, many found it disconcerting that the head of research at a major City institution would put his name to a report stating that a tightening of the energy equation might be bringing 200 years of economic growth shuddering to a halt. Though there were exceptions, much of the mainstream response varied between the dismissive and the derisive. Many, I felt, did not want to accept an analysis which would challenge their fundamental assumptions, as well as predicting an end to a relatively satisfactory state of affairs.

Now, though, this is changing – in two main ways. First, if the Perfect Storm thesis had been wrong, we should know by now, because the economy should be growing strongly, indebtedness should be decreasing as we implement the lessons learned so painfully in 2008 and, above all, there should have been a return to normality.

Instead, we have “secular stagnation”, where such growth as does occur reflects nothing more than the spending of borrowed money. Debt continues to escalate, and the extreme abnormality of ZIRP and other forms of monetary manipulation is doing a great deal of harm. (Even if rates creep up a little, by the way, we will remain a very long way from normality).

Second, economists are now starting to question their prior certainties, with some members of the profession prepared to admit that they may have got it wrong. The credibility of economics itself is in the spotlight.

In short, the economy is moving on in ways that refuse to conform to conventional theory, but bear a closer resemblance to the surplus energy interpretation. The thesis that the real economy would stumble, and that we would go on driving an ever-wider and more dangerous wedge between the “real” and “financial” economies, does seem to be happening.

What is Surplus Energy Economics?

Very briefly, SEE says that the economy is an energy system, not a monetary one. Prosperity is determined by surplus energy – that is, the energy available after the deduction of the energy which is always used up whenever we access energy.

Our entire history can be seen in this way. As hunter-gatherers, all the energy that people obtained from food was consumed obtaining that food, so there was no surplus, no economy and no society.

Agriculture was the “first great breakthrough” because it created the first energy surplus. Put simply, the greater efficiency of farming compared with hunter-gathering, plus the use of animal labour, enabled twenty people to be fed by the labour of nineteen, freeing the twentieth to do other things. This first energy surplus was small, and most people continued to undertake subsistence activities. But there was now an economy of sorts, and a society developed in parallel with it. People could now, for the first time, invest, sacrificing current consumption to create capital assets (such as barns, bridges, agricultural implements and rudimentary workshops) which would improve their lot in the future.

A vastly bigger energy surplus was created when we learned to tap fossil fuels, such as coal, oil and natural gas. This triggered two centuries of exponential growth, not just in economic output, but in population numbers and energy consumption as well. So sophisticated have economies become that, most notably in the West, very few people are engaged in producing food.

The end of growth?

For decades, people have speculated about the relationship between exponential growth and a finite planet. This debate rages on, but the balance is tilting, in two very obvious ways.

First, we are discovering the limitations of the earth as an ecosystem and, second, the surplus energy which has driven growth in economic output and population numbers is coming under mounting pressure.

Where fossil fuels – still well over 80% of our energy consumption – are concerned, two factors are in play. Depletion is robbing us of the gigantic, ultra-low-cost sources of energy which hitherto powered economic growth. Technology is endeavouring to offset this, both increasing the efficiency with which we access conventional fuels, and enabling us to tap energy from renewable sources.

Technology will doubtless continue to progress, but we are in danger of complacency over technological solutions. Renewables still account for barely 3% of global energy consumption, and no-one has yet worked out how to power a 747-size jet using renewables, or how to extract 1 tonne of ore from 500 tonnes of rock without using fossil fuels.

We should be optimistic about renewables, but also realistic. Renewables can supply energy more cost-effectively than fossil fuel sources discovered and brought on stream today. But my interpretation of the thermodynamic balance is that renewables are not going to take us back to an age of vast, low-cost, high-surplus energy from giant fields.

Measuring the state-of-play

If the economy is fundamentally an energy system, we need to assess our situation using measures which are energy-based, not financial. One such measure is EROEI (Energy Returns On Energy Invested). Another is ECoE (the Energy Cost of Energy).

I have long postulated an ECoE curve which is trending upwards relentlessly. I want to be quite clear about the lack of available data, which reflects a lack of financial support for research. The trend ECoE curve used here has been developed and refined over several years, and is subdivided by fuel and location. The system I use is called SEEDS (the Surplus Energy Economics Data System). It can only be a “best estimate”, but I derive encouragement from its seemingly good fit with what is happening to the economy.

This overall curve suggests that ECoE has been on a rising trend since the 1960s. Initially, increases were pretty modest, with ECoE increasing from 1.2% in 1970, via 1.9% in 1980 and 2.8% in 1990, to 4.2% in 2000. But, because this is an exponential progression, the rate of increase is rising markedly. My estimate for trend ECoE in 2010 is 6.4%, and this is projected to rise to 9.6% by 2020.

In short, we have now moved into territory where ECoE, once a number so small that we could afford to ignore it, starts to destroy the capacity for growth.

The concept of ECoE is best understood as “economic rent”, a charge levied on the economy by the limitations of the earth’s resource set. It is not the same as financial cost, because cost is a closed-system – money spent by, say, a company developing an oil field or a solar project, is a cost to that company, but an income to others, such as contractors, suppliers and employees.

Rather, ECoE is an economic rent, levied by resource limitations but not accounted for when we measure the economy. It can be thought of as a restriction of choice, forcing us to spend more on energy and, therefore, less on other things. It is in some ways analogous to taxation – tax does not reduce gross income, but it forces the recipient to use some of it in a way that might not be his or her preference, reducing how much can be spent in ways that the person might like.

In case this seems remote and theoretical, ECoE is already, and noticeably, eating into our discretionary incomes. As a direct corollary of rising ECoEs, the cost of household essentials has long been rising much more rapidly than general inflation, undermining how much of our incomes we can spend as we choose. I have explained before how prosperity is not a function of how much money someone has, but of how much choice (“discretion”) that person has after paying for essentials.

Finally, ECoE is only tangentially related to the current price of energy to the end-user. As prices soared between 2000 and 2007, and remained high until 2014, massive investment was poured into energy supply. This created a glut which, as well as driving prices down sharply, resulted in a slump in investment. In due course – and depending, of course, on demand – this dearth of investment could drive energy prices sharply higher. But pricing, ultimately, is a cyclical process acting as “noise” around the trend determined by the interplay of depletion and technology.

What next?

If the surplus energy interpretation of the economy is correct, growth should continue to prove elusive. But our system is so predicated on growth – a topic for another article – that we cannot accept even stagnation, let alone adjust to decline.

So we have been faking growth by borrowing. By 2008, the debt mountain had become so big that we could no longer afford to pay a normal rate of interest on it, so the authorities adopted ZIRP (zero interest rate policy) in order to prevent the economy being engulfed. But ZIRP, and other forms of monetary manipulation, cannot resolve the situation, and have their own costs. At zero- or near-zero rates, the economy cannot function normally, and it certainly cannot provide for the future, which is why huge deficits are now imperilling pension provision.

In theory, we might go on faking growth for many more years yet, and I’m pretty sure the authorities will be mightily tempted to try. But this would result in a further escalation of debt, which would also mean that raising interest rates significantly – let alone restoring them to something resembling normality – would become out of the question (which may already be the case). Comparing 2020 with 2015, and taking inflation out of the equation, the world seems likely to grow its GDP by close to $10tn, but to add at least $50tn to its $151tn non-financial debt mountain.

If (or, rather, when) debt escalation reaches crisis point, some kind of write-off might be tried, unless the authorities decide to unleash high inflation in an attempt to destroy the real value of debt. Inflation, which has been described as the “hard drug” of our economic system, can very rapidly get out of control.

So here we have some pointers to the future – debt escalation, and/or hyper-inflation, both of which would be insane choices, but neither of which are beyond the short-termism of the political class.

Ultimately, and whichever folly is chosen, faith in fiat currencies is likely to collapse, to which I will only add that there are already at least two major currencies that I, for one, would not want to hold. In the normal course of events, inflation strips money of its value, but this tends to be gradual – we have little widespread (though plenty of local) experience of what happens when a fiat currency falls apart.

People cannot be expected to accept any of the post-growth consequences described here with a resigned shrug. They are not doing so now – instead, and naturally, they are beginning to blame, and repudiate, established political leaderships, and this was the most significant trend to emerge in 2016.

If the economy – and, in the first instance, the financial system – does start to implode, governments are highly likely to resort to coercion, spouting precious claptrap about “the national interest” as they try to maintain their hold on power.

Though the financial and real economies are different concepts, it is impossible for finance to collapse without inflicting grave damage on the real economy.  Our economy is essentially fragile, depending on attenuated systems, most obviously for payment and clearing. If you try to envisage running an economy without payment systems, banks, insurance or even trusted money, in a climate in which no one knows who owns or owes what, you will appreciate that the real economy is a hostage to finance.

Meanwhile, I’m continuing to refine the SEEDS system, with a new version now almost ready for roll-out. Clearly, it would help if this system, like the broader interpretation of the economy as an energy equation, reached a mainstream audience. My belief is this will happen – as the scale of our predicament, and the shortcomings of conventional interpretations, become ever more obvious, there will emerge a pressing need for a new understanding.

Governments are unlikely to adopt this, though trans-government organisations might. It seems likeliest that a major financial corporation, seeking commercial advantage from “getting there before the competition”, might be the first big player to act.

How things may unfold, and when, remains conjectural – but I do feel that I now have more than enough material for a sequel to Life After Growth.