Manchester

The next article to appear here is written and ready to go. But I feel we all need to pause because of the tragedy in Manchester.

I cannot have been more than about five years old when I was caught up in a bombing. A warning had been given, and we all filed out to safety before the bomb went off.

At that age, you just don’t understand what’s going on.

Decades on, I still don’t understand. Human beings have our differences, and we argue for our opinions. That’s natural.

But I cannot peer into the darkness of soul that can inflict murder and mayhem on innocent people, so many of them children.

My sympathies are with the bereaved and the maimed, the frightened and the bewildered.

Compared with this, nothing else matters.

#95: Exponentials unravelled

STRIKING CONCLUSIONS ON THE BEHAVIOUR OF DEBT AND GDP

Just occasionally, when conducting research for a project, one can stumble – almost accidentally, as it were – upon something which is really important.

During preparatory research for a discussion of “chaos theory” – my shorthand term for the various doomsday scenarios which purport to predict the collapse of Western civilization – I happened to notice that the trajectories of world debt and GDP seem to be following an internal mathematical logic of their own.  More specifically, each seems to be subject to exponential progression at remarkably consistent rates.

If this is indeed the case, its implications could be far-reaching, which is the reason for sharing this with you here.

I assume that readers are conversant with exponential progression but, just in case, here’s the gist. Essentially, a numerical series can adopt a “j-curve” or “hockey-stick” shape even though the annual rate of change remains the same. Imagine a $1,000 investment, increasing by 5% per year. In the first year, the extra 5% increases the total by $50, to $1,050. By year 17, however, the total has reached over $2,000, so that year’s increase is more than $100, even though the rate of change is still 5%. Each year, then, the quantity added becomes bigger despite the rate of growth being constant.

The first chart applies a constant rate of progression to total world debt. Let’s be clear about the conventions used in this and subsequent charts. All numbers are expressed in international dollars, converted using the PPP (purchasing power parity) method. In all cases, values are stated in constant 2016 dollars. The blue columns on the chart are historic numbers since 1999, with the 2016 data-point being the end of September, since year-end debt figures are not yet available. The red columns are SEEDS projections out to 2022, and the superimposed black line is an exponential progression at a constant rate of change.

95 1 debtjpg_Page1

Where debt is concerned, the exponential rate which produces a remarkably close fit is 5.2%. In fact, annual variations from this rate have been strikingly small – and, for each of these charts, a close-up version at the end of this article shows quite how exact the correlation has been.

In 2009, and for wholly understandable reasons, total debt did exceed the 5.2% trend-line, but the very modest deleveraging which occurred in the following year restored the relationship.

Let’s be clear about the implications of this. What this chart is telling us is that global debt is growing by a constant 5.2% annually, and has been doing so for more than fifteen years. Come hell or high water – or their economic equivalents of boom and bust – this progression hardly varies at all. Neither, of course, does inflation enter into this, because these are constant-value numbers.

The suggestion, then, is that global credit expansion is subject to some internal mathematical logic of its own. This, in  turn, would help to explain why there has been no retreat from borrowing despite the shock effect of the GFC (global financial crisis) of 2008.

The next chart applies the same methods to GDP (gross domestic product), again in constant (2016) PPP-converted dollars.

95 2 GDPjpg_Page1

Once again, the correlation is very close – had the constant rate curve been followed exactly, GDP would have been $92 trillion (rather than the actual $94tn) in 2010, and $107tn (rather than $111tn) in 2015, but these are very minor divergences.

The big difference this time, though, is that the annual rate of compound expansion is 3.2%, rather than the 5.2% revealed by the progression of debt. (Please note that the first three charts used here have proportionate vertical axes, enabling an undistorted visual appreciation of comparisons).

Strikingly, GDP is growing at a trend rate (3.2%) which is significantly lower than the rate (5.2%) at which debt is increasing. And, since the debt number has been bigger than the GDP number from the outset, the quantity of debt being added each year is bigger than the annual amount of growth.

Moreover, the gap between the annual increments of debt and growth is widening – as, of course, mathematically it must.

This largely explains why the ratio of global debt to global GDP has increased from 163% in 1999 to 221% at the end of September last year. It further suggests that, if the incremental rates of change identified here remain in place – and there seems no reason why they shouldn’t – then the debt ratio will reach 246% by 2020 and 272% by 2025. Neither ratio is impossible – after all, debt to GDP is already higher than 272% in countries such as Japan and the United Kingdom.

Again, a fascinating implication of this finding is that GDP, like debt, rises at a constant rate seemingly dictated by internal mathematical logic. To be sure, GDP got ahead of this rate in the years immediately preceding 2008, but then fell back to trend. Once again, the close-up charts at the end of this discussion show how the trend was first exceeded, and then restored, by the boom-and-bust cycle around the GFC.

This, of course, refers to GDP as the authorities measure it, and regular readers will know my view that recorded GDP has been inflated by the spending of borrowed money. The logic here is that, just as investment relinquishes current in favour of future consumption, the spending of borrowed money, since it does the opposite, is a form of negative investment. In fact, debt is simply one component of futurity, which also embraces, most obviously, pension provision. Just as debt has expanded, pension provision has weakened, because both are components of our financial relationship with futurity.

Therefore, the SEEDS system produces estimates of how much borrowed money is used to inflate current consumption at the expense of the future. This creates estimates of underlying GDP, and this series is the subject of the next chart.

95 3 UL GDPjpg_Page1

As you can see, there is, once again, a remarkably close fit between actual numbers and a compounding rate of change, which in this instance is 1.8%. Because it excludes the estimated impact of spending borrowed money – of mortgaging futurity, that is – the trend rate of expansion is a lot lower than the rate applicable to GDP as recorded officially.

It is, of course, up to you whether you agree, or not, with my view that, by ramping up debt and using a lot of it to fund consumption, we are boosting today’s consumption at the expense of tomorrow’s. This interpretation seems to me to be reinforced by the opening up of enormous shortfalls in provision for futurity, most visibly in pension deficits.

In short, if pension funding is deficient, the amount available to all of us as pensioners in the future will be smaller than it would otherwise have been. This in turn suggests that we are “pillaging the future” to increase current consumption. Of course, the reason why pension deficits are ballooning, ultimately, is that returns on invested assets have collapsed – and this is a direct consequence of cheap money policies, essentially imposed on central banks by the sheer impossibility of servicing today’s debt mountain at historic (higher) rates of interest.

Wherever you stand on this “mortgaging the future” question, the key point to emerge here is surely that both debt and GDP seem to be subject to rates of change which correlate so closely as to suggest that an internal mathematical dynamic is operating.

The immediate conclusions seem to be that:

  • World debt is growing at a compound annual rate of 5.2%.
  • GDP is growing at a compounding rate of 3.2%.
  • Adjusted for the effects of passing off the spending of borrowed money as “growth”, underlying economic output is growing at a trend rate of 1.8% annually.

All of these numbers exclude two factors which are further undermining prosperity at the individual level. The first of these is population growth, which dilutes per capita shares of economic output. The second is the rising trend in the Energy Cost of Energy (ECoE) – by driving up the cost of household essentials, rising ECoEs act as an expanding “economic rent”, undermining prosperity as this is experienced as “discretionary” (ex-essentials) spending capability.

The findings presented here, of course, are global aggregates, and individual countries’ experiences and prospects vary very significantly around these central trends. India, for instance, could go on growing at current underlying rates for several more decades, whilst the British economy could fall apart within five years.

The general conclusion, however, has to be that, because internal rates of growth are pushing up debt much more rapidly than GDP, there will in due course have to be a reset, most probably through the “soft default” process where the real value of accumulated debt is destroyed by a sharply higher inflation.

What this will not do, however, is reset broader futurity as typified by pension deficits – so we will still need to readdress how we allocate resources between the present and the future.

95 5 detailjpg_Page1

#94: Spring has sprung……a leak

THE TRIUMPH OF HOPE OVER REALITY

I’m a cheerful person – really, I am – and with the sun shining on a shimmering sea outside my window, who wouldn’t be? But there’s a big difference between reasonable optimism and outright delusion, and the latter, it seems, has been taking a big hold over many of those whose job it is to forecast our economic weather.

This week, we’ve seen a pretty upbeat set of forecasts from the IMF (the International Monetary Fund), which has predicted that growth in world GDP (measured in international dollars at PPP rates of conversion) will improve this year, from 3.1% to 3.46%, rising steadily thereafter, to 3.7% by 2019, and nearer 3.8% by 2022. This seems to have reinforced an optimism percolating through the forecasting community, with some even opining that we may be approaching a nirvana known as “take-off velocity”.

In fact, and if the IMF is right, global economic output will be 24% bigger in 2022 than it was in 2016. To find a six-year growth record as good as this, you have to go back to the period from 2002 to 2008, when world GDP grew by 29%, and that ended well, didn’t it?

Oh.

The trouble with “take-off velocity”, you see, is that, if the aeroplane is carrying too much weight, it can fly straight into a brick wall. “Weight”, in this context, means debt. The SEEDS database shows that the 29% growth achieved between 2002 and 2008, whilst adding $21.5 trillion to GDP, was accompanied by $44.7tn in net new borrowing. In other words, world debt grew by twice as much as GDP (if you’re a stickler for detail, the ratio was 2.09:1).

This couldn’t happen again, could it? Surely we’ve learned from the shock effect of the 2008 global financial crisis (GFC), haven’t we?

Well, no.

In 2016, global GDP grew by 3.4%, adding $3.9tn to GDP. Where debt is concerned, we do not yet have comprehensive data for the whole of the year, but we do know that world debt increased by over $11.4tn in the first three quarters of 2016.

In that nine-month period, governments borrowed more than $5.5tn, households $2.3tn, and non-financial businesses $3.5tn. That stacks up to $3.90 of borrowing for each $1 of reported growth, even if we assume that prudence reigned supreme, such that nobody borrowed at all in the three months running up to Christmas.

To be sure, we cannot make a one-for-one comparison between borrowing and growth. But we do know that a lot of this credit expansion went into consumption expenditures, not least because that’s what governments spend most of their money on. The calculations made by SEEDS suggest that, stripped of the spending of borrowed money, reported growth of 3.4% falls to an underlying level of just 1.2% – and even that probably makes some pretty generous judgments on the validity of a very big pile of borrowing.

Nor is that all – because debt is not the only hostage that current practices are handing to posterity. Debt, though it adds to the burdens of futurity, can at least be managed, if we let inflation accelerate, essentially bilking lenders by paying them back in devalued money.

This cannot work with other forms of futurity, most obviously pensions, where the same inflation that devalues debt simultaneously increases the burden of future payments, not just of pension commitments but also of welfare. It should come as no surprise whatsoever that pension deficits are continuing to widen alarmingly.

In short, claims that we are nearing “take off velocity” should be taken with a huge pinch of salt.

Indeed, we’d do better to steer very well clear of any kind of take-off – until the pilots on the flight-deck of the world economic aeroplane have sobered up.

#93: The prosperity equation

MEASURING THE BOTTOM LINE

In the previous article, we looked at some fundamental principles which belong in the realms of philosophy and ideals. Such discussions are valuable, and are all too often neglected in a world seemingly obsessed with immediacy. But we do also need to focus on the tangibles – and nothing is more tangible than prosperity.

Strange though it may seem, conventional economics is really pretty weak on this fundamental matter of prosperity. The claim put forward here is that the surplus energy economics approach can provide unique insights into prosperity. What follows is an explanation of how the SEEDS system measures prosperity, together with some conclusions which might be surprising.

Prosperity isn’t assets

Let’s start by noting that the link between assets and prosperity is far weaker than we might assume. If you buy a house for £100,000, and its value doubles to £200,000, that sounds like an increase in prosperity which, superficially, it is. It’s certainly possible for you to sell the property and pocket the gain (always assuming that you don’t need, as most people do, to buy another house to live in, which will have risen in price by just as much).

But this process does not add to the aggregate wealth of the economy – it would not be possible for all homeowners, or most of them, or even a sizeable minority of them, to monetize these gains. If huge numbers of properties were put on the market, prices would slump, which is a simple example of supply and demand. But the really fundamental point is that the housing stock cannot be monetized because the only people who can buy that stock are the same people who already own it.

What this really means is that transactions at the margin do not value the aggregate in any meaningful way. Likewise, the aggregate value of, say, all the equities or all the bonds traded on a market is meaningless, because that value simply cannot be monetized.

Prosperity and income

Financial assets, such as houses or investment instruments, then, are not the same thing as “prosperity”, though cash in the bank comes nearer to it.

Rather, real prosperity depends on incomes, provided that we qualify this statement in some critical ways. First, if an extra £10,000 comes into your hands because your pay has risen, or even because you backed the right horse at Cheltenham, your prosperity has increased. But this is not the case if you have an extra £10,000 to spend because you have taken out a loan of that amount – in this instance, your prosperity has neither increased nor decreased.

Second, even incomes do not correlate directly to prosperity. Let’s say that someone’s employer raises his pay by 5%. If, at the same time, the cost of all the things he has to spend money on – things like fuel, food, water and so on – has risen by 10%, this person’s prosperity has diminished, not increased.

This gets us to a definition of prosperity, something mentioned here before but so important that it bears repetition. Prosperity is “discretionary” income.

To measure it, we start with income. From this, we deduct the cost of essential or “non-discretionary” expenses. What remains is “discretionary” income, meaning the amount that the recipient can choose to spend in whatever way he or she chooses. Put simply, if the money in your pocket after essential spending increases, you are more prosperous.

Measuring prosperity

Surplus energy economics provides unique insights into prosperity because the trend cost of energy is the principle driver of non-discretionary costs. The cost of essentials is massively linked to the cost of energy. Fuel, power and light are themselves significant components of the non-discretionary spend. But energy also drives the cost of water, minerals, food and the various manufactured goods which need to be acquired and replaced over time.

Let’s illustrate this taking China as an example, and making a ten-year comparison between 2006 and 2016. Over that period, and stated at constant 2016 values, China’s reported GDP increased by 134%. This does not, however, make the average Chinese citizen better off by 134%. For a start, the population of China increased by almost 16% over that period. This dilutes the per capita share of GDP, so that the increase thus measured is 123%, not 134%.

Then there’s the question of debt, remembering that adding to your overdraft does not increase your prosperity. Between 2006 and 2016, China’s inflation-adjusted GDP increased by RMB 42 trillion, but debt increased by RMB 141tn, or RMB 3.37 for each RMB of growth. Clearly, some of that borrowing was used to fund consumption expenditure, thus inflating reported growth to levels higher than the “organic” or “underlying” situation.

The SEEDS calculation is that, of the total RMB 141tn borrowed, nearly RMB 23tn (16% of all net borrowing) inflated GDP by financing debt-funded consumption. Adjusting for this, underlying GDP growth over the decade wasn’t 134%, but 87%. Underlying per capita GDP, meanwhile, didn’t rise by 123%, but by 65%.

Lastly, we come to the cost of essentials, which SEEDS measures using the trend ECoE (Energy Cost of Energy). This, as outlined in previous articles, is an “economic rent”. As such, it does not diminish GDP or the income of the average person, but it does increase “non-discretionary” costs, so the effect is to reduce “discretionary” incomes and, hence, prosperity. According to SEEDS, the trend ECoE of China increased from 10.3% in 2006 to 14.3% in 2016. The effect of this was to reduce growth in the real economy over that decade to 71%. The per-capita equivalent of this was 58% – and that’s the real extent by which prosperity per person increased over that period.

To sum up, then, we can list the sequence for China like this:

  • GDP: +134%
  • Population change effect: -11% (growth now 134% – 11% = 123%)
  • Adjustment for debt-funded consumption: -58% (growth now 123% – 58% = 65%)
  • Increased ECoE, increasing non-discretionary spend: -7% (growth now 65% – 7% = 58%)

International prosperity – an overview

That the average Chinese person saw his prosperity increase by “only” 58% over a decade remains pretty impressive. But the same adjustments, when applied to less vibrant economies, have some very adverse implications for prosperity.

Here is a league-table showing the itemised path from growth to prosperity for the SEEDS universe of 21 economies. Its implications are far-reaching.

Fig. 1: Prosperity per capita, 2016 vs 2006

 

In the United States, growth of 14.6% in GDP translates into a decrease of 7.0% in prosperity, which might go a long way to help explain why Donald Trump was able to wrest the White House out of the clutches of the political establishment.

In Britain, GDP growth of 12.2% translates into a slump of 13.8% in prosperity, which might likewise help explain “Brexit”. Italian prosperity fell by 9.7% between 2006 and 2016 – a worse fall than any other country except Britain – which no doubt influenced the resounding voter rejection of Matteo Renzi’s reform proposals.

More positively, personal prosperity over that decade increased by 48% in India, 18% in Russia and 12% in Poland.

The French conundrum

All of which brings us, topically, to the situation in France. Until recently, it was generally assumed that, after the first round of voting on 23rd April, the second and decisive round on 7th May would pitch the anti-establishment Marine Le Pen against a “centrist” (meaning “pro-establishment”) contender, presumably Emmanuel Macron.

Latterly, however, the meteoric rise in the popularity of far-left candidate Jean-Luc Mélenchon has created, for the establishment, the potential nightmare scenario of the nationalist Ms Le Pen confronting Mr Mélenchon, whose policies include a marginal tax rate of 100% on incomes over €360,000.

As well as vanquishing the incumbent elite, this outcome would ensure an anti-EU occupant of the Elysée because, whilst Ms Le Pen takes a nationalist view of the EU, Mr Mélenchon seems to see the whole thing as a neoliberal cabal. The view expressed here is that leaving the EU would almost certainly push France into default, something which would terrify the country’s creditors (most obviously Germany) and have knock-on effects throughout the world. The viability of the Euro, and even of the EU itself, could be fatally undermined by the reintroduction of the Franc, “Frexit”, or both.

What part might prosperity (or the lack of it) play in the voters’ decision? According to SEEDS, per capita prosperity in France declined by 6.6% between 2006 and 2016 and, looking ahead, is projected to carry on deteriorating, albeit at pretty modest rates.

Of course, the average voter, in France or anywhere else, does not spend his or her time studying economic indicators. But voters do have a very immediate sense of prosperity, because they know how far their money goes after essentials have been paid for.

It’s impossible to say whether the 6.6% ten-year deterioration in French prosperity will be enough to oust the establishment from power – but a not-dissimilar deterioration (of 7%) was followed by the election of Mr Trump, whilst Italy’s 9.7% decline was more than enough to see off Mr Renzi.

If France does elect Ms Le Pen or Mr Mélenchon, the consequences could be drastic – and not just for France herself.

ANNEX

 

#92: Pianists in a brothel

THE TRIUMPH OF REASON, OR A NEW DARK AGE?

There is a story (which may well be apocryphal) about an Italian politician who took a friend home to meet his mother. On the way, he warned his friend that his mother was a rather grand old lady, with high notions of decency and respectability. For this reason, he had not informed her that he was in politics, and asked his friend to keep his secret. “If she knew I was a minister in the government”, he said, “she would be appalled”.

His friend asked him what his mother thought he did do for a living. “She thinks I play the piano in a brothel”, replied the politician. “That’s far more respectable”.

This story is a reminder that politicians as a genus have never topped the public popularity stakes. Some very decent men and women do go into politics, but the system seems (and probably is) designed to prevent them from getting to the top. Ideally, our leaders would be taking a strategic view. All too often, however, they are too mired in trench-warfare to do this.

This means that we need to rely on ourselves, not wait for government to find solutions.

The need for solutions seems particularly imperative now. Even those who don’t subscribe to the interpretation of economics along surplus energy lines would find it hard to deny that there are strange tendencies afoot, not just in the world economy but in the social and political spheres as well.

It has been well said that “a country is more an idea than a place” – and much the same can be said of the world itself. Ideas are perhaps the most important influence of the lot. Politicians, theories, and even prosperity, come and go, but the fundamentals remain the same – how do we best manage the issues of getting along with those around us, balancing security with individual freedom, and combining prosperity with both harmony and sustainability?

At times, we have seemed tantalisingly close to success, only to slip off the rails, temporarily at least. Great thinkers – amongst them Smith, Voltaire, Gandhi and Mandela – have carried us forward, but never far enough, it can seem, to put the demons of greed, brutality and unreason finally behind us. We seem to have to endure recurrent periods of madness, examples in modern history including the First World War and the rise and fall of murderous regimes in Nazi Germany and Soviet Russia.

Solid evidence suggests that material conditions have a very significant bearing on the swings between enlightenment and darkness. Prosperity seemingly gives us the leisure to think, and the security to interact more constructively with others.

This linkage is particularly disturbing at a time when the established (though historically recent) expectation of continuous material advancement faces grave challenges. The danger is that a climate of unreason may advance hand-in-hand with a deterioration in prosperity. Indeed, it seems that this may already be happening.

This being so, preparations for new era of straitened material circumstances need to go far beyond practical preparations, such as learning new skills or stockpiling tools or food. I for one have never believed in the practicality of survivalist solutions, accepting instead that we need to do as much as we can to shore up civilization (which means reforming it), in order to depend less on prosperity, and more on reason.

I am reminded of the imperative of reason by the rapidity with which, in some situations at least, rationality appears to be breaking down. Nowhere does this seem more obvious at this moment than in Britain and America, though I should make it clear that my fear for the role of reason in both countries is not – repeat, not – based on the political choices that have been made.

Some have described the election of Donald Trump as an insane choice by American voters. Whilst I am not an admirer of Mr Trump, I do find this reaction unduly extreme. For starters, the alternative, Hillary Clinton, was an unappetising choice, less perhaps in herself than in what she represented. For good reasons, millions of Americans wanted something different, which was exactly what they would not have got from the Democrats’ archetypal establishment candidate. Some of the anti-Trump rhetoric seems strangely intense – and anyone painting Mr Trump as the most dangerous man ever to occupy the Oval Office must be suffering from convenient amnesia about the Iraq war.

Similarly, Britain’s “Brexit” decision to withdraw from the European Union (EU) was always going to prove divisive. But the debate, both before the referendum and since, has moved far beyond “divisive” and into “thoroughly nasty”. Perhaps because they lost, the Remain side seem the angrier, sneering at opponents whom they deride as stupid (and much worse). If the Leave camp had lost, we would probably have been hearing similar nastiness from them, whilst there does seem to be a link between nationalism and attacks (both metaphorical and literal) on EU citizens living in Britain. Neither side seems able to accept that the other side might have a scrap of logic or integrity – but experience surely teaches us that things are never, ever really as black and white as this.

What surely matters, in America as in Britain, is not why people take the positions that they do, but why they hold them with such intensity, and with such intemperate hostility towards those who disagree. There is a flavour of selfishness and arrogance in this, probably underpinned both by fear and by insecurity. In Britain, tub-thumping over Gibraltar is the most recent example of irrational hysteria – the future of the territory is a subject for negotiation, but not for threats or intemperate language.

It seems to me that a common strand which links intemperance, intolerance and unreason in Britain and America is the set of shared attitudes to which both have been subjected. The catch-word we can use for this is “neoliberalism”, though labels matter far less than substance. If the vast majority of Britons and Americans are to become more at ease with themselves and others, they need to start by challenging the thinking (as well as the economic quackery) of neoliberalism.

If one stands back and thinks about it, the intellectual case for neoliberalism is extraordinarily threadbare and tawdry, and about as rational as Soviet communism. Where the Communists made “profit” a dirty word, the neoliberals have elevated it to the status of Holy Writ. Both attitudes are idiotic. To make a profit is not automatically wrong, but neither is profit a mantra which can justify everything.

According to neoliberals, the profit motive is supreme, triumphing over all other values. Human beings, then, are portrayed by neoliberals as motivated almost entirely by personal greed. This is a puerile argument, because there are many values of comparable, indeed of far greater, importance, values which include compassion, co-operation and culture. To be dominated by the pursuit of material gain, or for that matter by a craving for celebrity, is to become mentally stunted. In a sane society, these incentives have their place, but should not reign supreme. Thus elevated, they lead to the nastiness of unfettered selfishness.

A balanced observation of where this has led surely underlines this point. Advertising, for example, has become a vast propaganda machine proselytizing material values over all else. Our happiness, this argument runs, can be gauged, and our worth measured, by our comparative success in accumulating money and possessions.

The sheer banality of this sometimes beggars belief. If one buys a certain beer, or so the ads imply, one will instantly be partying with sports stars and celebrities. The purchase of a particular car will place you on a winding mountain road, or on strangely depopulated city streets, in both instances magically freed from the daily reality of traffic jams, speed limits and the police. Buying the right fragrance will make you instantly irresistible to members of the opposite sex. A particularly nasty subtext here is that these things will put you ahead of others – this is life lived purely comparatively, not by any real sense of self-worth.

The motives behind this are as transparent as the argument is banal. Many big corporates subjugate all else to the pursuit of sales and profit. This is not done to advance the interests of shareholders (who bear the burdens when things go wrong), let alone of workers, as the outsourcing of jobs and the casualization of employment surely attest.

Moreover, if profit and personal gain justify everything, cheating and dishonesty lose any moral dimension, and penalties become merely snakes on a board dominated by ladders. Such is the grip that this thinking has exerted that shareholders, not decision-makers, are punished for corporate misbehaviour, whilst the politicians who should challenge this equation seem happier instead to pass on by, on their journey to retirement into the materialist nirvana of “consultancies” and “the lecture circuit”.

Even by its own lights, this neoliberal orthodoxy has failed, becoming progressively more economically destructive. Outsourcing skilled, well-paid jobs whilst maintaining the relentless adulation of consumption has driven debt sharply upwards, such that ten-year growth of £215bn in British GDP has been accompanied by a £1,370bn escalation in debt. Undermining the tax base has undercut the provision of public services, whilst monetary policies geared towards co-existence with debt have created huge deficits in pension provision. The emphasis on the pursuit of quick material gain has favoured speculation whilst undermining the patient creation of value through innovation and initiative. The uncomfortable suspicion lurks that, when the economy slumps, pension provision collapses and the debt burden becomes overwhelming, the masterminds of this state of affairs will already have departed to pastures new.

Of course, there are policy initiatives that the public could pursue to improve the situation, most obviously by capping the earnings of politicians and administrators in retirement, and by legislating to make executives accountable for corporate misbehaviour. Both would help. But such initiatives would be purely cosmetic if they fail to address fundamental patterns of thought.

Rather, what we surely need to do is to enlist reason to make pragmatic choices. Has the neoliberal formula made most of us more prosperous, or happier? Since it clearly has not done these things, we should repudiate it, not just through the ballot box but by promoting intellectual resistance. Pragmatism seems to tell us that the “mixed economy” works best, combining both private enterprise and public provision where each is most effective. If that is so, we should demand it.

Happiness is not promoted by material prosperity alone, but by security and a sense of worth at work, and by solidarity and co-operation more generally. We need to develop a mental toughness which rejects the blandishments of the most blatantly commercial, and a reason-based balance which prevents us from thinking that anything, ever, is either totally right or totally wrong.

Had I been writing this in a Soviet bloc country in the 1980s, I would have been concluding that communism was a bad idea, damaging to society as well as economically inept. As it is, the detrimental tendency today is towards self-serving neoliberalism, with its cult of selfish materialism and its willingness to subjugate all other values to this tawdry doctrine.

We are better than neoliberalism portrays us. We need to remind ourselves of this, and enlist reason to assert it.

 

#91: SEEDS goes live!

MAKING DATA ACCESSIBLE

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

A SEEDS-BASED GUIDE TO THE BRITISH ECONOMY

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

Conventions

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.

Energy

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

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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

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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

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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

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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

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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.

Conclusions

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