#84. Looking ahead


It is customary to use the start of the year to set out some forecasts. Though I’ve not previously done this, I’ve decided to make an exception this time – mainly because I’m convinced that the wrong things are being forecast.

Central forecasts tend to focus on real GDP, but in so doing they miss at least three critical parameters.

The first is the relationship between growth and borrowing.

The second is the absolute scale of debt, and our ability to manage it.

The third is the impact of a tightening resource set on the real value of global economic output.

Most commentators produce projections for growth in GDP, and mine are for global real growth of around 2.3% between 2017 and 2020. I expect growth to slow, but to remain positive, in countries such as the United States, Britain and China.

It’s worth noting, in passing, that these growth numbers do not do much to boost the prosperity of the individual, since they correspond to very modest per capita improvements once population growth is taken into account. Moreover, the cost of household essentials is likely to grow more rapidly than general inflation through the forecast period.

What is more intriguing than straightforward growth projections, and surely more important too, is the trajectory of indebtedness accompanying these growth estimates. Between 2000 and 2015, and expressed at constant 2015 dollar values, global real GDP expanded by $27 trillion – but this came at the expense of $87 trillion in additional indebtedness (a number which excludes the inter-bank or “financial” sector). This meant that, in inflation-adjusted terms, each growth dollar cost $3.25 in net new debt.

If anything, this borrowing-to-growth number may worsen as we look forward, my projection being that the world will add almost $3.60 of new debt for each $1 of reported real growth between now and 2020. On this basis, the world should be taking on about $5.8 trillion of net new debt annually, but preliminary indications are that net borrowing substantially exceeded this number in 2016. China has clearly caught the borrowing bug, whilst big business continues to take on cheap debt and use it to buy back stock. Incredible though it may seem, the shock of 2008-09 appears already to be receding from the collective memory, rebuilding pre-2008 attitudes to debt.

On my forecast basis, global real “growth” of $8.2 trillion between now and 2020 is likely to come at a cost of $29 trillion in new debt. If correct, this would lift the global debt-to-GDP ratio to 235% in 2020, compared with 221% in 2015 and 155% in 2000.

Adding everything together, the world would be $116 trillion more indebted in 2020 than in 2000, whilst real GDP would have increased by $35 trillion.

Obviously, this is not a sustainable way to behave. Taking individual economies as examples, the United States would have added $30 trillion in debt for $6 trillion in growth. Britain would have grown by £620bn but borrowed £3,340bn in the process. China’s debt would have increased by $32 trillion for a $12 trillion gain in real GDP.

Moreover, these numbers relate only to formal debt, excluding the financial sector whilst taking no account of quasi-debt obligations such as pension commitments. These are likely to become ever more onerous, particularly in those Western economies in which the population is ageing.

Pretty obviously, we are deluding ourselves where growth is concerned, spending borrowed money and calling this “growth”. Someone does not become more prosperous by increasing his or her overdraft and then spending it – he or she merely looks more prosperous to those who gauge prosperity by looking only at a lifestyle impression conveyed by consumption.

Meanwhile., the global resource set continues to tighten against us, adding to the “economic rent” which we experience, but fail to measure. According to the SEEDS system, the trend energy cost of energy (ECoE) cost us 4% of GDP back in 2000, but now accounts for 8.2%, and will reach 9.6% by 2020. Adjusting real GDP for this indicates that, between 2000 and 2015, the amount of debt added for each “growth” dollar was $3.80, not $3.25 – and that, from here on, each $1 of growth is going to cost us over $4.70 in new borrowing.

Altogether, what we are witnessing is a Ponzi-style financial economy heading for end-game, for four main reasons.

First, we have made growth dependent on borrowing, which was never a sustainable model.

Second, the ratio of efficiency with which we turn borrowing into growth is getting steadily worse.

Third, the demands being made on us by the deterioration of the resource scarcity equation are worsening.

Fourth, the ageing of the population is adding further strains to a system that is already nearing over-stretch.

One thing seems certain – we cannot, for much longer, carry on as we are.


#83. Backlash, part 2


These are disturbing times for those of us who believe in free market economics, and are followers of Adam Smith. After more than three decades in which the West has been governed by regimes claiming adherence to the principles of the market, the economy is locked into “secular stagnation” and massively in debt, and the public is in the process of repudiating incumbent regimes.

How have things gone so horribly wrong? Have events proved our faith in the virtues of competitive markets to be misplaced?

The reality is that the principles of the free market economy have not failed. Rather, these principles have not been followed. The regimes that are now being rejected by the voters have never paid more than lip-service to the principles associated with Adam Smith.

There have been two critical departures from these principles. First, governments have failed to break up the domination of key sectors (including electricity, gas, water, cell-phones and the internet) by small numbers of companies. Second, there has been a failure to enforce honesty and transparency. The principle mechanism of the market – free and fair competition – has therefore failed to operate.

At a time when “capitalism” is being condemned by people who are in fact victims of corporatism, there is a pressing need to restate the case for market economics, distancing it from those who have stolen its language to clothe a creed of selfish cynicism which is now ending in abject failure.

An exercise in failure

That things have gone wrong is surely undeniable, and is evident in two critical ways.

First, the public across the West are in open revolt against the self-styled “liberal” elites. Though widening inequalities, and the sheer arrogance of self-serving regimes, have contributed to this anger, a critical motivation is economic. Real wages have declined steadily, even when measured against official inflation, and even more markedly when set against the cost of essentials – whilst secured and unsecured household debts are at uncomfortably high levels.

In Britain, for example, real wages have been declining since 2007, and are projected to go on falling throughout an official forecast period which runs to 2021. In the United States, middle class real incomes have declined, arguably over an even longer period. Italian real GDP is now 12% lower than it was in 2007. At the same time, security of employment has deteriorated, and millions have been pushed into a “precariat” whilst millions more are now described as “JAMs” (“just about managing”). This is a track-record of failure.

Second, governments and central banks have contrived to run near-zero interest rates for more than seven years. This, too, is evidence of failure, because negative real rates are not consistent with a healthy economy in which investors can earn returns, and provision for retirement can be accumulated. Again, Britain typifies this malaise. Government continues to borrow heavily, despite sustained “austerity”, whilst official forecasts link projected growth to an assumed further expansion in household credit. Immediately after the most recent cut in interest rates, deficits in pension schemes were reported to be £945bn, more than 50% of GDP.

As well as crippling pension provision, ZIRP – zero interest rate policy – has destroyed returns on capital, created a massive bubble in the value of assets, saddled the economy with enormous debts, stymied the necessary process of “creative destruction”, and failed to deliver the stimulus which was supposed to push the economy out of “secular stagnation”.

Between 2000 and 2014, each dollar of nominal global “growth” came at a cost of $2.50 in additional debt. Even this ratio understates the problem, since “growth” has really amounted to nothing more than the spending of borrowed money. The ratio of borrowing-to-growth, which was 2.2:1 before the GFC (global financial crisis), has been 2.9:1 since then.

The dependency on borrowing has become so absolute that it can, without hyperbole, be stated that the global economy has been transformed into a giant Ponzi scheme – and such systems can only ever end badly.

This is failure on a gargantuan scale.

A question of blame

This situation presents a stark choice between two possible explanations.

The first is that the implementation of market-based policies has been an abject failure.

The second is that the supposed market-oriented policies of the Western establishment have, in reality, been no such thing.

To resolve this issue, the obvious starting point is with Adam Smith, the Scottish economist rightly regarded as the pioneer interpreter of the market.

It was Smith who stated that competition is the dynamo that drives the economy, not just in goods and services, but in employment and investment as well. He asserted that competition is so important that any departure from it is damaging.

In the story of economics as Smith tells it, the villains are monopolists, cartels, and anyone else seeking to undermine competition. Any such interference, Smith says, is “a conspiracy to defraud the public”.

The incentive for corrupting the market is, Smith says, self-evident. By ensuring best value for customers, competition obviously limits profitability. Accordingly, Smith makes it abundantly clear that markets need to be kept competitive, fair and honest, despite the incentives which promote malign interference. This is a pretty good description of the regulatory function. Far from proposing an economic equivalent of an unfettered free-for-all, then, Smith is an advocate of vigilant regulation, a clear implication being that only the State can provide it.

It is worth remembering that the great man was born in 1723, and died in 1790. This was an era when government did very little. In Smith’s Britain, time-zones differed even between London and Bristol. There was no income tax, and no national police force. There was certainly no welfare state, very much a twentieth-century innovation. Obviously, Smith could only have looked puzzled if he had been asked about “the public sector”. It simply didn’t exist – and wouldn’t, for more than a century after his death.

The Adam Smith whom we meet in his writings – the advocate of competition and avowed enemy of monopoly and other market distortion – becomes a very different (and lesser) figure in the policies advocated by “the neoliberal right”, and followed by governments since the 1980s.

Now he is an inveterate opponent of “the public sector”, a cheer-leader for “the private sector”, an advocate of “deregulation”, a believer in minimal government, and the high priest of “law-of-the-jungle” economics.

It is a massive transformation.

In plain English, it is simply piffle.

Of course, Smith is not the only victim of the ideological air-brush – Keynes is claimed as an advocate of deficit stimulus in adversity (which indeed he was), but his matching tenet (that governments should run a surplus if the economy threatens to overheat) is seldom if ever mentioned. In the hands of “semi-Keynesians”, the great man becomes a cardboard cut-out, forever demanding stimulus and unconcerned, presumably, about exponential growth in public debt.

But it is on the misrepresentation of Smith that the self-serving creed of “neoliberal” economics bases its flimsy case.

Nonsense compounded by greed

If we once accept Smith falsified into the arch advocate of unfettered private ownership and deregulation, much else follows, particularly if the simulacrum of Keynes can be invoked as well whenever the system needs to be juiced-up with fiscal deficits and cheap money.

For starters, if The Public Sector is A Bad Thing, privatisation follows, not just of businesses like car manufacturing and airlines (which arguably should never have been in state hands in the first place), but of public services as well. The proven concept of the mixed economy is abandoned. Whilst it is not quite the case that The Private Sector can never do anything wrong, the presumption is of innocence in the absence of overwhelming proof to the contrary.

Though lip-service is paid to competition, comparatively little is actually done about it, and the probity required by the real Smith’s concept of the honest and transparent market becomes at best a ‘desirable, but not essential’ characteristic. This is a vision of the market as “law of the jungle”, “red in tooth and claw”, “caveat emptor” and “the devil take the hindmost”. It also follows that deregulation is a public good, and that banks’ managements, not regulators, are the best judges of shareholder interest.

Above all, this is a mind-set. Though the tenets of the falsified Smith can be pulled apart by a first-year student, the attitude is that “market forces” are sovereign, bad outcomes for some or many are just the luck of the draw, the future is irrelevant, debt is irrelevant as well, integrity matters little, inequality is “natural” rather than contrived, and profitability is the sole arbiter of effectiveness.

From this nonsense, almost everything else follows. There is no contradiction between promoting consumption and undermining wages, because debt can fill the gap so long as deregulation keeps the taps open. Buying $1 of “growth” with $2.50 (or much more) of new debt is fine, because debt isn’t very important anyway. Ethics become optional, and corporate misbehaviour, where it cannot be ignored, can be explained away as “miss-selling” (which sounds no more serious than misplacing an umbrella) whilst, if penalties really must be meted out, the hapless shareholders can always be punished. The bosses are almost untouchable.

One of the most tragic consequences of “neoliberalism” has been the relentless degradation of business ethics. Increasingly, only “the eleventh commandment” (“don’t get caught”) is observed, and even this hardly matters if your control of the state renders you but all immune to sanction. Anyone who has read Adam Smith knows that honesty and transparency are indispensable characteristics of a properly functioning market.

A predictable consequence of “free-for-all” economics is that it has fostered market concentration, particularly in sectors like water, gas, electricity, cell-phones, the internet, retail banking and, in America at least, air travel. Anyone truly convinced by Adam Smith’s interpretation of the market would long since have demanded break-ups, so that no business in these sectors should enjoy more than, say, 10% or 15% of the market.

This, of course, is one of the bits of Smith that his falsifiers conveniently forget. Many big corporates have more than enough political clout to ensure that the very idea of “trust-busting” is out of the question, the preference being for “regulators” whose powers are necessarily very limited in comparison with competitive pressures. Wherever we look in some of the most important sectors of the economy, we see a market concentration that impairs drastically the free choice of customers, and delivers profitability far in excess of competitive market norms. The acceptance of this concentration by government has been a huge betrayal of the principles of the competitive market.

The case must be made

The public need to be told that those who claim to speak loudest for “the market” have in fact been its biggest betrayers. The case needs to be made for competition as the servant of the many, not the hollow slogan of a manipulative minority. This requires making the case, too, for regulation and for the primacy of ethical behaviour, and emphasising that the system at fault is not “capitalism”, but corporatism.

If this case is not made, we face two distinct risks. The first, less likely danger is that the current elites survive, perhaps by using ever greater coercion to maintain their power and wealth. The greater danger is that an infuriated public turns instead to the same collectivist philosophy which failed so spectacularly in the Soviet Union and its satellites.

Believers in the principles of the free market should feel angry, not apologetic, about the debasement of their beliefs by a self-serving elite. They should side with the public, and explain that the competitive market offers a future far better than the siren call of collectivism, or the tawdry manipulation of corporatism.

It is to be hoped that what emerges from the popular backlash is reform that does three main things.

First, it must insist on competition, breaking up companies whose market shares inhibit competition.

Second, it must demand the highest standards of honesty, transparency and accountability in business, reinforcing this with appropriate sanctions.

Third, it must block the “revolving doors” between government and corporate wealth.

If these reforms are made, the competitive market can restore prosperity.

If they are not, a populist-collectivist future looms.

#82. Backlash, part 1


Following “Brexit” (the British referendum decision to leave the European Union), the election of Donald Trump as President of the United States is another severe blow to the self-styled “liberal elites” that have governed the West since the early 1980s.

In both instances, voters defied the wishes of the vast majority of the political, corporate and financial elite, and made decisions that “experts”, and much of the mainstream media, regarded as dangerously misguided.

These outcomes can be baffling, until one point is noted – each establishment endorsement of Hillary Clinton delivered more votes for Mr Trump, just as each political, corporate or “expert” speech supporting “remain” won more votes for “leave”.

What is happening is a revolution, in the sense that society is engaged in the rolling repudiation of established elites. The significance of this is obvious, even though interpretation is made more difficult by an establishment mind-set of denial that is reflected, too, in much of the mainstream media.

Understanding the popular rejection of the elites is complicated, and this article has been through far more “rough drafts” than most. The best course of action is to set out a central point of view, and then discuss the reasoning behind that view. The focus here is on political change – part 2 will explore the economic implications.

The tide of events

We need to start by being clear that “Brexit”, and the election of Mr Trump, are not freak events, and that they were completely predictable. To those of us who have expected a popular backlash against the elite, the only real surprise is how long it has taken.

Just as these choices are not aberrational, neither are they reversible. Much of the British establishment hopes that someone – Parliament, the courts, the Scots, but even Batman and Robin would do – can either stop “Brexit” altogether, or water it down into meaninglessness. If this did happen, public anger would be likely to explode. Likewise, many in the United States hope that office will moderate Mr Trump. But, if the new president does not do most of what he has said he will do, voters will elect somebody else who will.

With hindsight, the 2008 global financial crisis (GFC) was the high-water-mark of the “liberal elites”. Incumbent governments succeeded in preventing the collapse of the banking system, but, in the process, surrendered so much of their political capital – in other words, their credibility with the public – that their demise became inevitable.

Historical inevitability?

Are the “liberal elites” due for repudiation by the public? History suggests that three conditions are required for “regime change” of this nature.

First, an incumbent regime has to be seen as self-serving and exploitative.

Second, it needs to be regarded as arrogant, complacent and out of touch with the general population.

Third, it needs to be seen as having failed.

The public will tolerate self-enrichment, arrogance and incompetence, or even two of these in combination – but will not tolerate all three.

As a rider to this, regimes due for the chop are usually the last to know, and react to a popular challenge by retreating into denial. In deriding the population as misguided dupes, blaming “populist” agitators, and dismissing defeats as just “a little local difficulty”, today’s establishments are doing nothing that wasn’t done by Communist apparatchiks in 1989, Tsar Nicholas II in 1917 or the court of King Louis XVI in 1789. For this reason, we need to ignore the protestations of the elites, and disregard much of what is said in the mainstream media.

Two valid indictments

On two of the three “criteria of unfitness” listed above, incumbent regimes have already been convicted in the court of public opinion. The case against the elites on these issues does seem so self-evident as to need little comment.

Where being “self-serving” is concerned, the evidence is surely overwhelming. In terms both of income and of wealth, the gap between the rich and everyone else has widened dramatically. There is scant evidence that this is linked to merit, because “the system” has played far too big a role in the enrichment of a minority for this defence to be valid.

Big corporations are perceived by the public to have become too powerful, in that they stifle competition, interpret the tax regulations to suit themselves, treat both customers and employees with disdain, and exert undue influence over the political process.

The “revolving doors” between government and business have not been blocked, and the public is entitled to be more than suspicious of the generous remuneration of former politicians and administrators through consultancies and the “lecture circuit”. It defies popular credibility that the burblings of politicians in their dotage, or even their consultancy services, are remotely worth the huge sums paid to many of them. This being so, the suspicion is fostered that the enrichment of retired government figures is linked to influence. This inference may be unfair, of course – but appearances are often decisive.

The second pre-condition for repudiation, too – which is that the elite has become arrogant – also seems beyond dispute. This has been evident, first, in their imposition of their own values on the public through increasingly coercive enforcement of what is known as “political correctness”. Governments are entitled to take a moral lead on issues, but go too far when they start denying the right of free expression to those who disagree.

Second, there have been all too many instances of what looks like systemic unfairness. Bankers are rescued, but steelworkers, shop employees and pension savers are not. The vigour with which benefits cheats are pursued contrasts with very few prosecutions of wealthy tax-evaders. Behaviour treated as “fraud” when engaged in by individuals or small businesses seems to become “miss-selling” when practised by big companies. When corporations break the rules, it is always the shareholders, and seldom, if ever, the responsible executives, who are held to blame.

Policy has favoured the wealthy, both in inflating asset values and in failing to tax “unearned” capital gains more demandingly. Little is seen to be done to close tax loopholes from which only the wealthy benefit, whilst governments seem loathe to tackle “offshore financial centres” which are widely regarded as tax-havens. The latter would, in fact, be pretty easy to implement.

On the charges of being self-serving and arrogant, then, the case seems to be unarguable. What about the third, decisive charge – that of failure?

An exercise in failure?

Regimes which are both self-serving and arrogant can remain in power if they deliver economic success – the public may be prepared to accept a great deal of downside if this is seen as the price of growing prosperity. The public mood today, however, seems unconvinced by the elites’ claim that they are good at managing the economy to the collective benefit.

There are really two dimensions to this issue. First, has the validity of the economic principles and policies of the elites been proven by experience? Second, have ends justified means? In the current instance, this question re-frames as “has improvement in the general economic conditions vindicated the management of the incumbent regime?” The distinction here is that the public may be prepared to tolerate current hardship if they believe that this will result in longer-term improvement (an obvious example being public support for austerity during war). What they will not tolerate is unfairness that does not also serve the general well-being.

And this, essentially, brings us to one core issue – “globalisation”.

Globalisation – vision, or scam?

If “globalisation” simply meant spreading the benefits of development to emerging market economies (EMEs), few would have much reason to complain. The popular criticism of “globalisation” as it has been practised is that, far from seeking global development, it has been nothing more than a grubby exercise in profiteering through the reduction of wages.

Globalisation, its critics say, depresses wages at home, both by exporting well-paid jobs and by allowing immigrants to compete for less-skilled work. This accusation might not have been true had the aim of globalisation been to spread the benefits of development by boosting both production and consumption in the EMEs.

In fact, this was never the objective – the aim of globalisation, as it has been practised, was simply to reduce the cost of production, widening margins on goods and services still sold to Western consumers.

This has had two detrimental effects on the global economy. First, it has failed to grow demand in the EMEs, something which is necessary for balanced development. Second, it has driven debt levels sharply higher, initially in the West, but latterly in the rest of the world as well.

The linkage between globalisation and the escalation of debt is quite simple – with wages under downwards pressure, consumption could only be sustained by encouraging Western consumers to borrow the difference. A cynic would argue that this is why, over a period of decades, banking regulation has been relaxed, whilst credit has become ever cheaper.

On the facts

It would be hard to deny that the combined effect of regulatory and monetary policy has been to supply the debt needed to sustain consumption in the face of stagnant or declining wages.

This process of using borrowing to support consumption is evident in the data. Between 2000 and 2007, global debt (excluding the inter-bank or “financial” sector) rose by $38 trillion, or $2.20 for each $1 of nominal growth in GDP. Between 2007 and 2014, debt increased even more rapidly, growing by $49 trillion, or $2.90 for each growth dollar.

Even the “growth” denominator is suspect, of course, amounting to nothing more than the spending of borrowed money.

Closer analysis shows that the escalation in debt has taken place in distinct stages. Between 2001 and 2008, the brunt of new borrowing was borne by Western households, whose indebtedness increased from $16 trillion to $34 trillion. These households’ ability to borrow was maxed-out by 2008, despite the use of ever-riskier lending techniques (such as sub-prime, and the on-sale of packaged securities), which involved separating risk from return in ways that previous regulatory norms would not have facilitated.

Since 2008, the further increase in global debt has come from Western governments, and from the EMEs. The retreat from the borrowing-based “boom” of 2001-08 impaired tax revenues whilst increasing welfare demands. This, and the need to rescue an over-extended banking sector, forced Western governments to increase their debt from $26 trillion in 2007 to $46 trillion in 2014. Meanwhile, EME borrowing has surged, with China alone seeing its debt total rise from $7 trillion in 2007 (and just $2 trillion in 2000) to well over $30 trillion today.

Because, by 2008, servicing this global debt mountain – let alone ever repaying it – had become all but impossible, the authorities responded with ultra-low interest rates, pursuing ZIRP (zero interest rate policies), flirting with NIRP (negative rates), and even contemplating outlandish ideas such as “helicopter money” and the banning of cash.

All along, ordinary people have suffered, with wages falling behind even official inflation, let alone the cost of essentials. Though net household borrowing in the West effectively ceased in 2007, debt levels still remain far higher than in 2001. Some of the adverse side-effects of ultra-low rates are now becoming apparent, most conspicuously in the emergence of dangerous deficits in pension provision. The wealthy alone have prospered, most conspicuously from the inflation of asset values, and from generous tax treatment of capital gains created by monetary policy. Young people have particular reasons for feeling aggrieved at a system that has increased costs (such as housing) whilst exporting well-paid jobs.

Justified responses?

If it is obvious – to everyone except the elites themselves, of course – that what is happening is a global repudiation, not a series of isolated events, it is equally obvious that solid logic informs the popular backlash. Self-serving, arrogance and a failure to promote the general good are valid accusations against the “liberal elites”.

For those elites, denial is as pointless as it is predictable. What is needed now is thorough-going, self-denying reform, whilst the scope for implementing reform still exists.

This does not, of course, mean that the “populist” agenda is the right one. In particular, protectionism is the wrong answer to the right question. A switch from monetary to fiscal stimulus does make sense, but isn’t as easy as it may sound, whilst the likelihood of higher taxes on the wealthy is, in itself, nothing more than the swinging-back of a political pendulum that had gone a very long way in the opposite direction.

In part 2, we’ll look at how the populist revolution could improve the economy – but only if its leaders and supporters are clear about what works……..and what doesn’t.




#81. Constitutional crisis?


Only in a perfect world would the interests of governing and governed be perfectly aligned. What is happening in Britain today, though, threatens to widen this difference into a dangerous estrangement. Latest twists over “Brexit” call for the establishment to submit to the popular will, and to do so with good grace.

On 3rd December, the High Court ruled that the government could not trigger Article 50 (the formal preliminary for the “Brexit” process) by royal prerogative, but must put the matter to a vote in Parliament, a ruling which will stand unless overturned on appeal to the Supreme Court.

This decision prompted a backlash, not just among pro-“Brexit” politicians but in much of the national press as well. The Daily Mail pictured the three High Court judges above the headline “Enemies of the People”, whilst the Daily Express lamented “the day that democracy died”. The Daily Telegraph warned of a “constitutional crisis”.

This raises three profound questions. First, have the judges made a political intervention, with the courts blocking the wishes of the voters? Second, are anti-“Brexit” interests in the establishment plotting to subvert those wishes? Third, what happens now?

Due process

The vilification of the judges is unfair. Their ruling is not political, but concerns a point of law – can a major constitutional change (and “Brexit” is surely that) be made by the executive alone, or must Parliament be consulted?

This decision is surely correct. With an unelected upper chamber, and a voting system skewed towards established parties, British democracy is weak enough as it is, without handing more powers to the executive. Had the court ruled for the government, what further constitutional changes might be imposed on the country without Parliamentary scrutiny?

If it is right that Parliament should be consulted, it is surely right, too, that it should pass a single, “one-line” Act empowering premier Theresa May to trigger Article 50. The public, consulted directly on a major issue for the first time in four decades, has decided. Those MPs and Peers – a substantial majority – who disagree with the voters’ decision should abstain, not try to tack weakening or qualifying amendments on to the legislation.

It is imperative that this is done – and done quickly. Anything else will spell trouble, reinforcing the fear that “the establishment” is trying to subvert the will of the people.

Justified mistrust

This suspicion of trickery flourishes because the British establishment has a truly shocking record of pursuing its own interests at the expense of the public.

Trust in elected politicians, already very low, was driven to new depths by the expenses scandal. Phone-hacking tarnished the reputation of the press, and did nothing for trust in the police. The House of Lords has scant respect because it is nominated by ministers, not elected, as upper chambers are in most democratic countries. The permanent administration is seen as unaccountable, few if any senior heads having rolled even after scandals like Stafford and Rotherham. Controversial rulings (including the grant of “super-injunctions” to the wealthy) have undermined faith in the courts.

Successive administrations have done nothing to counter a feeling that government has been “captured” by two powerful interest groups – big business, and a “liberal elite” whose aims have been labelled “political correctness”. When the state bails out bankers, but not steelworkers or employees of failed retailer BHS – and when the rigorous pursuit of benefits cheats contrasts with few prosecutions of wealthy tax-evaders – the public is entitled to smell a rat.

Estrangement – the price of failed economics

Though successive administrations’ policies on energy, foreign affairs and defence have been shockingly misguided, the real failure of governments has been the economy.

Since 2000, a £0.8 trillion rise in nominal GDP has come at the expense of £2.3 trillion in additional debt. The current account – Britain’s financial relationship with the rest of the world – has plunged into a shocking deficit, reflecting the outflow of profits and interest on past asset sales and borrowing as Britain has sold assets, and borrowed from abroad, to finance consumption. Over the same period, the cost of household essentials has risen by far more (75%) than average wages (51%).

In short, an “anything goes” philosophy of neoliberalism has benefited the wealthy and the powerful to an extent that looks intentional, not accidental.

In this context, the public are right to harbour deep suspicions of the establishment. That establishment now faces its greatest test and one which, if mishandled, will have grave consequences.

What must happen now

Mrs May needs to put forward simple Article 50 enabling legislation on her stated basis that “Brexit means Brexit”. MPs need to pass it without adding amendments. Peers need to deliver a simple assent.

Britain does not yet – quite – face a constitutional crisis, but anything less than the straightforward implementation of the voters’ choice of “Brexit” could rapidly create one.

Regimes isolated from the general population are a recurring historical phenomenon, frequent enough for us to know what happens to powerful elites which seek to preserve their wealth, privileges and prejudices in the face of a rising tide of public anger.

There is a time to retreat with good grace. For the British establishment, that time has arrived.


#80. Grossly Distorted Prosperity


One of the quirks of economics is that, within GDP (gross domestic product), all output is included, irrespective of what it really adds to prosperity. GDP, like Oscar Wilde’s cynic, knows “the price of everything, but the value of nothing”. If government paid 100,000 people to dig holes, and another 100,000 to fill them in, the cost of this activity would be included in GDP.

Is there a better way of measuring prosperity? Well, consider two people who both earn $30,000. Theoretically, their circumstances match. However, if the first has to spend $20,000 on household essentials, leaving him $10,000 to spend as he chooses – whilst the second spends only $5,000 on essentials, leaving him $25,000 for “discretionary” spending – then clearly the second is much more prosperous.

This is analogous to what has been happening to the economy. The long-run trend towards higher energy costs is feeding through into essentials such as food, water, chemicals, minerals, plastics, construction and virtually every other essential purchase. This is undermining the scope for discretionary spending, leaving the economy poorer even if the headline statistics do not seem to bear this out.

On the ground data bears this out. In the United Kingdom, for example, average wages increased by 25% between 2005 and 2015, but the cost of essentials rose by 48%. This process is happening around the world.

For the economy as a whole, it can be illustrated like this:

Fig. 1: “Growth”? – the impact of higher energy costs80-1

GDP is higher in the second picture, but far more is spent on energy and essentials, leaving a smaller surplus available for everything else. This surplus – and not the recorded total of GDP – determines prosperity.

Where this leaves the economy is with two pictures that do not match – raw growth numbers imply a prosperity that people seem not to experience. As a result, we – whether as individuals or as governments – have been using borrowing to supplement a diminished capability for discretionary expenditures.

This in turn accounts for the escalation in debt. Between 2000 and 2007, world debt (1) escalated from $87 trillion to $142 trillion, triggering the global financial crisis. Slashing interest rates to all-but-zero has enabled us to co-exist with this debt, but the amount outstanding has continued to soar, now exceeding $200 trillion – whilst near-zero rates have been very far from cost-free.

How does the cost of essentials, and the resulting impact on prosperity measured as capability for discretionary spending, help us to explain this?

The energy economy

As most readers will know, the interpretation which guides all of my work is that the “real” economy of goods and services is an energy equation and not, as is so generally supposed, a monetary one.

Everything that we buy or sell, produce or consume is a product of energy. Far back in history, this energy came entirely from human or animal labour. This changed fundamentally with the Industrial Revolution, when we began supplementing this labour with inputs such as coal, oil and gas. This process triggered a dramatic escalation in economic output which has totally transformed our society over more than two centuries.

The modern economy is entirely a function of energy. As well as obvious uses such as transport fuels and plastics, energy is critical in access to minerals – without energy inputs, we could not possibly extract 1 tonne of copper from 500 tonnes of rock (and doing this using manual labour would make copper impossibly costly).

That the earth now supports 7 billion people, compared with just 0.8 billion back in 1800, is entirely due to the use of energy in agriculture, both as indirect inputs as well as directly in planting, harvesting, transport, processing and distribution. Water, too, could be not accessed without energy inputs.

If you doubt any of this, imagine how farming and the food chain would operate without energy inputs. Planting and harvesting would rely on large numbers of labourers and animals, all of whom would have to be fed. Inputs like phosphates would not be available without the energy needed to extract and transport them. Processing and transporting crops would be incredibly costly and difficult, as would storage without refrigeration. In short, without energy inputs, food supply as we know it today would collapse.

Taking this a stage further, it is obvious that the cost of food must reflect the cost of energy at each stage of the process.

Correlation between energy costs (here represented by crude oil) and other essentials is illustrated in the next chart, which shows how the prices of wheat, rice, vegetable oils and copper have all tracked oil prices in recent years. This is far from surprising, since energy is the key input in the supply of these resources. They have tracked not just the increase in oil prices but also the post-2014 decline – but remain about twice as costly as they were in 2000, which compares with broad inflation of about 38%, globally, over the same period (2).

Fig. 2: Commodity prices – the energy connection (3)80-2

Ultimately, the physical economy can be defined like this – it is a process of applying power inputs (rather than human labour) to raw materials which are themselves accessed using energy.

Our homes, roads, schools, factories, railways, ships and hospitals could not possibly have been built by manual labour alone, or by relying on materials accessed without energy inputs.

A key point will have occurred to you from the foregoing, which is this – an increase in GDP can correspond to a decrease in prosperity, if the proportion of GDP which has to be spent on energy (and energy-linked essentials) grows.

We know that energy has a cost, which in fact is an opportunity cost – money spent on oil platforms, refineries, pipelines and solar panels is money that we cannot spend instead on hospitals and schools. The more expensive energy is, the less we have to spend on everything else.

The cost equation

Energy is never free. The human capacity for physical work derives from energy gained from food, and obtaining food requires the use of energy. Likewise, accessing the energy contained in oil, gas, coal or renewables requires the expenditure of energy. Oil platforms, refineries, pipelines, wind turbines and solar panels cannot be built without spending energy. Extracting iron from ore requires energy, as does converting it into steel – and, on top of this, there is the energy expended in building the steel works itself in the first place. This applies to all components used in the energy access process.

So the equation which determines prosperity is the relationship between, on the one hand, the amount of energy accessed and, on the other, the proportion of this energy consumed in the access process.

This equation can be expressed in two ways. EROEI – the Energy Return On Energy Invested – expresses the gross amount as a multiple of the cost. My preferred measure is ECoE – the Energy Cost of Energy – which expresses the cost as a fraction of the gross amount of energy accessed.

These equations change over time, through the interplay of two factors. The first of these, which pushes costs (ECoEs) up, is depletion. Naturally, we have exploited the lowest-cost energy sources first – just as you would always choose to develop a large oil field before a neighbouring small one, you would not extract costly oil from deep water fields, from shales or from bitumen if you could instead tap giant, simple reservoirs of high quality crude. As the most economical sources of energy deplete, we turn to successively costlier resources which push overall costs upwards.

The second determinant, offsetting the depletion effect, is technology, where the advance of knowledge enables us to access energy more efficiently, and thus at lower cost, than in the past.

The critical point about technology is that its limits are set by the physical characteristics of the resource. For example, the advance of technology has made shale oil far cheaper to produce than shale oil was ten years ago. What is has not done – and cannot do – is to transform shale resources into the equivalent of a giant conventional oil field like Al Ghawar in the sands of Saudi Arabia.

Likewise, renewables are cheaper to produce now than the same renewables were ten or even five years ago. This has, in many instances, made renewables cost-competitive with oil, gas and coal. But this is a two-part process – the competitiveness of renewables has benefitted both from cost-lowering technology and from rises in the cost of fossil fuels. Renewables can compete with oil or gas developed today – but they could not compete with giant oil fields like Al Ghawar.

Thus seen, the driver of costs is depletion (determining the physical envelope of energy access), with technology acting as a mitigating factor (improving efficiency within that envelope).

Cost trends

It will be obvious from the above that we are studying comparatively gradual processes. Depletion is something that happens over time. Technology can advance more quickly than this, but the pace at which technology is applied is dictated both by capital investment and by the depreciation of earlier plant.

Because the cost change process is gradual, it should be equally obvious that longer-term trends are critical. The immediate cost of energy to end-users can oscillate very rapidly through market forces, but these are oscillations around a longer term trend.

Fig. 3 illustrates my analyses of where the ECoE costs of various energy sources now are. Obviously, these are broad-brush estimates, but should suffice for at least a general interpretation.

The process of depletion has driven the ECoE of oil sharply higher. If we could go back to the 1950s and 1960s, we would see that oil production costs were extraordinarily low, which helps account for the very rapid annual consumption growth rates (as high as 8%) experienced at that time. But there has been a profound rise in oil costs in recent years. Coal costs, too, have been rising sharply, not least because the energy content per tonne has been falling markedly as the highest-quality resources are depleted. Gas costs, too, have been rising, though it remains markedly cheaper than oil or coal.

Fig. 3: Estimated ECoEs by fuel80-3

The good news, of course, is that the ECoE of renewables has fallen sharply, making them cost-competitive with oil and coal, and no longer markedly more expensive than gas. The factors involved in reducing the ECoEs of renewables are technology and economies of scale. As little as ten years ago, renewables were a lot costlier to produce than oil, but this is no longer the case.

A cautionary note is needed here, however. In 2015, renewables accounted for just 2.9% of primary energy consumption. As a still-small industry, renewables can be assumed to have cherry-picked the best sites first, just as oilmen developed the cheapest oil fields first. Rates of growth which are easily achieved from a low base become progressively harder to sustain as the base enlarges. Renewables can be expected to go on increasing their penetration of electricity supply very markedly, though the nature of solar and renewables suggests that some fossil- or nuclear-powered capacity will still be required.

Other applications will be harder to crack, particularly where the sheer density of oil (measured as energy per unit of weight) remains critical. The gigantic petroleum-powered machines that hack minerals out of rock at concentrations of less than 0.5% might be hard to replace with electric alternatives, and an electric-powered aircraft of anything approaching the size of a 747 remains a pipe-dream.

The overall picture

What we have, then, is a changing mix in which the overall ECoE is rising because of the uptrend in costs in the still-dominant fossil fuels sector. The next chart, comparing the annual cost of energy with the long-term trend, reflects this.

Fig. 4: Trend and current energy costs80-4

The current cost of energy to end-users oscillates dramatically over comparatively short periods and, historically, oil has been the pivotal component. In the 1970s, OPEC drove oil prices sharply higher, where they stayed for a decade until weak demand, and a surge in non-OPEC supply, broke the cartel’s grip. From 2000, oil prices began to move up sharply, largely due to demand growth in China and other emerging market economies (EMEs). High prices invited massive investment in new supply, which has now pushed prices sharply downwards. This is an essentially cyclical process, and the slump in investment since 2014 suggests that supply shortages will in due course push prices back upwards.

These price movements occur on timescales far shorter than the cost trends dictated by the interplay of depletion and technology. Depletion has for decades been driving the trend costs of fossil fuels upwards, in a way that can only be mitigated, not reversed, by technology. Technology is making renewables cheaper, but these account for just 2.9% of current global consumption. So the underlying trend cost of energy is rising relentlessly.

Counting the cost

Where, though, does this show up in our measurement of the economy? If energy costs more, we have less to spend on other things – but money spent on obtaining energy still forms part of GDP. After all, energy expenditures show up in activity measures, and money spent by an energy company provides business for suppliers and wages for those working in the energy and related industries.

So the bottom line is that rising energy costs do not necessarily impair GDP, but do undermine prosperity, by reducing how much we have to spend on everything else. Rising energy costs will eventually impact GDP as we record it, because they will reduce our capacity for investing in other things. This makes GDP a trailing indicator of the economic impact of higher trend energy costs.

If we want to anticipate this, and measure the current impact, there are two routes open to us. Both are based on the recognition that prosperity is a function, not of income in the absolute, but of discretionary spending capacity (the income that remains after the cost of essentials, really meaning the cost of energy, has been deducted).

The first way of measuring the current impact of trend energy costs is a bottom-up measure of prosperity which factors in the cost of essentials at the individual level. The second, far more practical approach is to deduct the trend (not the current) cost of energy from reported GDP. Since the cost of all essentials – such as food, water, minerals, plastics and transport – is dictated by energy costs, deduction of the trend energy cost essentially identifies discretionary GDP.

The global situation and outlook is set out in fig. 5. As trend ECoEs have risen, a widening gap has emerged between the financial and the real economies. This shows up within individual experience as an increase in the proportion of incomes absorbed by essentials. For the economy as a whole, the proportion of GDP that has to be spent on energy and its derivatives – including food, water and basic materials – has been rising, crowding out scope for discretionary expenditures even where total GDP is supposedly increasing.

To picture what this means in practice, imagine a government health system whose share of GDP is constant, so that cash resources increase in line with GDP. This ought to make it possible for health provision to be enhanced – but the opposite happens, because the cost of essentials absorbs a growing proportion of its budget.

In due course, this “crowding out” will impact investment in discretionary areas, meaning that headline GDP itself will start to fall. But prosperity – as it is experienced both individually and in the aggregate – will fall before the deterioration in the underlying situation is reflected in GDP.

Fig. 5: World financial and real economies80-5

Finally – and whilst not wishing to intrude on private grief – fig. 6 shows what is happening to the real economy of the United Kingdom, and links it to trends in ECoE.

From 1980 to about 2005, the UK enjoyed a lower ECoE than the global average, mainly because Britain was a major net exporter of oil and gas. But energy production has fallen sharply, from 249 mmtoe (million tonnes of oil-equivalent) in 2002 to 108 mmtoe last year, and the UK now has to import almost half of its energy requirements, despite a decrease in demand.

This is a mathematical calculation delivered by SEEDS, and is reflected in a precipitate decline in real economic output. But what does this mean in practice – and can we see it in action?

What it ought to mean, first, is that the comparative (through-cycle) cost of energy in the UK is rising – which it is because, since 2005, the cost of energy to British consumers has risen by far more (90%) than general inflation (27%). It ought to mean that the cost of essentials is absorbing a growing proportion of incomes – which, again, is the case, the cost of essentials having grown by far more (48%) than average wages (25%). It ought to mean that government budgets buy less services, even where those budgets have at least kept pace with inflation – as is palpably the case with health care. It ought to undermine ability to provide for the future, something which is reflected in huge pension fund deficits.

That these trends are set to continue seems equally evident. Energy costs in Britain are rising, as reflected in the ultra-high contract price for electricity from the new Hinkley C nuclear plant. The cost of essentials will continue to rise (which the slump in the value of Sterling ensures). This will continue to make people feel poorer, as the cost of essentials continues to out-pace incomes. And it will further stretch public services (such as health), even where budgets rise at least in line with inflation.

I rather doubt whether planners and policymakers, in Britain or elsewhere, understand this dynamic. If they don’t, they must be baffled by the phenomenon of more money buying less.

Fig. 6: UK economy and comparative ECoE80-6

The concluding point, generally applicable, is that the rising trend cost of energy – and hence of energy-derivatives such as food and minerals – is squeezing discretionary spending capability even before it exerts major downwards pressure on gross output. The latter is beginning to happen as well, though, through a squeeze on discretionary investment capacity.

What this all means is that we should take headline GDP figures with the proverbial pinch of salt. What really matters is prosperity, meaning scope for discretionary spending after the cost of essentials (really meaning energy) has been deducted from incomes.

By this critical measure, we are at the end of growth – and no amount of borrowing, or of mortgaging the future, can change this, or even long disguise it.



  1. Includes financial sector. Debt excluding the financial sector was $67 trillion in 2000 and $105 trillion in 2007, and is about $155 trillion now.
  2. Source: SEEDS database
  3. Source of data: IMF


#79. “Don’t you know there’s an excuse on?”


The Second World War was a time of enormous hardship for the British public. But there were some people for whom it was manna from heaven, and I’m not talking about black-marketeers. Poor service in a restaurant? “Don’t you know there’s a war on?” Shoddy workmanship? “Don’t you know there’s a…….” There seemed to be hardly anything that couldn’t be blamed on the war.

“Brexit” – the ugly label for the voters’ decision to leave the European Union (EU) – is being used similarly, as a stock excuse for any and all weaknesses in the British economy.

Behind the Brexit bluster, what is really happening in Britain is the culminating failure of a faulty economic model. The theory of “neoliberal” economics has been openness to foreign investment even in strategic areas, the adoption of mantras of deregulation and privatisation, and a willingness to surrender decision-making to the market. The practical outcome has been sluggish growth, an escalation in debt, widening inequality and a dangerous dependency on foreign creditors. If Brexit tells us anything, it is that critical scrutiny of the British economy has revealed some dangerous weaknesses.

When British voters defied the establishment by voting to leave the EU, then they were doing more than simply rejecting supposed European incursions on their sovereignty – they were rejecting an economic system whose failures have been manifested in the British economy.

Brexit caveats

Though regrettable, the use of Brexit as a catch-all excuse is understandable. Brexit, after all, is the first decision in decades to be taken directly by the public, rather than on their behalf by politicians. No-one grounded in reality would expect politicians to miss such a golden opportunity for wholesale blame-shifting.

This being so, we should be wary about “the Brexit excuse”. We should remember that America, Japan, China and others trade perfectly satisfactorily with the EU without being members of it. We should also note that many of Britain’s glaring economic weaknesses long pre-date the EU referendum.

Of course, there has been at least one direct result of Brexit – a sharp fall in the value of Sterling. Even here, though, politics has influenced markets. Overwhelmingly, government, big business, finance and the mainstream media urged a “remain” vote, so the voters’ “leave” decision was a ringing rejection of an arrogant establishment. It also, of course, created immediate uncertainty, with the departure of premier David Cameron and chancellor George Osborne.

Consequently, markets have had to recalibrate political risk, recognising that the British are not, after all, grumbling-but-resigned followers of their leaders’ diktats. Despite an electoral system (known as “first past the post” or FPTP) designed to entrench the incumbency, the public proved themselves far from supine when given a first-in-a-generation directly proportional consultation.

From a global standpoint, you might think that Britain doesn’t matter all that much in the grand scheme of things. But we do need to note two significant points. First, Britain remains important enough – particularly in finance – for her travails to influence global developments.

The demise of a paradigm

Second, the UK, even more than the United States, has been the poster-child for neoliberal economics – not for nothing is this called “the Anglo American model” – so Brexit may accelerate the demise of an increasingly discredited orthodoxy.

For three decades and more, the UK has championed an extreme variant of “laissez faire”. Britain has welcomed overseas investment even where that has meant strategic industries, protected in most other countries, falling into foreign hands. The UK has supported the deregulation of finance, championing the now-derided “light touch” regulatory system which helped lay the foundations for the 2008 banking crisis. Privatisation, though it began with industry, has now penetrated deep into public services, and few restraints have been exercised over immigration. To a significant extent, British failure constitutes the failure of an economic philosophy as well.

Mind the gap

The critical metric for the British economy is the current account, where the deficit has widened alarmingly – to 5.2% of GDP last year, from 1.2% in 2005. It hit 7% in the final quarter of 2015.

Within this, the trade shortfall has been a relatively stable component, being somewhat better in 2015 (at 2.0% of GDP) than in 2005 (2.7%).

The slump in the current account has instead reflected a collapse in the net flow of income. Back in 2005, this flow was positive, contributing £20bn (1.5% of GDP) to the current account, and usefully offsetting the trade gap. In 2015, however, income was in deficit to the tune of £60bn (3.2% of GDP), a sharp and dangerous reversal in a comparatively short time.

The disturbing connection here is that current account shortfalls have become a vicious circle. Each deficit, when met by asset sales or borrowing from overseas, sets up increased future outflows in the form of profits and interest.

To this extent, Britain has been trashing her balance sheet to sustain consumption in excess of current output. British GDP and, with it, British viability, has become increasingly dependent on what central bank chief Mark Carney has dubbed “the kindness of strangers”.

This is a misnomer, of course, because lending and investment are determined by calculation, not altruism – and here lies the immediate problem. The slump in Sterling means that those who lent to or invested in Britain last year are now sitting on losses of about 20%. If they decide that putting further capital into Britain would amount to “throwing good money after bad”, the UK will be in very, very deep trouble. The harsh reality is that about 6% of British GDP, or £120bn, comes courtesy of foreign creditors.

Deep in the hole

If selling assets and taking on debt to subsidise consumption looks feckless (which it is), further evidence to the same effect can be found in Britain’s aggregates of debt and quasi-debt.

Between 2000 and 2007 – but expressed at constant 2015 values – growth of £354bn in GDP came at a debt cost of £1.34 trillion, or £3.80 of borrowing for each £1 of growth. Since then, the ratio has worsened dramatically, with £127bn in net growth requiring £1.24 trillion of new debt, a borrowing-to-growth ratio of £9.70 per £1 (see chart). Even these numbers exclude borrowing in the “financial” or inter-bank sector.


Of course, this very strongly suggests that “growth” has really amounted to nothing more than the very inefficient spending of borrowed money.

This addiction to borrowing has ravaged the British balance sheet. Whilst a 268% ratio of debt to GDP (1) may not look too serious, inclusion of the banking sector (2) increases this to around 450%. On top of this, the most recent, knee-jerk cut in policy rates worsened the deficit in private pension provision to £945bn (52% of GDP) (3), whilst unfunded public sector pension commitments are generally put at £1,000bn (55%).

This has three disturbing implications for the British economy. First, it is becoming ever clearer that past irresponsibility has undermined Britain’s future financial security. Second, it has turned Britain increasingly into a supplicant for the goodwill of China and others.

Third, the UK is in no condition to cope with increases in interest rates, yet such rises may become inevitable if international markets continue to take a tougher stance on British risk.

No quick fix

Some believe that the slump in Sterling might itself start to improve things, making imports more expensive whilst boosting the competitiveness of British exports.

One obvious snag with this is that a weaker currency increases the cost of essential imports, which include food, raw materials, components, the consumer iFads to which many in Britain seem addicted and, thanks to serious policy failures, rapidly increasing quantities of energy. A second is that it is by no means clear what Britain has to export – or that exporters will use a cheaper pound to boost volumes, rather than simply pocketing fatter margins.

Above all, of course, the British external problem does not lie in her trade deficit so much as in a rapidly-worsening income balance – and this will continue to worsen, until and unless the UK ceases relying on foreign creditors to subsidise consumption.

Two things are clear. The first is that, as exemplified by Britain, neoliberalism has failed, widening inequalities whilst sacrificing the balance sheet on the altar of immediate self-gratification.

The second is that Britain must reform to survive, specifically by shifting incentives from speculation to innovation. In short, innovation has weakened – and productivity with it – because riding state-backed inflated asset markets has been made into a surer and less risky route to prosperity than developing new products and services.

Here, some of the early statements of new PM Theresa May are encouraging, but the really tough calls – such as increasing capital gains taxation, and extending it to all property gains, in order to reduce the tax burdens on small and medium enterprises (SMEs) – still lie in the future.

She may be helped in this, ironically enough, by the very same “baby boomer” generation which hitherto has ridden the wave of asset inflation and demographic unfairness.

Boomers, sitting complacently on inflated property values, might soon begin to wonder to whom they are going to sell their property when they need to turn it into cash. Well, they won’t be selling to a younger generation that they have helped to impoverish. That they might have to monetise it at all has been made much more likely, and more imminent, by the undermining of pension investment.

Historically, the impetus for reform has seldom come from smugly comfortable beneficiaries of the system. This time, though, might just be different.



  1. Source: BIS data for end-2015
  2. Based on financial sector debt of 183% of GDP as at mid-2014
  3. Source: FT



#78. The fragility of the “new abnormal”


For reasons largely outside my control, there’s been a bit of a hiatus here in recent weeks. This said, I’m working on a paper that I think could be very interesting indeed, examining how we measure prosperity, something which reported GDP data conspicuously (and increasingly) fails to do. That paper is work in progress. Meanwhile, what is the state of play?

As it happens, not a lot has changed during my absence. Fundamentally, the world financial system continues to look bizarre, with ultra-low rates destroying both returns on capital and pension provision whilst failing conspicuously to deliver the much-vaunted “stimulus”.

So abnormal have things become that I’m waiting on “the great reset”, and the turbulence that will necessarily accompany it.  An essentially stagnant global economy simply cannot go on accumulating ever more debt without the system toppling over.

Finance – waking up to reality?

There does seem to be a dawning comprehension, amongst supra-national organisations at least, that a point may rapidly be approaching when we can no longer live on an endless tide of cheap credit. Though there remains much talk of growth, “secular stagnation” is probably the best gloss we can put on the underlying economy.

Western central bankers, I suspect, may waking be up to the fact that, if you wanted to go somewhere progressive, you wouldn’t start from here. I’m pretty certain that, had they access to a time-machine, central bankers would go back and make some significant changes.

Slashing interest rates in 2008 and 2009 did make sense, as did using QE to – as I see it – depress yields by driving bond markets upwards. But these were emergency measures, and should have been temporary. The central bankers’ big mistake, influenced no doubt by Wall Street, was to allow ZIRP to become permanent. With hindsight, they should have started to push rates back upwards pretty soon, starting no later than 2010.

A policy of normalisation, had it been pursued, might have driven GDP lower, but an immediate, one-off hit could have been a lot better than allowing denial to push us into a tunnel of the surreal. A policy of interest rate normalisation would, no doubt, have triggered some big losses – but this, too, would have been manageable, and a “back to normal” approach would have staved off an escalation in debt which is now looking very dangerous indeed.

Thanks to the prolonging of ultra-loose monetary policy, debt has escalated. Back in 2008, debt of $140 trillion was enough to frighten the system. Now, debt has soared beyond $200 trillion, where I suspect that fear has been replaced by outright paralysis.

Politics – left behind by change

Politicians and most commentators, meanwhile, remain way off the pace, not just of economic fundamentals, but of public feeling as well. The same experts who told us that Donald Trump was a “joke candidate” with no chance of winning the Republican nomination, and that the “out” campaigners couldn’t possibly win Britain’s “Brexit” referendum on EU membership, continue to misunderstand how rapidly the political landscape is changing.

These experts now think that revelations about Mr Trump’s deplorable attitudes to women will kill off his campaign, and that Jeremy Corbyn’s only chance of winning power in Britain is to shift to the centre-ground. They are wrong on both counts, and wrong, too, if they underestimate the pivotal, pan-EU importance of the Italian referendum on constitutional reform set for 4th December.

American angst

What, then, is the reality that politicians, pollsters and pundits are missing? In a word, that reality is anger. In America, surveys show a rapidly rising tide of consumer discontent which increasingly merits the label “rage”. This is directed against utilities, cell-phone providers, airlines and other sectors in which the market dominance of a handful of players enables them to ignore consumer anger. Rather than helping customers – who in reality have nowhere else to go – these corporates concentrate instead on influencing Washington, to ensure the maintenance of barriers to entry.

Voters and consumers are the same people, and consumer anger against corporate arrogance feeds into a mood of rebellion against the establishment. This, for many, makes Mr Trump, whatever his faults, an attractive proposition. It also makes voting for the quintessentially-establishment Hillary Clinton almost unthinkable.

British disillusion

Likewise, the anti-establishment anger which delivered “Brexit” also informs strong support for Labour’s Jeremy Corbyn. What pollsters and pundits seem unable to grasp is that this support does not come from the comfortable, those people who are satisfied with “politics as usual”, and whose voting intentions can be measured.

It comes instead from the ranks of the insecure, generally younger and often non-voting millions who are the victims of depressed incomes, employment insecurity (the “gig economy”), the high cost of housing and, above all, the sense that nothing is ever going to get any better for them unless society changes drastically.

Because these people do not respond to telephone surveys, and have better things to do with their time than take part in focus groups, they tend to fall beneath the pollsters’ radar. But they are numerous enough, and motivated enough, to swing an election – provided that Mr Corbyn does not try to become another centrist in the Blair mould.

At the moment, the Western governing establishment relies on the votes of the so-called “baby boomer” generation, people who seem to be sitting pretty on hugely inflated property values. This, though, is likely to change when the boomers – or the market on their behalf – starts to ask two very awkward questions.

First, what’s happened to your pension? (answer: thanks to ZIRP, its value has cratered).

Second, to whom do you think you’re going to sell your highly valued property, when you need to monetise it? (hint: not to a younger generation that has been deeply impoverished by demographic imbalances).

The irony here is that Theresa May is shaping up to be the first British leader in a very long time who really understands the issues of isolation and sheer unfairness which are bubbling beneath the surface of formal politics. It is her misfortune that her premiership seems to have coincided – if the exchange rate is any guide – with the fundamental flaws in the British economy being rumbled.

Brexit blues?

Those who blame the slump in sterling (along with pretty much everything else) on “Brexit” seem to have overlooked Britain’s horrendous current account deficit, which long pre-dates the EU referendum. Anyone who believes that “Brexit” is alone responsible for the slump in GBP has to believe something else, which strains credulity to the limit – which is that, in or out of the EU, Britain could have gone on living beyond its means to an extent sustainable only on the basis of foreign capital injections of £100bn annually, and rising.

Those who lent to or invested in the UK during 2015 are sitting on losses averaging about 20%. They must now be running their slide-rules over the British economy, and not liking what they see. If they decide that advancing further capital would amount to throwing good money after bad, the game really is up.

Looking ahead – regime-change and bad numbers

Events in Britain and America – even without bringing the Eurozone, China and Japan into the equation – make the economic and political outlook fascinating, albeit rather frightening. What we are witnessing in the West is the start of regime-change, with the neoliberal orthodoxy, which has ruled the roost for three decades and more, destined for the shredder.

The global economy has become unsustainably addicted to borrowing, and has created a mountain of debt that would imperil even a strong economy, let alone one that is flat-lining. But where and how are we going to see the economic implications of this mess feed through into data?

Well, SEEDS – the Surplus Energy Economics Data System – can supply some answers, by distinguishing between the “financial” and the “real” economies. The current SEEDS projection is that the global “real” economy, expressed at constant 2015 values, will grow very gradually, from $67 trillion last year to $69 trillion in 2019, before commencing a decline that will reduce it to $66 trillion in 2025 and $64 trillion by 2030. This does not amount to a crash, but it does mean that growth is over.

This looks rather worse when you take some other issues into account. First, the global population continues to increase, so growth at the per-capita level is poised to reverse significantly. This seems certain to feed into the politics of insurgency, because inequalities of wealth and income become very much harder to defend when per-capita average prosperity is shrinking.

Second, “excess claims” – that is, claims created by the financial economy that cannot be met by the real one – have already climbed to $80 trillion, from $55 trillion as recently as 2010, and look set to top $100 trillion by 2019.

If you’re familiar with surplus energy economics, you’ll know exactly why all of this is happening. However, GDP, as we measure it, is unlikely to capture the plateauing of real economic output, whilst the accumulation of “excess claims” – effectively, the proportion of global debt that is incapable of repayment – cannot be measured using conventional methodologies.

For those of us familiar with surplus energy economics, this isn’t entirely disadvantageous, as it should give us an edge in terms of anticipation.

What we do need, however, is a way of reconciling the SEE-based measurement of the real economy with data in common usage – and this is my current work-in-progress.