#93: The prosperity equation


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.



#92: Pianists in a brothel


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!


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

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

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

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

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

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

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

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

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

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

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

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

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


#90: After peak prosperity


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

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

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

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

SEEDS 2.15 UK dataset March 2017


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

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


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

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

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

The United Kingdom: energy balances


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

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

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

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

The United Kingdom: energy economics


The role of borrowing

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

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

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

The United Kingdom: growth and borrowing


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

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

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

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

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

The United Kingdom: economic output


Debt dangers

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

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

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

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

The United Kingdom: debt


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

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

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


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

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

* * *

Here is the new PDF for Canada:

2.02317 Canada

#89: Chinese whispers


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

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

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

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

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


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

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

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

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

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

GDP and debt

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

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

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

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

China bespoke 1 GDP & debtjpg_Page1

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

Borrowing and growth

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

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

China bespoke 2 B & Gjpg_Page1

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

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

The Chinese debt model

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

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

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

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

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

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

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

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

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

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

China bespoke 3 GDP % ULjpg_Page1

For how much longer?

The implications of this assessment are stark.

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

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

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

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

4.China – debt/GDP ratios, 1995-2021F

China bespoke 4 debt ratiosjpg_Page1

China PDF

#88: SEEDS to go live?


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

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

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

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

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

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

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


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

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

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

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

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

Going public?

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

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

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

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

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




#87: A world economy snapshot


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

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

The cost of energy

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

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

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

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

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

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

The economy – output and borrowing

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

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

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

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

Borrowed consumption and underlying growth

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

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

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

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

A world in denial

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

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

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