According to London Broker, Global Economy is Shrinking
The main premise of Life After Growth: How the Global Economy Really Works – and Why 200 Years of Growth are Over is that global economic growth has ended. Western governments conceal this fact through debt creation, inflation and clever manipulation of statistical economic indicators. According to Tim Morgan, leading analyst at the London financial brokerage Tullett Prebon, economic growth ended in 2000 and the economy has been shrinking ever since.
Morgan attributes the end of global economic growth to the high cost of fossil fuels.* This is because the real economy (which many people confuse with the financial economy) is a direct function of surplus energy. In pre-agricultural times, there was no energy surplus: human beings derived exactly the same amount of energy from their food as they expended acquiring it. With the advent of farming, they managed to produce a small surplus of energy that enabled a small minority to engage in work other than food production.
In the 18th century the invention of the heat engine enabled surplus energy (and the real economy) to grow exponentially over the next 200 years. Now that the cheap fossil fuel has been used up, our energy surplus is declining. This, in turn, is reflected in the gradual shrinkage of the global economy.
Measuring Surplus Energy
Energy surplus is measured as EROEI (Energy Returned Over Energy Invested), the ratio between the energy produced and the energy consumed in the extraction or production process. 1930s oil fields had an EROEI of 100:1. Once the easily accessible oil was used up, the EROEI began to decline. It was 30:1 in 2000 and it declines by about 2% a year. In 2014 it stood at 14:1. Unconventional oil sources have an extremely low EROEI (eg tar sands and fracked shale oil have an EROEI of 3:1).**
Declining EROEI’s are always accompanied by a spike in oil prices. This translates into higher prices for everything, due to the energy required for food production and manufacturing. Owing to higher prices, people consume less and the economy slows.
Globalization Has Been Extremely Damaging
Morgan is highly critical of politicians who fail to distinguish between the real economy of goods and services and the shadow economy of money and finance. He also feels globalization and rampant consumerism have been extremely damaging to the real economy. The mistake western countries made with globalization was reducing their production without reducing consumption. Instead they increased consumption levels by increasing borrowing and debt. Globalization was extremely beneficial for banks, due to the voracious demand for their product (loans). Meanwhile the diversion of large sums from production to the finance sector – aggravated by consumerism and the rise of consumer debt – hastened the decline of the real economy.
This wholesale debt creation and the widening split between the real economy and the financial economy is largely reflected in inflation and the destruction of the value of money. The US dollar lost 87% of its purchasing power between 1962 and 2012, which the government systematically conceals through misreporting of key economic indicators.
All economies function best when the financial economy coincides with the real economy. At present the primary methods of debt destruction are quantitative easing*** and inflation (it’s always easier to repay debts with devalued money). Other methods in the wings are cuts in pensions and Social Security payments and eventually bank failures and government defaults. Morgan feels that resource poor countries like Japan and the UK are at highest risk for default.
How Governments Lie with Statistics
My favorite chapter details the decades of statistical manipulations that have made government indicators of inflation, growth, output, debt and unemployment totally meaningless. John Kennedy was the first to exclude “discouraged” workers (who weren’t actively seeking work) from the unemployment rate. Johnson was the first to conceal the size of the government deficit by including the Social Security surplus in the federal budget. Nixon was the first to exclude energy and food costs (which rise the fastest) from core inflation calculations.
I was most shocked to learn that 16% of GDP consists of “imputations” or dollars that don’t actually exist. The largest single imputation the US government adds is “owner equivalent” rent. This is an amount equivalent to the rent all rent homeowners would have to pay if they didn’t own their own home. In 2011, this added up to $1.2 billion (out of a total GDP of $12.7 trillion).
The second largest imputation involves non-cash benefits employers give their workers (medical insurance, meals, accommodation, etc) and free banking services.
The US Government is Technically Bankrupt
This over-reporting of GDP, combined with under-reporting of inflation, makes it appear that the US economy is growing when it’s not. .
Morgan estimates that as of 2011 true US debt (government, business and personal) was 449% of GDP. Technically this means the US is insolvent as collective liabilities far exceed any realistic prediction of future income.
Politicians Need to Stop Lying
Morgan maintains that industrialized societies urgently need to living with less surplus energy. Rather than continuing to delude themselves (and us), our political leaders must face up to the reality that our claims on future energy surpluses (aka debt) are totally unrealistic.
They need to end globalization and rampant consumerism and enact policies (support for renewable energy, public transport and strong local economies) that will help people adapt to the new economic reality.
*Most analysts predict oil prices will return to $100+ a barrel in June 2015, once the US surplus is used up.
**Some other EROEI’s (for the sake of comparison):
• Coal 8:1
• Solar PVC panels 8:1
• Solar concentrating power: 17:1
• Large hydro generation: 22:1
• Small hydrogenation 32:1
• Landfill/sewage gas cogeneration 40:1
• Onshore wind 20:1
*** Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This differs from conventional money creation, in which private banks create money out of thin air as new loans (see An IMF Proposal to Ban Banks from Issuing Money).
Also published in Veterans Today
So in other words, we have a global economic crisis of epic proportion and the situation is only going to get worse because instead of recognizing that this crisis is unlike anything that we have ever seen, the governments are instead, playing poker with chips that are not backed with any actual and real currency.
The United States is bankrupt has been bankrupt for quite some time but to keep this under wraps, the Fed continue to print money out of thin air and to spread lies about how great the ‘recovery’ is coming along and how great our fracking and shale industry is doing and that if it weren’t for those pesky Saudis deliberately flooding the market with oil, everything would be right as rain and as soon as the Saudis let up on oil production, the US fracking and shale industry will get cracking again and continue to crank out endless supplies of oil reserves so that we can all continue to shop at all the stores that have closed or are about to close after they exit bankruptcy. And let us not forget about all of the malls that have closed or are about to close when just a few decades ago, malls were all the rage.
The death of the American mall
“Once-proud visions of suburban utopia are left to rot as online shopping and the resurgence of city centres make malls increasingly irrelevant to young people”
And of course, the closure of brick and mortar stores is being blamed on online sales. Yeah! I’m really ‘buying’ that because it has been stated that sales were down not only at the brick and mortar stores, but online sales weren’t exactly something to write home about and we all know that America runs on consumers consuming and when that stops, this ship sinks.
“U.S. online sales rose 8.3% on Thursday vs. Dec. 25, 2013, just half the 16.5% year-over-year jump last Christmas, says IBM’s (NYSE:IBM) Smarter Commerce, which tracks sales from 800 websites in the U.S.”
“Online sales growth also tumbled on Thanksgiving Day, Black Friday and Cyber Monday.”
Yeah! Just as I thought. But the government is spinning the hell out of shit in an attempt to spin shit into cotton candy. Again, I’m not buying it!
Is that the gist of this? Please correct me if I’m wrong and I would dearly love to ‘stand corrected’. As you can see, I’m no economist, just a realist.
Thank you for posting this Dr. Bramhall. Many need to see through the lies and propaganda, smoke and mirrors to the real reality of just where we stand and where we are headed.
That’s exactly my understanding of what Morgan is trying to say, Shelby. I never expected an investment banker to come out with such things. Things must be getting really bad if they’re starting to tell the truth about the actual state of the economy.
The ship is truly sinking. The good news about the impending economic collapse is that it should sharply curtail fossil consumption and prevent catastrophic climate change.
“I never expected an investment banker to come out with such things. Things must be getting really bad if they’re starting to tell the truth about the actual state of the economy.”
I sincerely don’t believe that it was due to the goodness of the heart that the cat is let out of the bag since it is a really, really big and gigantic cat that jumped out of the bag and only those who have their head stuck in the sand couldn’t or didn’t see this event. When the liars lies are just too ridiculous to be believable due to what is going down, they have two options; continue to tell lies and hope that people don’t notice their empty wallets and empty stores or throw their cards on the table and fold. Dude folded.
Excellent point, Shelby. These idiots are cutting their losses.
Sorry, but I have to disagree with this. My commitment has always been to telling the truth as I see it, however uncomfortable it might be. Not everyone in the financial markets behaves like a neo-con.
As an analyst, I have always believed that any research that falls short of the truth amounts to short-changing clients.
The analysis set out in the book is a matter of deep conviction. And it isn’t the only ‘unfashionable’ stand that I have taken. .
No analyst is doing his job properly if he simply tells people what they want to hear.
Thank you very much for your comment, Dr Morgan. From that vantage point, it’s an extremely courageous book. Just out of curiosity I wonder if you’re acquainted with IMF economist Michael Kumhof’s Chicago Plan Revisited and your opinion of the proposal to end fractional reserve banking?
Thanks. A good friend and then-colleague was the first to call time on the dot-com bubble – it does happen!
I’m not familiar with that thesis but will look it up. I’ve just posted an (over-long) blog on the monetary system. I’m not sure that fractional reserve banking actually exists – though regulatory requirements do create “shadow” FRB.
My thesis on money is that “extend and pretend” in a minimal-growth world is creating a second and worse bubble. First we had the credit bubble – now, we’re still adding debt (USD 57 trillion since ’08) but we’re also creating a “money bubble” as well. The Modern Monetary Theorists might be describing today’s monetary system correctly – but, if they are, it’s a system divorced from money as a store of value. It seems to me that bond markets at current highs canNOT reflect underlying value (where underlying value = discounted net present value of divs plus redemption). So markets and fundamentals are divorced……
Interesting blog. I look forward to checking it out. Here’s a video of Kumhof presenting The Chicago Plan at the London School of Economics: