Tuesday, January 29, 2013

The end of the world as we know it

In respect of the economic prospects for Western economies, there have been doomsayers for as long as I can remember – and longer.

Moral and cultural critiques dominated in the early 20th century, economic/environmental ones in more recent times.

Many of the predictions (about oil availability, for instance) have proved to be spectacularly wrong. Nonetheless, Western countries like the United States and most of Europe are undoubtedly undergoing rapid relative economic decline (relative to most of East Asia, for instance); and we may be on the brink of something worse, something quite irreversible.

A particularly bad sign is that the doomsayers are becoming more mainstream.

For some years now we have had the rather too flamboyant and hyperbolic Marc Faber. But behind the media personality is a former investment banker with a good doctorate.

Jim Rogers (Yale and Oxford) is another. Though he projects a more conservative image, he agrees with Faber about most things economic. [Here is a good, relatively recent, interview.]

Dr. Tim Morgan, Head of Global Research at Tullett Prebon, is another commentator with grim tidings for Western countries. The Economist's Buttonwood reports that Morgan has just produced an 82-page 'note' (hah!) called 'Perfect storm: energy, finance and the end of growth'.

'The economy as we know it,' Morgan writes, 'is facing a lethal confluence of four critical factors – the fall-out from the biggest debt bubble in history; a disastrous experiment with globalization; the massaging of data to the extent that economic trends are obscured; and, most important of all, the approach of an energy-returns cliff-edge.'

As Buttonwood points out, very little, if any, progress has been made in bringing down debt-to-GDP ratios, but Morgan goes beyond the numbers and sees deep cultural factors at work here.

Since the 1980s 'there has been a relentless shift to immediate consumption as part of something that has been called a cult of self-worship. The pursuit of immediate gratification has resulted in the accumulation of debt on an unprecedented scale.'

Buttonwood notes that this theme 'was picked up way back in 1976 by Daniel Bell in his book The Cultural Contradictions of Capitalism. Bell's idea was that the driving force behind capitalism was puritanical – it relied on deferred gratification as entrepreneurs cut back on current consumption in order to accumulate capital and build businesses. From the 1950s onward, western societies became more interested in immediate consumption – the car in every garage, the kitchen stocked with white goods and so on. Since then, arguably, governments have been desparately trying to satisfy those needs, first with fiscal policy and then with debt-financed growth. Oddly enough, it is now the nominally communist Chinese who display the capitalist virtues of high savings and capital accumulation.'

The globalization arguments are more complex, but at the root of the problem is the fact that, while Western economies like the U.S. have switched from manufacturing to services, most of the services involved are internally consumed and not globally marketable, and so are not really adding value to the economy. Thus chronic U.S. trade deficits financed by debt from abroad.

The distorted statistics claim is one I have only recently become aware of (or taken seriously). In blissful ignorance, I had assumed that the professionalism and impartiality of the economists and bureaucrats charged with dealing with these sorts of things could be relied on, and suggestions of data being massaged or distorted were the sort of thing one expected only from know-nothings and conspiracy theorists. Not so.

As Buttonwood points out, 'inflation has been understated because of adjustments for quality improvements (hedonics); GDP growth has been overstated; and national debt totals omit the cost of contingent liabilities such as pensions.'

Morgan's last and central point is less well-known. It is that we have developed the easiest sources of energy already and that new sources are less efficient to produce as measured by the EROEI (or energy returns on energy invested) formula.

'High energy prices,' explains Buttonwood, 'have weighed on consumers ever since 2007. Normally prices slump during a U.S. recession but demand from emerging markets means that hasn't happened; the west has turned from being a price-setter to a price-taker.

'... Whereas Saudi oil had an original EROEI of 100:1, shale oil is just 5:1... If we depended entirely on shale, energy cost would consume 16.5% of GDP, compared with around 3% of GDP in the 1980s and 1990s. Cheap oil played a major part in that late 20th century boom just as expensive oil was a big factor in the turbulent 1970s.'

Frankly, I don't need the EROEI argument to be pessimistic. But adding it in does make the future look even more bleak than I had bargained for.

Morgan concludes that, if (as seems likely) EROEI measures fall materially, 'our consumerist way of life is over. It is hardly too much to say that a declining EROEI could bomb societies back into a pre-industrial age.'


  1. I don't see private consumerism as much of a problem. If you buy stuff, sooner or later you have to pay for it. If you don't, bankruptcy or jail is the usual result.

    It is government-funded consumerism that is a much bigger problem. The government gives us stuff, and no-one pays for it. It becomes public debt or inflation. Each of us hopes someone else will pick up the tab. We vote to shift the debt onto the other guy. The effect is corrosive of public life.

    1. Agreed. What surprises me is that so many economists don't seem to get this – and effectively provide governments with cover for their irresponsible spending.

    2. Have to disagree with you, Alan. Read the report. In America, private debt has been transferred into public debt via bank bail-outs. Private over-consumption IS the problem. To say that private individuals over-spend because their governments do is to put the cart in front of the horse.