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Terrifying Tim from Tullett: Perfect storm; energy, finance and the end of growth


READERS may feel your blogger is a bit on the gloomy side but, believe me, there are a lot more pessimistic commentators out there. Take Tim Morgan of the brokers Tullett Prebon, whose boss Terry Smith is a regular guest on BBC financial discussion slots. Tim has just produced an 82-page note (complete with lots of pictures of ancient ruins) called “Perfect storm; energy, finance and the end of growth.”

It is definitely worth a look, even though I’m sure Economist readers will find much to disagree with. The note starts with a bang

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

Regular readers won’t need a repeat of the debt bubble thesis, except to say that the pessimists are often accused of worrying solely about government debt when it is the total of debt across the various sectors of the economy that is the problem. The sharp rise in government debt in recent years is the result of the build-up of debt in other sectors – finance, consumers – in previous years. Five years into this crisis, we have made very little progress (and in some countries, none at all) in bringing down the total debt-to-GDP ratios. (For the data, see this post.)

However, Morgan sees a cultural significance in the rise of debt. He thinks that, 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.

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 onwards, 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 desperately 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.

How about the “disastrous experiment with globalisation”? Here Morgan’s argument is that

Western countries reduced their production without making corresponding reductions in their consumption. Corporations’ outsourcing of production to emerging economies boosted their earnings (and, consequently, the incomes of the minority at the very top) whilst hollowing out their domestic economies through the export of skilled jobs.

This is a big claim and Morgan doesn’t back it up with much in the way of data. Our survey on inequality, published in October, cited studies that found 10-15% of the widening of wage gaps could be explained by trade while an OECD report found that globalisation – as measured by a country’s trade exposure and financial openness – had no impact on wage inequality at all.

Nevertheless, he does focus on an issue that has always nagged me; the extent to which services activities are “taking in each other’s washing” and thus not really adding any value to the economy. The crucial test, as he points out, is whether the service is globally marketable; yes, for iphone applications, no for hairdressing. His estimate is that the American economy expanded by $8.5 trillion in real terms between 1980 and 2011, of which only $900 billion was in the form of globally-marketable output, whether goods or services. In other words, the American economy has become more focused on internally-consumed services, helping to explain its long series of trade deficits, financed with debt from abroad.

This is already a long post so I’m not going to devote much space to his distorted statistics claim, the outlines of which will be familar to many. 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.

The final, and central point, is about energy. This is not a peak oil argument; it is that we have developed the easiest sources of energy already and that new sources are less efficient to produce on the measure of energy returns on energy invested (EROEI) formula. I have written a column about this point and quoted Morgan in the past; it seems to me an under-discussed factor. High energy prices have weighed on consumers ever since 2007. Normally, prices slump during a Us recession but demand form emerging markets means that hasn’t happened; the west has turned from being a price-setter into a price-taker.

But what about the impact of shale oil and gas and America’s looming energy independence? Clearly the price of gas has slumped in the US but it is a lot less traded globally than oil. Morgan argues that shale is still subject to the same problems; fracking uses a fair amount of energy. Whereas Saudi oil had an original EROEI of 100:1, shale oil is just 5:1, better than tar sands at 3:1 but not great. 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.

Hanging our entire economic outlook on the EROEI formula is a big step, especially when the estimates are so imprecise. But let us allow Tim Morgan his big (and terrifying) finish.

if EROEI falls 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.

See, I told you I was a ray of sunshine by comparison.

The Economist

10 Comments on "Terrifying Tim from Tullett: Perfect storm; energy, finance and the end of growth"

  1. Plantagenet on Thu, 24th Jan 2013 10:09 pm 

    If energy costs rise to 16.5% of GDP, then there will have be ——reductions— in other areas.

    All it takes is a little austerity.

  2. GregT on Thu, 24th Jan 2013 10:32 pm 

    “if EROEI falls 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.”

    As the author of this article has pointed out but failed to acknowledge, the EROEI of oil has already fallen, and will continue to fall as time goes on.


    You are right. It will take a little austerity this year, and a little more next year, and even more the year after that. Until we return back to where we came from. Pre-industrial civilization.

  3. BillT on Fri, 25th Jan 2013 1:11 am 

    First, this is written by/for economists. I printed out his referenced article, “Perfect storm…” but have not had time to read and absorb it yet. It appears form the quotes that it is a bite of reality that most will not want to taste.

    Yes, Planet, we will need austerity. If you think it is easy look at Greece, Spain, etc. Say your austerity is giving up your car this year and cutting back your grocery bill by 50% next year. Then the next year it means giving up your medical insurance, and finally, your home. Now you are a renter without a car, insurance and on a diet of fish and rice. Fun isn’t it? Maybe you lose your job next and there is nothing out there to apply for.

  4. Dmyers on Fri, 25th Jan 2013 1:35 am 

    Morgan is calling things correctly, including his globalization points, which the Economist found wanting for lack of data. The Economist’s rebuttal on that point is based on its own preferred data from its own “survey on inequality.” I’d rather go with my gut than with any survey by that name.

    The old gut is telling me that, yes, the exportation of jobs, wage costs going from way up there to way down here, will tend to enrich the profit makers (where profit is most profoundly affected by wage costs)as it leads to decline for the more numerous workers.

    In a somewhat opposing viewpoint, the Economist takes an interest in and agrees with the “take in each other’s washing” aspect of the service economy, which it acknowledges does not create economic value. That take on the situation, that acknowledgement of a disappointing fact, should be emphasized more than it is in contemplating our economic future.

  5. GregT on Fri, 25th Jan 2013 1:47 am 

    Say your austerity is giving up your car this year and cutting back your grocery bill by 50% next year. Then the next year it means giving up your medical insurance, and finally, your home.

    Hmm, sounds like this has already started in the US as well. It’s all easy to ignore I suppose, until it becomes personal.

  6. Gates Outcast on Fri, 25th Jan 2013 2:29 am 

    The sad part is that we have the science, the tech from it and knowledge to reduce consumption and lead a more material free existence without giving up critical care like medical science,BUT looking at my leaders we will take the darken messy road.

  7. BillT on Fri, 25th Jan 2013 4:26 am 

    Keep in mind that tech is the partner of plentiful, cheap energy. Oil made it possible and lack of oil will take it away.

  8. GregT on Fri, 25th Jan 2013 5:20 am 



    Maybe we are related?

  9. BillT on Fri, 25th Jan 2013 7:42 am 

    If your last name is a variation of the German word that means “to walk or step”, we could be. lol. Although you would be one of the few intelligent relations not asleep and drugged.

  10. GregT on Fri, 25th Jan 2013 7:02 pm 

    Nope, Scottish blood for me.

    Same thing in my family, the only one that gets it is my younger sister. Took her seven years of university.

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