Читать книгу Why Things Are Going to Get Worse - And Why We Should Be Glad - Michael Roscoe - Страница 12
ОглавлениеThe creation of artificial wealth is bound to have a significant impact on the economy. By ‘artificial wealth’ I mean the creation of money by banks in the form of credit, as happened in a big way leading up to the 2008 financial crisis, or by governments in the form of ‘quantitative easing’, the process by which central banks buy government debt (bonds etc) from banks and other institutions with newly created money, as undertaken after the crisis.
One effect, as I’ve already tried to show, was to boost economic activity by as much as $20 trillion annually in the years leading up to the 2008 crash. In Figure 13 I’ve taken the information on real wealth creation – based on raw-material extraction, as shown in Figure 11 – and used it to plot a line representing my estimation of GDP without the credit bubble. This is simply the line that GDP would have followed if it had continued to grow at its long-term trend rate, which, allowing for efficiency improvements and a gradual reduction in the waste of resources, happens to correlate very closely with raw-material extraction. This is, of course, what one might expect, and follows the trend that my first chart showed for most of the previous century, until money lost its link to gold in 1971, after which time the financial sector of the economy began to expand quite rapidly.
The chart shows the build-up of this artificially created wealth: the loans that led to the inflation of asset prices, especially housing, which in turn contributed to the inflation of the credit bubble. By adding up the difference between the two lines for each year, I arrive at a figure that represents the bubble. This figure is in the region of $200 trillion, and at the time of writing (early 2014) the bubble still appears to be expanding.
$200 trillion seems a lot of money to have been created out of nothing, and I am inclined myself not to believe it. Although the method I used to reach this figure seems sound enough, the whole thing obviously requires careful investigation.
Figure 13
First, I think we should look more closely at GDP, which, as I mentioned earlier, is not an accurate reflection of real wealth creation. [When I talk about total world Gross Domestic Product, as I do here, I really mean the gross output of the global economy. The word ‘domestic’ no longer applies in the global sense, but I shall continue to refer to it as total world GDP, because it is arrived at by combining national GDP figures.]
GDP is theoretically a measure of annual industrial output, but it includes all economic activity, whether productive or not. As well as including spending based on debt, which has been my main point so far, it also includes a great deal of unproductive output based on general activity within the service sector, including government spending on health, education and defense, only a small percentage of which involves real wealth creation (mostly the spending that goes into construction of public buildings, plus some manufacturing related to equipment and the defense industry). Because of this, the figure for real wealth creation – what we might call productive GDP – has always been much lower than the official GDP data would suggest. We can see this in Figure 14, which gives a breakdown of economic activity in the US, UK and Eurozone, according to official GDP figures.
Figure 14
The data suggest that agriculture represents just 1.2% of the US economy, by value added. For Britain the figure is a mere 0.7%, while the financial sector apparently adds over 30%, when grouped with related activities such as insurance, accounting and legal services (banking by itself is around 10%).
Even taking the lower value, one might conclude from this information that banking is more than 10 times as important to the UK economy than is agriculture, and business services generally more than 30 times as important. In GDP terms, this is obviously the case. But out there in the real world, on the ground as it were, away from the City of London’s square mile, it seems an absurd statistic. Who would you prefer to be without, bankers and lawyers, or farmers?
Even in Britain there is still a lot of farming going on, with 69% of the land either cultivated or grazed, though this isn’t enough to feed everyone (40% of the food eaten in Britain is imported). But the US is the biggest agricultural producer in the world, or third biggest after China and India, depending on how you measure it. US agriculture feeds over 300 million people and still has enough left over to export a quarter of its produce to the rest of the world. You only have to pass through the vast American heartlands to see the obvious importance of this huge industry. Yet according to the figures, it represents only 1.2% of the economy. So what’s wrong with these statistics?
The problem lies in the way GDP is calculated. Gross Domestic Product is a measure of the final output of a nation’s economy, and represents the market value of all goods and services produced in one year. In 2010, for example, the net contribution of US agriculture to the economy was around $170 billion. But this figure then feeds into the food-processing industry, where value is added by turning the raw produce into food that people can eat. The value added to agricultural produce is now reflected in the manufacturing figures, the food-processing sector of which shows an output figure of $800 billion. This food is then distributed by the retail sector, where it adds another $500 billion to GDP figures. So a more accurate reflection of the importance of agriculture, when measured by value to the US economy, would be $1,470 billion. This would represent around 10% of the economy rather than 1.2%, with 15% of US jobs dependent on agriculture.
But this is to be expected; we already know that the primary sector is vital to industry, and industry to services. That’s how the economy works, as I explained in Chapter 2. The distortion of GDP figures really occurs because of the inclusion of economic activity brought about by the spending of accumulated wealth and newly created money (credit, or debt), whether by the private sector or by governments. According to the same set of figures that gave us agriculture as 1.2% of the US economy, we have a total government contribution of 22%, and financial and other business services, including insurance, law and real estate, giving a total of 32%. How is it possible that the government has created more wealth than farming and industry? It isn’t, of course. No real wealth can be created by finance, insurance or government – nor by any other service. All they can do is reallocate wealth that’s already been created by the primary and secondary sectors of the economy at an earlier period than the GDP figures imply.
In other words, although GDP figures are calculated so as not to count the same new wealth twice in one year (in the way I showed above, with the wealth of agriculture feeding into processing and then retail) they do count the industrial wealth of the past, over and over again. The apparent wealth-creating activities of the service sector, which make up such a large percentage of developed economies these days, are really just a recycling of the wealth of past industry.
In addition to this, although most investment income is excluded from GDP figures (in recognition of the fact that such ‘rent’ is not genuine output), there is a different measure of the so-called wealth added to the economy by the financial sector. A strange concept devised by the United Nations in 1993 attempts to account for the ‘intangible’ wealth created by banks using a system that translates the financial risk from loans into output.2 So the more debt a bank takes on, the more it apparently contributes to GDP.
Services add value by assisting the real wealth creators to produce their goods, certainly, but that value is already reflected in the figures for real industrial output. We see therefore that GDP figures are seriously flawed as a measure of real wealth creation, and this distortion must surely be reflected in policy decisions based on these figures.
Another example of how GDP figures seriously understate the importance of primary industry is in mineral extraction. A 2009 study by PricewaterhouseCoopers (PwC) of the US oil and natural-gas industry arrived at the results shown in the following table.
Contribution of Oil and Natural Gas Industry to US economy (2007)
Source: PwC report for American Petroleum Institute, Sept 2009
PwC concluded that the sector accounted for 7.5% of total US GDP, compared to the 1.5% shown in official GDP statistics. But even the PwC estimate still uses the same flawed data for overall GDP measurement. In other words, the total GDP figure from which they calculate the sector’s 7.5% contribution still includes the supposed 54% for the financial and government sectors, plus another 25% or so for all other services that, as I’ve already pointed out, are merely recycling past industrial wealth. If we remove these from the picture, we find that the US oil and gas industry makes up 37% of the real economy.
This failure by economists and politicians to appreciate the inadequacy of GDP figures seems quite pervasive. For example, the data for mineral extraction that form the basis of my first chart, and which set me off on this investigation, come from a 2011 United Nations report called Decoupling Natural Resource Use from Economic Growth. In this report, the authors state:
‘These data indicate that globally, natural resource use during the 20th century rose at about twice the rate of population, but at a lower pace than the world economy. Thus resource decoupling has taken place “spontaneously” rather than as a result of policy intention. This occurred while resource prices were declining, or at least stagnating. Further research is needed on this relationship between “spontaneous” relative decoupling and declining resource prices.’
In other words, the authors fail to understand why the economy apparently grew faster than the rate of natural resource use would suggest it should have done. They obviously didn’t make the connection to the growth in debt, yet I would suggest that the connection is quite clear. Because spending on credit requires no industrial activity, it uses no natural resources; the debt is created by leveraging the accumulated wealth of past industry. Or, to put it another way, new money is created from past activity. This is not to say that it doesn’t result in any use of natural resources – some of this new money is bound to be spent on industrial goods, and therefore will boost industrial production, and consequently the use of raw materials. But my point is simply that the credit is created from nothing, as distinct from money that has been earned by real work.
Although some of this artificial wealth will be spent on real goods, a lot more of it goes into services and inflated asset prices, particularly housing. Although construction uses resources, the inflation of house prices does not; a house of a certain size requires the same resources, however much it sells for. Yet inflated selling prices result in a general feeling of rising wealth and raise GDP figures by boosting economic activity, especially in the financial and real-estate sectors.
If we look again at that chart of GDP and mineral extraction, this time adjusting the baseline slightly so that both graphs start at the same point (Figure 15), we see even more clearly the link between natural resources and economic growth. The link begins to break some time around 1971, when the dollar, and subsequently all money, broke away from the gold standard.3 Adjusting the baseline might seem like cheating, but all we are doing here is comparing growth rates. The scales are not the same, but that doesn’t matter: there is a strong correlation between the growth of resource use and the growth of the economy, as one might expect. The only surprising thing, as the UN researchers found, is that GDP apparently starts to grow without resources, and I have explained this as being the debt bubble. [I also show here the relatively small gains from increased material recycling, reduction in waste and fuel-efficiency improvements.]
At the start of this chapter I calculated the size of the bubble at $200 trillion, a figure I considered too high to be believable. However, if we add up the GDP figures for each year going back to 1900 (in constant 2010 dollars), we get a total of around $1,760 trillion. This means that the total wealth ever produced, up to the year 2013, according to GDP figures (in today’s money), is around $1,800 trillion (the figures become relatively insignificant before 1900). Now I’ve already shown that GDP figures are a gross over-exaggeration of true wealth production, because they keep recycling wealth that was created in previous years, and therefore this figure of $1,800 trillion will also be grossly exaggerated. But it does at least explain how we might get that $200-trillion figure as the measure of the debt bubble. In GDP terms, $200 trillion of credit-fuelled growth starts to look quite plausible, as long as we remember the key point that it doesn’t represent real wealth.
Figure 15
If we compare my figure of $1,800 trillion for total accumulated GDP with the earlier figure we had for total private wealth in the world – around $240 trillion in 2013, according to Credit Suisse data – we might begin to understand the relationship between output in terms of GDP, and the amount of actual wealth in dollar terms that ends up accumulating in banks. But in reality, the situation must be more complicated than this. Some wealth must get lost along the way – assets such as property crumble with time – and also private household wealth doesn’t represent all the wealth in the world. What about state-owned wealth? Obviously, I must investigate this matter further. I return to this theme in Chapter 8, but first I must answer another question I think this chapter raises.
So what’s wrong with old wealth?
Because the service sector has expanded to become the dominant force in the economy, based on the recycling of past industrial wealth, the ratio of productive to non-productive GDP has been falling in recent years. I can show this in Figure 16 simply by plotting a line corresponding to the proportion of total global GDP that has come from real industry (in other words, from the primary and secondary sectors of the economy).
One might suppose that wealth accumulated from past industry would be just as good as that created from current industry, but this is rarely the case, primarily because this accumulated wealth tends to end up in banks and other financial institutions as private investment. Unless investment goes towards the development of the real economy (ie, non-financial business) – and most of it doesn’t these days, because there’s far more old wealth held in funds than is required for productive investment – then it doesn’t create jobs. All it creates is debt.
Figure 16
This process of debt creation is at the heart of the world’s economic problems. Not only is it linked to the reduction in real jobs and the resulting impoverishment and inequality in society, debt creation is also harmful in less obvious ways. Because so much economic activity is now based on the spending of credit rather than on genuine wealth that’s already been ‘earned’, it is effectively borrowed from future earnings. There are two negative aspects to this borrowing from the future.
First, even if a debt-fuelled economy sees an increase in genuine production due to the spending of this borrowed money, this production itself is also borrowed from the future, because production is bound to decline as debts are repaid; consumers will have less money to spend in the future.
Second, the debt-fuelled boosting of asset prices gives a false sense of increasing wealth. This new ‘wealth’ has no basis in reality because it is based purely on the increase in credit, and this in turn must have consequences for the value of money, because the value of anything follows a simple formula:
So if money has become less rare while its utility has barely increased (because its utility – its real usefulness – must be a function of its purchasing power, which in turn is related to genuine economic growth, and this hasn’t risen anything like as much as the money supply) then its value must have fallen. To look at it another way, while the amount of real wealth was rising moderately with genuine industrial output, the amount of money being pumped into the economy was expanding much more rapidly.
There is only so much real wealth in the world at any one time and, however much credit banks might create through leveraged lending, or governments might pump into the banks through quantitative easing (more on this in Chapter 12), it doesn’t add one penny to that stock of real wealth. So all it can do is dilute the value of money, like adding water to wine. Just as the wine will be lower in strength, so will the money, and this must inevitably lead to higher prices.
A quick word about inflation
Inflation is commonly understood these days to mean the rise in prices caused by the devaluation of each monetary unit. It would be more correct to say that rising prices are the result of inflation and that the actual inflation is the growth in the amount of money in the economy relative to real economic activity.
An easy way to understand the relationship between the amount of money in circulation and its value is to go back to the commodity analogy.
Say a bushel of wheat has traded for an ounce of silver for several years – this being the accepted market rate, according to the principle of supply and demand – but then farmers start to grow more wheat so they can exchange it for more silver. The effect will be to cause a shortage of silver, raising its price relative to wheat. Each bushel of wheat will then be worth less, when measured in silver terms.
Now try it the other way – an ounce of silver will buy a bushel of wheat. What happens if more silver is mined and gradually finds its way into people’s pockets, via the local market? The demand for wheat increases because people can buy more. Wheat becomes scarcer so prices rise. Farmers might plant more wheat next season to meet the increased demand, but that’s only possible if they have the land. If they don’t, then the cost of wheat stays higher and you have price inflation.
The same thing applies to money supply: if governments print more money than the economy merits, the price of commodities must rise to compensate for the new demand. The money is devalued. Inflation of the money supply beyond genuine economic growth results in rising prices.
Figure 17
The rise in money supply seen in Figure 17 is mostly due to rising wealth and economic activity, and only partly to inflation (this chart is not inflation adjusted). There should be a close correlation between money supply and GDP – otherwise it must mean a change in demand for money relative to output – but the two don’t actually move together. If, for example, we plot US GDP, unadjusted for inflation, against the broadest measure of money supply, which just happens to be very close to GDP in actual dollar terms, we see a close fit (as in Figure 18).
But we see also that the money supply has been rising more quickly in recent years. At the time of writing, we haven’t seen the full effect of this inflation of the money supply, because most of this newly created money is being held by banks and other financial institutions and hasn’t entered the real economy. The high demand that caused the last boom – demand fuelled by credit – has collapsed since the crash, but the supply side of the economy takes longer to adjust. Weak demand relative to supply keeps prices down.
Figure 18
We have had a trend of falling commodity prices over the last half-century (as shown in Figure 7), due to rising efficiencies on the supply side related to globalization and the increase in market size. Prices recently have been up and down like a rollercoaster, partly due to speculation, but this hasn’t resulted in a big rise in most consumer prices in the long term. However, the trend is turning upwards and is likely to rise more steeply as oil and mining companies, and farmers, demand a fair price – a price that takes account of the falling value of the dollar and of money generally.
This has not affected these primary producers significantly yet, because their costs haven’t risen all that much (the cost of equipment and labor and so on). But at some point there has to be a readjustment. It is inevitable that prices will rise, because although the value of money has fallen, the value of the earth’s natural wealth hasn’t changed – except in so far as resources have become scarcer, which will itself also cause prices to rise.
There might not appear to be any particular law that governs the relationship between the value of natural resources and money – supply and demand is hardly a scientific equation – but there ought to be a general consensus that links the scarcity of resources to the price, which must eventually feed through to the markets.
Figure 19
It’s true that markets aren’t actually all that good at valuing commodities, partly because of the influence of speculation – betting on future prices influences those prices, just as betting on a racehorse changes the odds. There’s a tendency towards a herd instinct that pushes the trend too far upwards, followed by an overreaction when it becomes obvious that prices have risen too much, sending the price too low, much the same as happens with stock markets.
One might suppose that the true value of something like oil, for example, shouldn’t vary greatly, both demand and supply being fairly constant. The former rises and falls with changes in the real economy, but not by all that much relative to the total quantity produced, as shown in Figure 20. Supply is depleted gradually by extraction, and can be temporarily reduced by production problems in a certain region – a war in the Middle East, for example. It can also be boosted by new fields coming into production. But these are not wild variations compared to the overall quantity of oil available from operational fields.
Figure 20
If we look at the oil price over the last half-century, as shown in Figure 21, we see that the price hardly varied until the dollar, and therefore oil, lost its link to gold in 1971, at which point producers began raising prices to compensate for the fall in the dollar’s value. Unrest in the Middle East added to the uncertainty and caused price spikes in 1973 and 1979. Prices fell as production increased in the 1980s and 1990s, then rose sharply in the boom up to 2008, driven by speculation as well as rising demand. So the price is obviously not governed purely by the true value of the product, and in fact might bear little relationship to it.
But ignoring these wild fluctuations, the trend for commodity prices is bound to turn upwards. Global demand will keep increasing as long as the population keeps rising and emerging economies continue to grow, while many commodities are gradually being used up. At the same time, money is more abundant than ever.
Figure 21
Easy money is cheap money
I look more closely at the subject of prices in Part Two, but for now I want to return to the debt problem. The credit bubble hasn’t really gone away: it only deflated slightly, and has since blown up again in a different form. With the government bailout of the banks, some private-sector debt has been converted into public-sector debt, which has hit a record level, greater even than was experienced at the end of the Second World War, even though there was nothing this time that remotely resembled the global crisis that made such debt unavoidable in the 1940s.
This has serious implications for the wealth of future generations, because surely public-sector debt is merely private-sector obligations carried into the future, in the form of future tax revenues. We talk about public and private sectors as if they are quite different things, but in the end the state is just the people; a collection of individuals. And unless it has somehow become possible to get something out of nothing, debts always have to be paid, one way or another.
Whether all this means we are in for another major financial shock, or whether the difference between perceived wealth and actual wealth can somehow be reconciled more gently over time, I wouldn’t like to guess, though if I were a gambler I’d put my money on another crash.
Figure 22
One thing, however, seems fairly certain: the amount of real wealth in the world today is considerably less than the figure suggested by Credit Suisse or any other financial institution, because the banks are measuring assets in terms of money that has been devalued by the credit bubble and subsequent inflation of the money supply, even though that devaluation hasn’t yet fed through into the economy.
Why hasn’t all this new money fed through into the economy? Because the banks aren’t doing anything with it. With interest rates effectively zero, the banks aren’t lending because there’s no profit in doing so. They have been building up their reserves instead, which is a good thing, but doesn’t alter the fact that money has been devalued.
The idea that governments should stimulate demand by keeping interest rates close to zero is self-defeating. The lack of demand isn’t caused by the cost of borrowing. How could it be, when interest rates are already so low? The lack of demand is caused by the reduction in the real wealth of the majority of the population, which is linked to the shortage of real jobs and the related decline in real wages.
The credit boom boosted demand with debt-based consumer spending – the growth in GDP was artificial, as I’ve shown. So the answer can’t be to increase demand through more borrowing. The answer is to accept lower demand, because this is the real level of demand, and concentrate government policy on creating jobs instead of creating more debt.
There is a fundamental relationship between money and work: when we exchange money, we are ultimately exchanging our labor, and although this doesn’t necessarily apply in practice in the modern world, the principle is still relevant, for reasons I shall explain in Part Three.
But there’s an even bigger issue behind all this, connected to the increasing dominance of accumulated wealth over produced wealth, as seen in the rise of the financial sector relative to real industry. It is this rise that led to the increase in lending, encouraged by ever-lower interest rates – a glut of cheap money that in turn led to the credit and house-price bubbles, and I think this has major implications for the future of the global economy, and for the future of civilization in general.
Representations of wealth, such as money, must be linked to the real wealth created by industry. Money has no other claim as a measure of wealth. Government promises mean nothing if the government cannot back the promise with real wealth. The rise of the financial sector to a position of economic dominance over real wealth-creating industry poses a serious threat to the value of money everywhere, and to the economy in general.
The whole concept of making money from assets such as property and other financial investments, rather than from real industry, is deeply flawed. No real wealth can be created this way; all that happens is wealth is transferred from the borrower to the lender, which usually means from the middle classes to the rich, and this of course reduces the spending power of the majority while increasing the wealth of the financial sector, creating a vicious circle of unsustainable credit creation.
When we take into account the ever-rising productivity of manufacturing and the associated reduction in the industrial workforce, we begin to understand the fundamental problems facing the developed economies of the world. I’ll come back to this after the next chapter. But before we go any further, we need to think a bit more about money and, in particular, what gives money its value.
1 The data for global mineral extraction, which forms the basis of Figure 1, comes from a 2011 United Nations report entitled ‘Decoupling Natural Resource Use and Environmental Impacts from Economic Growth’. The authors of this report in turn based their work on research undertaken by Fridolin Krausmann and colleagues at the Austrian Institute of Social Ecology, who made the following points regarding data reliability: ‘According to broadly accepted principles of material flow accounting, we accounted for the extraction of all types of biomass, fossil energy carriers, ores and industrial minerals as well as for bulk minerals used for construction. Extraction by definition also includes the biomass grazed by domesticated livestock, used crop residues and the tailings that accrue during the processing of extracted ores. Resources extracted but not used (eg overburden in mining, excavated soil, burnt crop residues etc) have not been accounted for. We think our data provides a consistent picture of the overall size and composition of global materials use, and their change over time. Our results match well with other estimates of global material flows covering the period 1980 to 2005.’
2 The United Nations System of National Accounts (SNA) is a global set of accounting rules for nations compiling statistics, and was updated in 1993 to include Financial Intermediation Services Indirectly Measured (FISIM).
3 For more about the link between gold and money, see Chapter 5.
