Why I disagree with Jeremy Warner

In today’s Daily Telegraph, Jeremy Warner takes issue with my colleague Dr Tim Morgan’s recent research report “Perfect storm: energy, finance and the end of growth”.

Let me begin by making three points:

1.    First and foremost, Tim Morgan’s report is independent research. I do not tell Tim what to write or edit his work. When I worked as an analyst I encountered many examples of people trying to suppress independent research, often with spectacular and very public results so I never interfere in Tim’s work. However, I have worked with Tim for much of the past twenty years across three firms, so clearly I respect his work.
 
2.    I usually agree with Jeremy Warner’s views, although not on this occasion.
 
3.    I would be happy if Tim is wrong as we would all be much better off. However, I doubt that is the case.

Jeremy’s critique seems to me to get little beyond the stance of the characters in Monty Python’s Life of Brian who sings “Always look on the bright side of life” whilst being crucified.

I note that Jeremy says only ‘Space prevents me taking the report apart bit by bit’. Obviously there are limitations of his column but if he wishes to write a full length rebuttal, I would be happy to publish it on this blog. I have a word of advice if he does so, in his article he says that Tim makes three main points. No he doesn’t. Page 10 of his report says ‘trend #3 - an exercise in self-delusion’ and a full chapter - ‘part four: loaded dice’ - devotes 16 pages to distortion of data on inflation, growth, GDP and unemployment’ which also needs to be covered. It’s hard to see how you can rebut Tim Morgan’s conclusions if you ignore his, in my view, vital point that policies are being guided by distorted data.

As for some of the other points Jeremy makes:

•    ‘If you were to accept Dr Morgan’s figures at face value - that for every £1 of growth in GDP between 2001-2 and 2009-10 Britain added £5.40 of public debt - then you would indeed want to slit your wrists’: the trouble is that Jeremy does not then say why we should not accept those figures.
 
Coincidentally, Bill Gross from PIMCO, the world’s largest bond fund manager, makes the same point in his Investment Outlook note for February which is titled “Credit Supernova!”: ‘there may be a natural evolution to our fractionally reserved credit system which characterizes modern global finance. Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a big freeze trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence. And too, the advancing entropy in the physical universe may in fact portend a similar decline of “energy” and “heat” within the credit markets… Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result.’

•    ‘Losses on UK mortgages and other forms of British household lending have been negligible’: I wonder if that has something to do with the fact that interest rates have been at a 300 year low for four years and the banks willingness to forgive breaches of debt service in order to avoid recording further losses? What might happen if rates have to rise when Mr Carney starts targeting nominal GDP growth (a euphemism for ignoring inflation) I wonder?
 
•    ‘Unfunded future pension and welfare commitments’: It’s a pity that governments do not do accrual accounting unlike companies and so their promises on welfare do not appear on a balance sheet. You can tell how this distorts the true position when the government transferred £35bn of liabilities and £28bn of assets from the Royal Mail pension fund to the Treasury. The assets went to reduce the government debt, the liabilities seem to have simply been vaporised. Is Jeremy seriously suggesting that the future liabilities of a country or company have no bearing on its solvency?
 
•    ‘If the future pensions promise can’t be met it won’t be’: I quite agree, but there are some grave consequences to this glib statement for those relying upon these benefits, some of whom I suspect may also only be able to service their mortgage because of the aforementioned record low interest rates.
 
•    ‘America’s shale gas revolution, which has substantially reduced some costs’: I look forward to Jeremy’s rebuttal of Tim Morgan’s concept of Energy Return on Energy Invested (“EROEI”) and how an EROEI of 5:1 for shale gas ‘reduces costs’ compared with previous energy sources.
 
•    ‘Globalisation...has helped lift hundreds out of poverty at fairly limited cost so far to Western lifestyles’: Precisely because the West has been living beyond its means, borrowing to maintain consumptions and with the expansion of the State also on borrowed money disguising the loss of jobs.
 
As I said at the outset, I would be happy for Jeremy to be right and for Tim to be wrong, but for me to believe that’s likely would require a much better effort from Jeremy than we’ve seen so far. Like Jeremy I agree with Winston Churchill expressed views on many things, but Jeremy’s views on this seem to have more in common with Monty Python than Winston Churchill.  Churchill never seemed to base his actions on a misrepresentation of the gravity of the situation. Rather than the quote he uses from Churchill he might look at this one from 13th May 1940 - Churchill’s first speech in the House as Prime Minister, when he famously said:

"I have nothing to offer but blood, toil, tears and sweat."

But his next sentence was:

We have before us an ordeal of the most grievous kind. We have before us many, many long months of struggle and of suffering.’

We will rise above this ordeal, but not by denying how grave the situation is.

Comments

[Sujo]

Mr. Warner rightly states that for every borrower, there is a lender. He goes on to diagnose the problem as a savings glut.

Is this not a false dichotomy? Is it not the case that we have both financial repression (e.g. in China) and over consumption? I.e. a "savings glut" and "credit binge".

[Chris Downing]

Political and public debate on our economic position - and indeed it is exactly the same in discussions about the UK's position in the EU - seems to be a fact free zone. When someone like Tim offers up some facts on our position, those with an agenda that can only be served through denial, always seem to make an aguement based on opinion, or phrases like" Everybody knows that...(insert personal opionion here)"

I remember Robert Heller, the business author, telling me many times that, "You can manage fact, but you you can't manage opinions, hope, and unfounded enthusiasms. You have to truly understand where you are, before you can set a course for where you want to be". I see little evidence that those in power want to share with us the truth of where we are now, or the process of how we get to where we want to be. We are navigationally becalmed.

[David Hutchison]

I am reading this article while in India. Reading the Indian newspapers is uplifting, especially the business section.
It is all about enterprise, not just about entitlement!
Reading the UK papers when overseas is always depressing. It has increasingly been the same old story since the end of Maggie Thatcher's premiership.
Of course the BBC with it's constant socialist comment, not to metion Europe is even worse. No wonder The East is leaving the Old World behind!

[DB]

"•‘Globalisation...has helped lift hundreds out of poverty at fairly limited cost so far to Western lifestyles’: Precisely because the West has been living beyond its means, borrowing to maintain consumptions and with the expansion of the State also on borrowed money disguising the loss of jobs."

Please could you clarify your thinkin here? It is not clear whether you think globalisation a Bad thing per se or whether you think globalisation leads to Western job losses because of current labour market policies in the West or something else.

[Haydn]

Terry - ca I do a short email interview for my Forbes column? Can't find a contact here for you.

[Brian Coxon]

Wait until interest rates do finally return to normal then watch the number of repossessions soar.

[Moraymint]

I've also taken the opportunity to comment on Jeremy Warner's surprisingly disappointing response to Dr Morgan's report over at 'Moraymint Chatter' ...

http://tinyurl.com/cwqkvb7

[Geoffrey Ashby]

AS usual spot on comments.

A conspiracy to try to keep people in a spending mood plus Politicians have no solution to the UK intractable bankruptcy. - more alarmingly, nor can the rest of us!
I anticipate Carney going for inflation but increased wages will be hard to generate with unemployment and competition from immigrants on peoples minds.
It amazes me how the myth of Mortgages being hard to get is increasingly accepted when (as oer the comments) the problem is that overpriced Property prices and contingent Bank losses (and their further insolvency) are the problem.
Newspapers only sell good news is another problem.

[Will]

Terry,
I loved Accounting for Growth. Can you recommend any more forensic accounting books?

Thanks!

[David Lilley]

In reply to the first comment stating that to every borrower there is a lender.

This would be just fine if it were true. It was the case with the origins of the building societies but it is not the case with frctionl reserve lending, mortgage backed securities and QE.

[Shane Latham]

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