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.