Plan for lower growth in real GDP going forward

Posted on July 13, 2012 by

The usual assumption that economists, financial planners, and actuaries make is that future real GDP growth can be expected to be fairly similar to the average past growth rate for some historical time period. This assumption can take a number of forms–how much a portfolio can be expected to yield in a future period, or how high real (that is, net of inflation considerations) interest rates can be expected to be in the future, or what percentage of GDP the government of a country can safely borrow.

But what if this assumption is wrong, and expected growth in real GDP is really declining over time? Then pension funding estimates will prove to be too low, amounts financial planners are telling their clients that invested funds can expect to build to will be too high, and estimates of the amounts that governments of countries can safely borrow will be too high. Other statements may be off as well–such as how much it will cost to mitigate climate change, as a percentage of GDP–since these estimates too depend on GDP growth assumptions.

If we graph historical data, there is significant evidence that growth rates in real GDP are gradually decreasing.  In Europe and the United States, expected GDP growth rates appear to be trending toward expected contraction, rather than growth.  This could be evidence of Limits to Growth, of the type described in the 1972 book by that name, by Meadows et al.

Figure 1. World Real GDP, with fitted exponential trend lines for selected time periods. World Real GDP from USDA Economic Research Service.

Trend lines in Figure 1 were fitted to time periods based on oil supply growth patterns (described later in this post), because limited oil supply seems to be one critical factor in real GDP growth. It is important to note that over time, each fitted trend line shows less growth. For example, the earliest fitted period shows average growth of 4.7% per year, and the most recent fitted period shows 1.3% average growth.

In this post we will examine evidence regarding declining economic growth and discuss additional reasons why such a long-term decline in real GDP might be expected. Continue reading →

Posted in Financial Implications | Tagged , , , , , , | 21 Comments

The Growing Part of the World in Charts

Posted on July 5, 2012 by

Some parts of the world pretty much sailed through the 2008-2009 recession, while other parts of the world had huge problems. The part that sailed through the recession is what I call the “Growing Part of the World.”

I thought it would be interesting to see how the countries in the “Growing Part of the World” have behaved over the long term with respect to a number of variables (energy, GDP, and population). I compare these countries to two other groups of countries which did not fare as well during the 2008-2009 recession:

  1. European Union 27, United States and Japan
  2. Former Soviet Union (FSU)

Together these three groups equal the whole world, which is why I call the Growing Part of the World “Remainder” on my charts.

Figure 1 (below) shows that GDP growth rates have been quite different over the long term for the three groups, with the growth rate of the Growing Group higher than that of EU, US and Japan. The FSU’s growth rate has been more variable. Thus, it is not just during the 2008-2009 recession that the groups were different.

Figure 1 – Annual per cent increase in real GDP by area, based on USDA Economic Research Service data. “Remainder” corresponds to the Growing Part of the World.

The charts I have prepared show huge differences in variables besides GDP growth: in population levels, growth rate of population, and types of energy used, for example. The amount of energy for each unit of GDP varies widely, as does the pattern over time. While the FSU and the “EU, US & Japan” grouping show lower energy consumption for each unite of GDP over time, the Growing Group in total does not.

At the end of this post, I explain the reasons that why the Growing Part of the World seems to be doing so much better than the world economically and offer my view of what its prospects are for the future.

Continue reading →

Posted in Financial Implications, Oil and Its Future | Tagged , , , , , , , , , | 69 Comments

Lower Oil Prices–Not a Good Sign!

Posted on June 28, 2012 by

Are lower oil prices good news? Not really, if it means the world is sinking into recession.

We know from recent past experience and from common sense that higher oil prices are a drag on oil importing economies, since if more $$$ are spent on the same amount of oil, there is less to spend on discretionary goods and services. In addition, oil money sent to oil exporting countries is likely to be spent within those economies, rather than being reinvested in the oil importing country that the funds came from.

igure 1. A rough calculation of expenditure (in 2011$) associated with oil imports or exports, based on 2012 BP Statistical Review data, for three areas of the world: the Former Soviet Union (FSU), the sum of EU-27, United States, and Japan, and the Remainder of the World. (Negative values are revenue from exports.)

A rough calculation based on 2012 BP Statistical Review data indicates that the combination of the EU-27, the United States, and Japan spent a little over $1 trillion dollars in oil imports in 2011–roughly the same amount as in 2008. Governments have been running up huge deficits and have been keeping interest rates very low to cover up this damage, but it is hard to make this strategy work. The deficit soon becomes unmanageable, as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) countries in Europe have recently been recently been discovering. The US government is facing automatic spending cuts, as of January 2, 2013, because of its continuing deficits.

Furthermore, lower interest rates aren’t entirely beneficial. With low interest rates, pension funds need much larger employer contributions, if they are to make good on their promises. Retirees who depend on interest income to supplement their Social Security checks find themselves with less income. The lower interest rates don’t necessarily have a huge stimulatory impact on the economy, either, if buyers don’t have sufficient discretionary income to buy the additional services that new investment might provide.

Below the fold, we will discuss what is really happening with oil prices, and consider reasons why lower oil prices may be a signal that the world is again headed for deep recession. Continue reading →

Posted in Financial Implications, News Related Post | Tagged , , , , , , | 30 Comments

RIO+20 Talks Need to Consider Physical Limits

Posted on June 19, 2012 by

RIO+20, the United Nations Conference on Sustainable Development, is to be held this week on June 20-22 in Rio de Janeiro.

The term Sustainable Development seems to me to be almost a contradiction in terms. One dictionary gives the definition of “development” as “the act or process of developing; growth; progress”. In a finite world, how can growth be sustainable? Isn’t it possible that human population already passed the world’s carrying capacity, and world leaders should be talking about shrinking instead of growing?

The open access journal PLoS Biology is starting to raise questions in this area. According to a press release of the journal, “Coinciding with Rio+20, the open-access journal PLoS Biology is publishing three articles in the June 19 issue by leaders in ecology and conservation science who raise important concerns about physical limits on resource use that should be considered at the conference—but almost certainly won’t be, because sustainability has largely developed with little reference to the key ecological principles that govern life on Earth.”

I’d like to highlight one of these articles called, “The Macroecology of Sustainability“. The article is by Robbie Burger and Jim Brown at the University of New Mexico, plus several other authors. I mentioned this upcoming article in March in my post True Sustainability Solutions.

The “Macroecology of Sustainability” points out that the discipline of sustainability science, as it is usually practiced, tends to be a social science rather than a natural science.  Studies are often at a local scale, rather than a global scale, and focus on efforts to improve standards or living and reduce environmental impacts, without consideration as to whether these so-called solutions would be feasible on a global scale. According to the researchers, “Any efforts to develop a science of sustainability or implement policy solutions are necessarily incomplete and will ultimately fail without considering the core ecological principles that govern all of life.”

This is a link to the entire current issue of PLoS Biology, including the three articles.

Continue reading →

Posted in Energy policy, News Related Post | Tagged , , , , | 42 Comments

Rentier Debt and the Collapse of Debt-Based Finance

Posted on June 8, 2012 by

At the Age of Limits conference near Artemis, Pennsylvania on May 25-28, I was asked to speak on rentier debt and the collapse of debt-based finance. This is a somewhat difficult subject, so I decided to talk about the subject more generally–how growing debt fits in with economic growth and growth of energy supplies, and how inability to keep increasing this debt makes any existing tendency toward collapse worse. In this post, I would like to share this presentation with readers.

Slide 1

Let’s start by talking first about a subject fairly far removed debt–the difference between the systems created by nature and systems created by humans. The reason why I bring this difference up is because if we were only dealing with natural systems, there would be no need for debt. It is only when we start dealing with man’s systems that debt becomes an issue. Continue reading →

Posted in Financial Implications | 129 Comments