Dr Tim Morgan, he of Tullet Prebon’s research department, has a new book out; well it’s new to me although it came out in 2013. Apparently he quit Tullett Prebon to get serious about scaring the shit out of the proletariat.
Now our Tim isn’t known for his cheery outlook. You only have to take a butcher’s at what he wrote while at Tullett Prebon to see he isn’t chipper about the prognosis for the global economy and the Anglo-Saxon variant of it in particular. You get the drift with a title like “Thinking the unthinkable: might there be no way out for Britain? Project Armageddon – the final report”
Tim is a bright fellow, and his book Life after Growth is a cogent summary of how he looks at the world. It’s interesting because some of his insights are well worth taking on board in their own right, and have direct application to the personal finance world.
A Tale of Two Economies
We often think about finance in the abstract, as if it is a law unto itself, you diversify to minimise risk, the long-run real return from equities is something between 3 and 5% etc etc. Tim Morgan is at pains to remind us that the money economy is a map, it isn’t the territory. There is a real economy underlying it – that is the economy that puts food on people’s plates, moves stuff around, makes iFads and takes away your sewage. As I observed in Today I shall live like a King, this economy is astronomically more productive than it was a century or more ago. On a pretty average day I can live a lifestyle a lot higher with much more capability than Queen Victoria – and that’s without indulging in any consumerism.
The money economy overlays that – money is a claim on future work. Yours if you owe me money, mine if I owe you money. The abstractions helps us manage our work across time – when you take out a mortgage, you get to use the work of all the builders and the land right away. But the bank owns part of your soul – part of your wages is garnished and you work for the bank for the next twenty or thirty years.
In a way the money economy is a model of the real economy, but we have set up the model with some implicit assumptions of how the real economy works. We have taken past performance as a guide to the future, exactly the same sort of thing that the FCA mandates nearly all investment details to tell you not to do.
The assumption Tim Morgan fingers as the big one is that of assumed growth. Growth is how Western democracies have alleviated poverty – because the overall size of the pie is increasing the material wealth gradually increases over time. Much of that growth, Morgan postulates, is because we have had cheap energy for a long time, but gradually the amount of energy available after that used for extraction is falling, and this is strangling the global economy.
The real economy is running out of energy
So why does our Tim reckon growth is over? Largely because of this chart – the cost of getting hold of energy is rising, because not unreasonably oil companies focused on the low-hanging fruit of easy to get at stuff first – in the early years of the 20th century you only had to drop a nail in Texas to end up with a gusher it seemed.
Where Tim Morgan does very well is in making some of the fundamentals clear in unusual ways. Take the rise in oil prices – in his afterword he says
It might interest you to know that, if you are an average earner – in Britain, in this instance, though this is true across the world – your salary would have bought you 1,076 barrels of oil ten years ago, but would only buy you 328 barrels now.
That is a large change. Morgan hasn’t got any nice words to say about how Western governments encouraged their firms to outsource production to emerging markets either. I have never understood why there is a shift of power from labour to capital. I observed it – as a professional engineer I saw the deterioration in the workplace, I see it in the changing nature of jobs, it’s shown indirectly in the earlier peaking of the career arc for younger people. Tim Morgan outlines why this is so in a succinct way
The globalisation process is pretty easy to describe (which makes the ignorance of policymakers and their advisors even less excusable). Suppose that an American company manufactured a television at a cost of $350, and sold it for $400, earning a margin of $50. The company then became able, courtesy of globalisation, to manufacture the same television in China for $50, boosting its profit margin dramatically.
This outsourcing of manufacturing boosted corporate profitability enormously, and created big cash inflows that were placed in the banking system. At the same time, there was a haemorrhaging of skilled jobs from the United States and other Western economies, and countervailing increases in skilled employment in China and other emerging countries. In terms of the West, it is a simplification, but also a truism, that corporate profits expanded whilst wages deteriorated.
He challenges the Ricardian advantage that underlies a lot of free-market thinking that underpinned globalisation. But essentially, what happened is the the West produced less and consumed more, and the difference was fuelled by debt, which was cheap because of the money coming in to Western banks from the new wealth in the producing nations. These banks had to lend this money out – and a lot of it has been shovelled into inflating property prices in the West, so that twits like Shona Sibary could take the money out again and spend it on middle class consumerism and school fees, not to mention having more children than she can afford at the lifestyle she wants to lead.
And then it all went titsup in 2007-9. The chart from his book that should scare the shit out of anybody accumulating financial wealth is that the map is not staying in track with the territory.
Now if he is true there’s no point in saving into a pension, because the value of what you will get back will be worth bugger all. Tim sums up the situation in Is Globalisation the Culprit, to be had from his old stamping ground at Tullet Prebon.
In the West, a small minority prospers, principally the CEOs of companies whose profits have surged, and bankers who gain from the expansion of the lending sector. On the other hand, the majority suffers, both because of declining wages and because of rising indebtedness.
The next sequential stage – which probably lies in the very near future – is the realisation that the claimed reversibility of QE is nonsense. For example, do we really believe that the Bank of England can ever reverse £375bn of money creation? And that, logically, is where the tragedy ends – in money-printing, hyperinflation and collapse.
What can you do?
Not a lot.There’s not much that is actionable as this sort of thing requires a collective response on a fairly wide scale. It also depends on the time-scale – something that changes over 100 years is easier to adapt to than something that takes place over 10. The obvious responses fall into two opposing camps
Spend – live for today
One is to do all the energy-intensive stuff you want to do sooner rather than later, so if you want to see Australia or Macchu Picchu prioritise that. Hell, if money will drop in real value then borrow it like gangbusters. Maybe the consumerism addicts are right after all? The problem with that approach is that creditors may be getting increasingly keen on payback, and become increasingly creative about it, which implies a different tack
Save – get out of debt
However, the transition will take time. You don’t want to be carrying too much debt because as it becomes more apparent that debts may not be honoured, creditors will become keener to make sure they get their bit first. You see this endlessly on the debt boards in MoneysavingExpert – it tends to involve guys with thick necks and an intimidating attitude. FWIW this is the approach I have taken[ref]getting out of debt, that is. I’ve gone easy on the thick neck and intimidating attitude[/ref], though for different reasons.
There aren’t many actionable takeaways because of the uncertainty
That’s largely the trouble with that sort of doomsterism – the confidence interval of the predictions is huge, so it’s hard to come up with effective action. After getting out of debt you could do a lot worse than take a look at Mistersquirrel’s list of things you can do, particularly the personal skills from point 1, because these are independent of the financial system and inalienable.
Unfortunately becoming more skilful and self-reliant is not the way that consumerism takes us – people are becoming less and less self-reliant even at some of the basic skills in life like cooking and basic construction. The increasing specialisation and antipathy to generalists in professional work is also running against that. You only have to look at back-issues of Popular Mechanics or Woodworking to see that previous generations were far more self-reliant. I am probably a fair way ahead of most people – I have built a fair number of odds and sods but I don’t have the solid grounding of my father’s and grandfather’s generations because I learned a lot of this from books, not from seeing people do it. I didn’t even know how to make a packing crate right.
On the upside, there is much room for improvement. Many of the ways we use energy are terribly wasteful. Transportation, for instance, is bizarre. I once worked in Beckenham and lived further in London than that, and it was amazing that the trains I was using were empty whereas the platforms on the other side were chock-a-bloc with people travelling to the City. Now the Guardian is advocating long commutes as a way to save money – how long is that going to last in a world of rising energy costs and train fares?
Things like the Internet and mobile networks are increasingly power-hungry. In principle we could have gone the decentralised resilient approach but we went for great big server farms instead. Humanity is a bit like the Americans Churchill groused about – we do like to eliminate the alternatives before doing the right thing. Even in Life After Growth there are surprisingly upbeat indications –
I was very surprised to see two renewables and nuclear power clustered at the knee of the curve around current oil and gas finds, so still very useful. And the appalling return on shale gas shows that for the sugar rush that it is 🙂 It should be noted, however, that renewables and nuclear provide electricity, which is not very useful for small-scale transport or for shipping, so it does imply changes will be afoot in the use of transport. With the cost of energy rising the world will become a larger world again – there aren’t any good alternatives to the convenience and compactness of liquid transport fuels and the concept of an electric passenger aircraft carrying 300 people at 500 mph is laughable at the moment, and indeed the thought of charging that aircraft isn’t a cheery thought at all.
A 747 takes 184,000 litres of kerosene (43.15 MJ/kg, so ~6400GJ, ~ 1.8GWh ) If we take the output of Sizewell B nuclear power station and plug all of it into our electrically powered 747 then it will be charged in about 1.5 hours. I don’t know how many aircraft Heathrow turns round in a day[ref]looking at this, a lot more than 18 long-haul[/ref] but something tells me this won’t fly.
The future will have less material wealth in it, for average Westerners
and probably for others too. But let’s face it, when we look at some of what we do with our material Stuff, we have gone a bit nutty. And it only takes a bit of a push to jump the tracks from the nuttyness. Take this from Tim’s Afterword describing the effects of the changes on the average person
This person is most of us, and his or her life is already being affected profoundly by the processes described in this book. Over the last decade, his pay has increased, and may even have risen by more than the official amount of inflation, but he does not feel better off. The prices of many things that he has to buy (such as electricity, gas, food and petrol) have gone up by a lot more than his wage packet. It is a fair bet, too, that the various departments of government, no less than utilities, are taking a far bigger bite out of his income than used to be the case.
If his employer provides a pension scheme, its real value has probably fallen. If he has saved for retirement, the income that he can expect to enjoy is far less than seemed likely until a few years ago. If he expects to rely on a state pension, he wonders whether it will really keep pace with the soaring cost of essentials.
Despite the squeeze on his disposable income, he is subjected to seemingly continuous commercial pressure to spend. If he has children, it is likely that peer pressure is fuelling ever greater demands for new gadgets. If he is a young person (between, say, 16 and 30), he faces the additional problems of scarce, costly accommodation and a lack of well-paid jobs. Whoever he is, he quite probably has far more debt (including mortgages and credit) than he had ten years ago.
Although I see where he is coming from, some of it doesn’t ring true. I have fought some of these. I have reduced energy consumption and tried to switch space heating to more local sources. We have reduced food miles, along with a fair number of other people, by growing this ourselves (or rather Mrs Ermine does). I have iced most of the commercial pressure to spend, by decommissioning my TV, using ad-block plus on the Internet and realising that much of this spend simply didn’t contribute usefully to my quality of life.
Some of the fight lies between your ears.
Think differently. Most of our gadgets are fantastic value – as long as you don’t churn them every year following stupid peer pressure. Learn to fix some of the damn things – most of the problems lie with connectors and batteries, and there seems to be a huge aftermarket industry supplying spares. Buy fewer but better things.
Don’t be a sucker for stupid fads that make other people money at your expense – the whole wedding industry seems to be a serious case of that, what with organised stag and hen parties that involve flying somewhere to get pissed. You’re being rooked, guys, WTF is the point of going somewhere fancy and spending shitloads of money if you’re going to be hammered all the time? According to MSE the average cost of a wedding is £18,000[ref]I struggle to find any sympathy for the stupid bint cited by MSE who was gifted £12k by her dad only to find the bank used £6k of it to pay off her credit card debt. If you are in debt then don’t spend stupid money on your wedding. You are NOT worth it, by definition.[/ref].
Only a generation ago ordinary people used to get married on Saturday and be back at work on Monday and the cost of the proceedings were a few rounds down the pub. £18k is 10% of the cost of the average house the average happy couple aspires to. It’s barmy to spend all that on your ‘special day’ and then sweat the next five years moaning you can’t buy a house. What makes a wedding special is the interaction between the people, not the amount of money spent trying to feel like a Kardashian for a day. You aren’t a sleb. Get over it. And picture the saving for five years towards a house before you casually toss it into the maw of wedding consumerism. At least ask yourself the question of which is more valuable to you, and if it’s the wedding then STFU about not being able to get the house. You can’t bloody well Have It All™ – but you can choose the It you will have.
I’ve picked on the wedding industry because it seems to be a particularly egregious example of “You’re Worth It” consumerism but there’s plenty more out there. I spent too much money on fast and furious holidays because it was a break from the crappiness of the working environment towards the end, until I realised that the more I spend on trying to forget about work the longer I would have to work, and that was the time I put a tin lid on it.
you can win the fight with consumerism because you own the battleground
Consumerism offers empty dreams that make other people richer and bind you deeper into wage slavery. It is illogical to indulge in consumerism or sponsor your kids’ consumerism if you moan about work. If you like your work or are neutral towards it, then no problem. But for every pound you spend on an iFad, you have to typically earn twice that much – you have to pay tax on the money, you have the parasitic overhead costs of commuting.
You aren’t what you buy. And the advantage of the battle with consumerism is that it is entirely within your head. This is a space that you should control. Buying things isn’t bad – but buying things because other people tell you to is. Buying things because you’ve considered the value delivered and come to the conclusion it’s worth the opportunity cost of spending the money elsewhere or later is fair enough. Live intentionally. We don’t need so much damn Stuff to be happy. We live like kings already, and need to cure ourselves of Tiny Details Exaggeration Syndrome. The latest iPhone is nowhere near as much better to what went before as the first iPhone was to what went before it.
Oh yeah. And don’t buy your Consumer Shit on credit, mkay? As the man said, your debt makes other people rich, That’s not cool and that’s not clever. If we could ice the Great British Consumer’s addiction to credit, we’d be in a much better position to tackle Tim’s Life After Growth. We’d probably then have to tackle the Great British Government’s addiction to debt, but one step at a time, eh?