The Good News Keeps On Coming

[BillyStubbsTears]

Mick. You will defeat anyone who argues with you, on the terms that you set. Anyone who argues from a position whereby they selectively quote, mis-quote and utterly ignore anything else that contradicts their world-view, no matter how clearly it is set out in front of them is absolutely impervious to reasoned argument. Of course people like that will win any argument. On the terms that they set.

There's a name for people like that. I'm sure you can Google it...

[River Don]

BST

I know I keep coming back to this but couldn't the lower productivity in part be down to the high cost of energy?

[IC1967]

The reason productivity has not risen is because we are paying the price for Labour's years of mismanagement. People and companies and the country were left in so much debt after Labour left office that the incoming government felt it couldn't do what it should have done... raise interest rates. A short sharp depression would have got rid of all the zombie companies and cleared out the debt from the economy. Unfortunately the politicians didn't have the balls to do this. We are now paying the price in terms of productivity.

[BillyStubbsTears]

RD.

On the "What sort of recovery is this?" theme, there is a very interesting debate starting in upper economic circles about "what sort of ECONOMY is this?"

I don't know if you saw the news about Larry Summers's speech a month or so back, but it was intriguing.

He sets out the following argument. It's based on American data, but it seems to apply exactly to us as well.

1) Economies that are overheated suffer high inflation. Economies that are fundamentally depressed suffer negative inflation.

2) All other things being equal, high levels of borrowing and debt result in higher inflation.
3) From about 1980 to 2008, the levels of debt in the USA grew to unprecedented levels. This graph is US household debt to GDP


4) In fact, during that period, there have been three mega-bubbles and crashes in the US economy, fuelled by (private) borrowing: The commercial real estate bubble in the late 80s, the dot com bubble in the late 90s and the sub-prime bubble in the mid 2000s. That is exactly what you would expect if borrowing was too easy and interest rates were too low.

5) But, if borrowing is too easy, inflation is supposed to explode and interest rates are supposed to have to be cranked up to damp down inflation.

6) In fact, during the same period, inflation collapsed. In the 1980 it was ~14%, in 1990, ~6%, in 2000, ~3% and by 2007, when debt was at its highest ever levels, inflation was ~2%.

7) And interest rates dropped steadily: ~15% in 1980, 8% in 1990, 6% in 2000 and between 1-5% from 2001-08.

8) So, America had a long term credit binge, and historically low interest rates. But inflation was historically low too.

9) That is a puzzle. It suggests that if interest rates had been pushed up to throttle off the debt binge, Inflation would have been negative for most of the last 20-odd years. In other words, without the credit binge, America has effectively been in a long-term Depression.

Summers's conclusion is that it might only be repeated bubbles that have been keeping the US economy afloat.

It's a scary thought...

[BillyStubbsTears]

RD.
I'm sure energy costs must be a part of the problem, but they cannot be the entire reason. Because there were two far more severe energy price shocks in the 1970s, but the productivity curve hardly blipped.

Mick: Yes dear. Whatever you say dear. Have a nice day dear.

[IC1967]

Larry Summers needs to look at demographics. That is far and away the biggest reason why things have happened as they have. You'd think he would have considered that wouldn't you.

[BillyStubbsTears]

Actually, I cannot help biting...God save me.

Mick:

We should have had a short, sharp Depression eh? To clear out the debt eh?

How in the name of holy f**k does a depression clear out debt?

[BillyStubbsTears]

Jesus wept, it really is like being inside a hamster wheel. The same piece of fetid, half-digested lumps coming into view with depressing regularity.

It was only a while before demographics came back onto the scene.

Mick. The argument that Summers sets out is based on what has already happened in America over the last 30 years. The time that the baby boomers were maturing as the driving force of the economy. In that time, the American workforce has increased by over 40%. The employment figures have increased by something like an extra 2million people a year. So what the f**k has demographics got to do with it?

[IC1967]

It's very simple. An ageing population does not spend anything like younger people do. America (as do we) has an ageing population. This keeps inflation under control. The countries that have inflation are the emerging economies where an ageing population isn't yet a problem.

[IC1967]

How in the name of holy f*** does a depression clear out debt?

It's very simple. I'll give a couple of examples. A consumer drowning in debt can no longer afford the mortgage. Result he goes bankrupt and is no longer in debt and can start to rebuild his life. Next time around the cost of the next house he buys will be a lot cheaper and so more affordable in the future.

An inefficient business finds the cost of borrowing means he can no longer survive. He goes bankrupt clearing his debt. The more efficient productive companies in the economy take up the slack from the company that has gone bust improving our nation's productivity.

[BillyStubbsTears]

How in the name of holy f*** does a depression clear out debt?

It's very simple. I'll give a couple of examples. A consumer drowning in debt can no longer afford the mortgage. Result he goes bankrupt and is no longer in debt and can start to rebuild his life. Next time around the cost of the next house he buys will be a lot cheaper and so more affordable in the future.

An inefficient business finds the cost of borrowing means he can no longer survive. He goes bankrupt clearing his debt. The more efficient productive companies in the economy take up the slack from the company that has gone bust improving our nation's productivity.

f**king hell Mick! The penny has finally dropped for me! You are actually being serious here aren't you? This really and truly IS what you believe! It all makes sense now. I am really, really sorry that I've been abusive. The problem all along wasn't a deliberate obtusiveness. It was just that you haven't got the first f**king idea how the world actually operates!

OK. Let's indulge you. These individuals and companies who throw their hands up and go bankrupt.

Magic! Their debt is wiped out.

What about the people that they owed that debt to? What happens to them? Say it is a bank that lent them money? What happens to the bank when it turns out that a lot of the debtors that they lent money to are unable to pay back their debt?

What happens to that bank then? Well, it may well go bust itself, because the bank actually borrowed money from someone else in the first place. Like individual savers. Or companies investing their profits in bonds. Or other banks, off-loading temporary excess funds.

So...if that bank goes bust. What happens to the creditors of that bank?

Etc....etc...etc...etc...

Got it?

[River Don]

RD.
I'm sure energy costs must be a part of the problem, but they cannot be the entire reason. Because there were two far more severe energy price shocks in the 1970s, but the productivity curve hardly blipped.

I'm struggling to find a long term inflation adjusted chart for crude, this will have to do.



Red is inflation adjusted.

The spike in oil prices were are seeing now is more severe than the 70s. The oil price is remaining at elevated levels, since 2007 and the initial dramatic fall it has risen back to around the $110 per barrel level and stayed there. Way above the $30 longterm norm.

[BillyStubbsTears]

RD.

I accept that the graph in that link looks scary, but in fact that was a momentary spike (on an admittedly, long-term rise) in oil prices.

These are the figures since then:
http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Chart.asp

Still high by historic standards, but overall, the last 10 years has been broadly similar to the 1970s, when productivity rises sailed on.

[River Don]

I suppose there are lots of variables but it seems to me crude hasn't shifted for the last two or three years from a new high level at somewhere just above $100 pb. In the 70s we saw a similar period just above $80. We'll need a few more years of data to see if this remains a new reality or if it starts to fall back.

Here is another interesting chart showing the price of petrol at the pump, adjusted for inflation.



We have never had to pay so much for fuel since the 1920s and nobody ran a car or fleet of lorries back then.

Edit: BST the chart you link to is for Illinois crude. Brent crude is a little higher more like $100 rather than $90 and I believe is now seen as the more significant figure for reasons I can't remember.

[IC1967]

f***ing hell Mick! The penny has finally dropped for me! You are actually being serious here aren't you? This really and truly IS what you believe! It all makes sense now. I am really, really sorry that I've been abusive. The problem all along wasn't a deliberate obtusiveness. It was just that you haven't got the first f***ing idea how the world actually operates!

OK. Let's indulge you. These individuals and companies who throw their hands up and go bankrupt.

Magic! Their debt is wiped out.

What about the people that they owed that debt to? What happens to them? Say it is a bank that lent them money? What happens to the bank when it turns out that a lot of the debtors that they lent money to are unable to pay back their debt?

What happens to that bank then? Well, it may well go bust itself, because the bank actually borrowed money from someone else in the first place. Like individual savers. Or companies investing their profits in bonds. Or other banks, off-loading temporary excess funds.

So...if that bank goes bust. What happens to the creditors of that bank?

Etc....etc...etc...etc...

Got it?

What about the people that they owed that debt to? It's very simple. They get as much of it back as possible. They will probably end up losing out but I've got news for you, that's how capitalism is supposed to work. These lenders will be a bit more cautious in future and will lend more responsibly. Capitalism isn't supposed to be a system where lenders get their money back off the taxpayer because they've made a bad loan. That's how the banks operated under Gordon Brown's watch and it needs to stop.

You do make me laugh. First you apologise for being abusive and then in the next breath dish out some abuse! It's a good job I can take it. It helps knowing I'm running rings around you.

[Boomstick]

This whole argument is futile, there is no right or wrong answer.
The world banking system is a Ponzi scheme. The only way to prevent a global collapse and anarchy is to create more debt by issueing more loans and creating more money.
Basically until there is a worldwide revolution and a paradigm shift, all the powers that be can do is to kick the can down the never ending road.
The Tories have got more control over the can, and manage to tippy tappy it down the road in a Barcelona stylee, where as labour were leathering the can down the road in a sheffield united stylee.

[IC1967]

You make some good points Boomstick. Eventually though the Ponzi scheme will unravel. Far better to bite the bullet now and have a world wide depression to get things back on an even keel. If we don't, then when the Ponzi scheme unravels things will be a lot worse.

[River Don]

A nice analogy Boomstick and it's good that we can drag this thread back to football.

[BillyStubbsTears]

Yes Mick dear. Of course Mick dear.

A nice little Depression and everything will be sorted.

You really, truly DO believe this, don't you? God f**king help us.

[BillyStubbsTears]

I suppose there are lots of variables but it seems to me crude hasn't shifted for the last two or three years from a new high level at somewhere just above $100 pb. In the 70s we saw a similar period just above $80. We'll need a few more years of data to see if this remains a new reality or if it starts to fall back.

Here is another interesting chart showing the price of petrol at the pump, adjusted for inflation.



We have never had to pay so much for fuel since the 1920s and nobody ran a car or fleet of lorries back then.

Edit: BST the chart you link to is for Illinois crude. Brent crude is a little higher more like $100 rather than $90 and I believe is now seen as the more significant figure for reasons I can't remember.

RD:

Points taken. There is another issue though. According to figures I've seen (lost the bloody link - will post it when I find it again) the total cost of all the UK's energy expenditure as a proportion of GDP was, in 2012, about 40% of what it was in the mid-70s. Primarily due to energy efficiency and the demise of energy-intensive industries. So, even if oil today is just as expensive as it was in the 70s, that ought to have a proportionately lower effect on our economic activity.

As I say, I'm sure the recent rise in energy prices has an effect on our stagnating productivity, but it seems to me that there is something more fundamental going on. It's astonishing that there is no political debate about this, because it is THE biggest threat to all our future livelihoods.

[IC1967]

THe UK probably has the most expensive energy in the world. What we used to pay doesn't matter a jot. It's what we currently pay compared to our competitors that counts. 13 years of Labour and they did naff all to sort the problem out.

http://www.bbc.co.uk/news/business-25390456

[IC1967]

Is there no end to the good news? The UK economy is growing faster than forecast.

http://www.bbc.co.uk/news/business-25461227

[River Don]

BST

I'm sure there is something else going on but energy might be a part of it.

Broadly aren't the EU nations following a similar path to the UK, while US productivity is better? I wonder if the US is benefitting from the natural gas boom?

[BillyStubbsTears]

RD

True some (certainly not all) other European countries are seeing poor productivity and America isn't. It could be down to energy costs, but there's another couple of aspects that UK and Europe have shared over the last few years, and America hasn't had quite so severely - Austerity and systemic difficulties getting credit out into the real economy.

Mick. You ever seen The Big Lebowski?

[BillyStubbsTears]

RD

Actually, I've just realised what it is that's been nagging me about the concept of fuel prices being responsible for poor productivity. You'd expect quite naturally that high fuel prices would adversely affect overall GDP. But that would normally also result in an increase in unemployment. Which would tend to keep productivity constant.  So there's not necessarily a link between fuel prices and productivity levels, unless the fuel price is adversely affecting how much productive work can get done per hour worked.

We saw something quite exceptional from 2010-2012. Our GDP utterly stagnated, but emiyment went up by over 1million. I suspect that this is without precedent in recent history for a mature evonomy. But it suggests a large number of people being far less efficient than they were in, say 2007. And, crucially, that the long-term trend of productivity increase (which was more or less constant throughout times of high, low and middling fuel costs) has been broken.

I hope someone knows how to fix it. It'd be a start if anyone in politics even started talking about it.

[River Don]

Is there no end to the good news? The UK economy is growing faster than forecast.

http://www.bbc.co.uk/news/business-25461227

Er yes, did you read the 2nd part of that story? The one sub headed 'gloomy reading'?

[River Don]

There has to be a link between fuel prices and productivity doesn't there?

I see fuel as cheap labour, I have a better understanding of that recently since I have started cycling. I know how much effort I have to put into lugging me sen four miles on a bike compared with driving it.

If fuel is getting more expensive then labour must be getting more expensive which would adversely affect efficency and productivity, wouldn't it?

[BillyStubbsTears]

RD

I know where you are coming from. And yes, cheap, plentiful fuel helps you to do big, hard, heavy things more productively.

But our economy is no longer based on heating, digging, bashing and moving big things. It's predominantly based on ideas. Finance people shuffling money. Architects scribbling out ideas for buildings in Abu Dhabi. Software engineers doing whatever they do. That doesn't require a huge amount of fuel. Take that and the measured fact that our energy usage as a percentage of GDP has halved since the 70s, and it's hard to attribute ALL of the current productivity collapse to energy costs, even if they do play some role.

[River Don]

True BST

I do think you have a point when you say something else is going on in the UK.

However with us having very high energy costs in this country (IC is right in that) it might tend to push the metal bashers out and we are seeing the manufacturing base continue to decline. What work replaces it, stockbrokers, architects, IT specialists yes particularly in bloody London but there are a lot of warehouse staff, call centre staff, hotel staff, retail staff and other low paid service sector jobs around here. They would all be becoming less productive, particularly when they're only working 16 hours a week.

You are right though, for instance you might expect China would be feeling this effect more keenly? But then perhaps they are more adept at absorbing the cost of energy because of their lower cost base.

I just can't help but think when something as fundamental as fuel more than trebles in cost, it's got to have an effect.

EDIT: just scanning the web for stories aboutl productivity, I find stuff like this.

http://www.bloomberg.com/news/2012-01-17/global-productivity-growth-slowdown-extends-to-2012-board-says.html

http://www.worldfinance.com/strategy/corporate-governance-strategy/a-global-productivity-slump

http://www.conference-board.org/data/economydatabase/

I've no idea how reliable these sources are but they are suggesting there is a global dropping off in productivity. Interesting too that scanning through the articles, none of these economists are mentioning fuel.

[IC1967]

Er yes, did you read the 2nd part of that story? The one sub headed 'gloomy reading'?

I'm a glass half full sort of person, you are obviously a glass half empty merchant.