Friday, May 16, 2008

Energy, GDP and Debt

I'll throw up this chart without too much comment. It tracks total energy consumption, real GDP and real total debt in the US (real = adjusted for CPI inflation).

Data: BP, FRB

The divergence between GDP and energy consumption started back in 1980 and could be explained - for a while, anyway - by efficiency and conservation gains. But from 2000 to 2006 energy consumption suggests a real US economy that has gone flat: total energy use in 2006 was virtually unchanged from 2000, while real GDP was reported as rising +15%. Cheap imports?

And surely the 42% increase in real debt since 2000 had something to do with it?

I'll leave it at that, so you can all reach your own conclusions. Have a very pleasant weekend.


I realized that today marks exactly one year since I started tracking how many people visit Sudden Debt. In that one year there have been 375,000 unique visits and 495,000 page loads - and they started from a daily count of almost zero. Many thanks to all who come here - I hope you find the experience worthwhile. And since I can't really do without charts...


  1. would this be explained by either:

    1. Fiat money growth without 'real growth' using bogus CPI numbers?

    2. Growth in those parts of the economy that do not require more energy (call then 'intellectual' (i.e. non-San Diegan) activities)?

  2. @thai

    debt service ends up in the GDP as well, i.e. the long/short spread is accounted as profit by the banks.

  3. One other question: you don't know what the equivalent graph for Argentina looked like in the decades prior to their peso devaluation?

  4. Communism before it's fall: hiding the books.
    Capitalism before it's fall: cooking the books
    Sooner or later main street America and maybe even the AARP will wake up to the fact how they're cheated out of trillions by bogus CPI numbers. Until then sweet dreams America.

  5. As per wikipedia...

    Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The IMF, however, kept lending money to Argentina...
    Now for energy data:

    Energy consumption in Argentina flat-lined between 1996-2001 and then dropped off as the economy went into a tailspin. Devaluation occurred in January 2002...

  6. @Hellasious

    do you have more datapoints on the left of the chart, or some good reference on long term linear correlation between GDP and energy consumption?

    The linear correlation appears quite intuitive and the chart you posted is quite suggestive, but it doesn't really prove the point of the divergence as it is.

  7. Re: More datapoints..

    Unfortunately BP doesn't go back further than 1965.

  8. Seems kind of compelling...


  9. Let me try an experiment.

    Hellasious has no money buys a $1000 item from me on credit. He gets the item and I book say a $100 profit (that goes to the GDP). I deposit the $100 on the bank that (thanks to the magic of the fractional reserve lending) now has the reserve for the $1000 it lent to him previously in the day.
    At the end of the year Hellasius has payed its >10% of interests and the bank books say $100 of profit (that goes to the GDP).

    So, Hellasius keeps its $1000 item and its $1000 debt, he has really payed only $100 in interests and GDP grew $200.

    Is it how it works?

  10. "I hope you find the experience worthwhile"

    Absolutely! You are the Lord of Chart Porn, Steward of Education Through Analogies, and Grand Seer Past All Illusions. Someone once accused you of having an agenda and you replied that the only agenda you had was a better future for your children. I was hooked.

    Half-tragedy, half-comedy statement attributed to someone in CA's state government (paraphrased): Its not borrowing money, its "redirecting future revenues".


    I tried to come up with some way to work "Caligula" into "Laguna Niguel" (i.e. CaliguLaguna), but its too early in the morning on this side of the country (oh crap, I hope that I just didn't prove your point...).

  11. Not Niguel (never mention such mud!). Oh no, I'm from Laguna Beach (go Artists!)

    Our surf team is one of the best in the state

  12. Hell writes:

    "But from 2000 to 2006 energy consumption suggests a real US economy that has gone flat: total energy use in 2006 was virtually unchanged from 2000, while real GDP was reported as rising +15%. Cheap imports?"

    could it be due to the destruction of manufacturing ?

  13. Hell, Thanks for the BLOG--my favorite.

    This was my thought Petros, transfer from manufacturing to building in an era of incredible increases in real estate prices.

    Is construction a less energy intensive industry than manufacturing? Are there better margins per BTU for building than manufacturing?

    If so that could explain the increase in GDP and decrease in growth of energy use during a time of declining manufacturing.

  14. So it is a case of peak debt rather than peak oil, don't you think?

    Regarding manufacturing, we still have a very big manufacturing industry. It manufactures rosy earning reports.

  15. Petros/Marcus-
    "the destruction of manufacturing?"

    Is a manufacturing economy so great? Having natural resources and being able to farm abundant food is great, but the actual processing of trinkets doesn't seem so wonderful. Ideally, we'd have robots do this and the humans could split their time between farming, cerebral work, and leisure. Oh wait, jobs and permagrowth (we must keep our population that doesn't want to go to school and greed-mad Wall Streeters happy).

    "Until then sweet dreams America."

    Merrily, merrily, merrily, life is but a dream :)

    "and GDP grew $200.Is it how it works?"

    Paper makes reality (according to some)

    "Oh no, I'm from Laguna Beach"

    What a relief! The difference between Laguna Beach and Laguna Niguel is the comparable to the difference between Hobbiton and Mordor. BTW, can you make surfboards out of hemp (we were too intellectual in San Diego to try)?

  16. Ales,

    Debt went up without have any correlation with GDP and energy consumption because money supply have been increased based on the number of ppl willing to be in debt, provided by intermediaries, and not based on the other two factors which caused the disparities.

  17. the more interesting is why GDP and Debt divide ? debt grew stronger than GDP. why?
    I think there starts the shadow banking system.

  18. aprilzi, I think the point people are making is positive GDP growth is a an artifact of the way earnings from debt are included in GDP figures but liabilites are not.

    Hell's energy consumption graph suggests that had GDP growth been reported in a way that also accurately included the liabilities we took on to achieve that growth, there would not have been any real GDP growth over the last 8 years.

    Greenie, I agree with the sentiment, though I am unsure we are at the actual 'peak'; it really depends on what the public sector does.

    There are those Keynesians out there (Hell among them sometimes ?) who keep suggesting the solution to all this is more government debt. It is quite possible (likely?) they will gain control of government. If/when they do, we may see a few more years till we hit the 'peak'-- god help us all once we do.

    You have to admit the parallel with Argentina is concerning (I would love it if Hell could put it in a graph).

  19. Dink, Wasn't placing a value on "dirty manufacturing", just throwing out a guess. Completely agree with the value of intelligence-based production.

    Aprilzi, If property values increased 1 trillion dollars without a subsequent rise in income, debt must increase to fill the gap.

  20. yoski wrote:

    "Communism before it's fall: hiding the books.
    Capitalism before it's fall: cooking the books
    Sooner or later main street America and maybe even the AARP will wake up to the fact how they're cheated out of trillions by bogus CPI numbers. Until then sweet dreams America."

    You can go back even further than that. The Bourbon's in France did precisely the same thing to their books that we're doing now.

    Great quote dink, about "redirecting future revenues" Whoever said that went to the same school of bullshit as the high ranking American officer who when asked by a reporter where he was retreating to in the face of superior enemy forces said,

    "We aren't retreating, we are advancing in a different direction."

  21. I know it's a tad OT, but would Hell, and/or anyone else care to comment on this, especially from paragraphs three onward:

    The point I would emphasize about the stock market is that stocks are not a static investment like a commodity. What I mean by that is that stocks generate earnings and a static investment generates negative earnings (storage costs).
    This puts a positive price trend into stocks and a negative price trend into static investments.

    Now, we do have supply-and-demand at work in commodities, so we can certainly have upward pressure on prices from that. We are witnessing that now. But, the prior period of underperformance of commodities is typical of that market over
    decades and we can't analogize that with stocks.

    If we assume that stocks are going into a 20-year downtrend, we will have to conclude that earnings will be trending to zero, going negative and staying
    negative for a protracted period of time. Unfortunately, while you might hold Gold waiting for prices to turn around, no operating company can continue losing money for a protracted period of time and will go out of business.

    But, this is where survivor bias comes into play. When a company goes out of business, it is replaced in the index by a company with growing earnings. Let's say all 500 stocks in the current edition of the S&P 500 start losing money year
    after year. They will be replaced by stocks which have positive earnings. Thus, while the original S&P 500 Index might show a downtrend for a hudred years (and, in fact, eventually goes to zero), the new, improved version will form a low and
    start rising again within a few years, not decades. Repeat this process month after month, year after year and I think it will be virtually impossible for the main stock index to go down for two decades in a row.

    Now, you might say, what if there are NO companies with positive earnings left
    on the planet to put into the index? In that case, you won't have to worry about the stock market. Survival from day to day will be your main concern.

  22. This would seem to agree with you thai (graph #3).

    I.e. no net GDP growth since 2000. Maybe no net growth since 1990 given that the recession of 2001-2002 wiped out the - adjusted meager - gains of the Clinton years.

    It helps greatly to look up a precise definition of GDP and how it's counted. There are only a few terms in the topmost expression, so you have to dig into each term.

    You might then reflect upon how GDP improves upon the prior GNP.

    Which is to say it's a moving target.


  23. Edwardo, I know its not your question, but I think paragraph 1 violates a number of Mandelbrot's 10 heresies of finance (remember that whole fractal thing I tend to see the world thru); notably rules 1,3,5,9 and 10.

    As for the stock index- survivorship bias issue... in fact, it is this very reason I chose to use Steve Cucchiaro of Windward Investment Management who feels that:

    1. Over the long term, on a risk adjusted basis, all asset classes perform equally... Actually Hell, if you know anything about this I would love your opinion.

    2. Indexes have far better risk-reward characterisitics than individual companies for the average investor (specifically because of this survivorship issue).

    3. Timing is very important (one of Mandelbrot's heresies), AND the notion of 'buy and hold' for even indexes CAN be VERY risky.

    Lastly, projecting 20 years in the future requires projecting productivity, and how can one forecast future productivity changes? While we may be 'working off this hangover' for 20 years, simulataneously somthing as equally unexpected might be happening, (say) "The Singularity".

    As Yogi Berra likes to say: "Prediction is very hard, especially about the future".

  24. Some manufacturing is very energy intensive. Steel, glass, cement, plastic, aluminum, etc.
    If you are building 300 million dollar fighter jets as your "manufacturing" job, then your contribution to GDP is not very energy intensive.
    Guess what we do?

  25. About stocks having a positive bias built into them....

    Yes, definitely - provided we are operating in the permagrowth model. If, however, there is a paradigm shift towards a steady-state socio-economic model, then the bias changes to flat, or even negative. Resource and environmental depletion is exactly such a game changer.

    Inordinately high levels of debt are signs that current levels of economic activity can only be sustained by mortgaging more and more of the future.

    That's the same as saying that current earnings are declining relative to the economy's capacity to generate them. And this means, among other things, that P/E ratios should be lower.


  26. Hell, what exactly is your definition of permagrowth?

  27. The permagrowth model is one where the entire socio-economic structure is supposedly dependent on constant "growth" in GDP to sustain it. Growth then becomes an objective in itself, as opposed to a means to an end. It's very much a loopy-logic type of affair.

    Remember the MGM logo "Ars Gratia Artis"? Permagrowth is the same: "Growth For The Sake of Growth". Another way to put it would be: Growth at all costs.


  28. Would endless social change meet your definition of permagrowth
    (i.e. change simpy for change sake)?

    Would a system of endless social change ALWAYS effect GDP? Are not the two forever inseperable?

  29. Edwardo. What you quoted exposes the lie that markets go up 72% of the time or that the market returns 10% annually year over year.
    It is well known that about 30% of all listed stocks go to zero.
    It is also well known that the market went up around 70% of the time over the last 8 years yest we are FLAT over that time span.

    I write about this often. The S&P 500 is a big cap mutual fund managed by a committee at the S&P headquarters. Its job is to mask what happens in individual sectors in the market and provide for a mediocre return, by design.
    Since it is cap weighted, continuous index and balanced frequently to weed out under-performers it will tend to go up over time assuming that the S&P committee does not botch the selection process.

    However since sectors go in cycles and since the cap-weighing forces you to buy more of over-valued stocks and less of under-valued stocks you are guaranteed mediocre performance.

  30. Greenie-
    "peak debt"

    When you have a conceptual construct not linked to any physical reality there are no limits. We chimps sapiens supposedly are able to perform abstract reasoning by the age of seven, but some never get there ("back to the gold standard!)and some take it too far ("helicopters of cash to bail out Bear Stearns!").

    "dirty manufacturing"

    Perhaps my post had unintended nuances. Physical labor is not to be insulted, but its purpose should be useful (i.e. farming and making space shuttles instead of Hello Kitty toasters and 45,000 different iPod covers). Also, just because you take a physical job doesn't mean you get to write off keeping your mind continually updated. The Chess Club has to go to P.E., the football team has to read textbooks. We're not two different species.

    "We aren't retreating, we are advancing in a different direction."

    I hope thats an urban legend, but I'm not going to Google it because I don't know how to cope if it turns out to be true.

    "you are guaranteed mediocre performance."

    I guess if your evolutionary strategy is just to stay at par with your cohorts and free up time from market research to actually live it would seem like a good idea to just give the cash from someone else to manage. But I believe the managers have betrayed our trust and have used the cash to play complex casino games...and will soon be shown to have lost.

  31. dink, i was referring to the S&P 500 passive index. since on most years some sectors go up and others go down, the S&P will just give you the combined mediocre return.

    In raging bull markets it will also give you a mediocre return albeit good by absolute measures.
    In nasty bear markets it will give you mediocre return albeit devastating by absolute measures.

    As for your point about those that manage OPM, there are very few people worthy of that trust. I am yet to give my money to a mutual fund manager, hedge fund manager or money manager that turned out to be worthy in hindsight, and i've tried all of those. so i now manage my own money.

    Statistics show overwhelming evidence against OPM managers of all sorts.
    Some people make the mistake of jumping to the conclusion that this means that self-managed funds are also destined to have poor returns.
    Not so In my opinion.

  32. So debt is not counted in GDP numbers? We should use a "NDP" (Net Gross Product" instead?

  33. Marcus, that is one of the best ideas I have read on this site! Are such numbers currently published for national benchmarking?

    Born2code said: "I am yet to give my money to a mutual fund manager, hedge fund manager or money manager that turned out to be worthy in hindsight, and i've tried all of those. so i now manage my own money."

    Really? All? I think Buffet's investors might take issue with the accuracy of your statement. I have no plans to change from Windward.

    While there is a reasonable (even good?) probability that your 'alpha' (for lack of a better term... I know there are problems with alpha) is greater than the alpha + fees of many (most?) professional managers, the truth is you will never know for sure.

    I certainly encourage you to 'do what you want', but don't pretend you are doing anything other than making an emotional decision (as am I)-- denial can be very dangerous when it comes to life and investing.

    As I said before: "you can never get away from issues of trust, faith and integrity, never".

  34. thai, i meant i tried all those categories, not tried every single manager out there.
    Buffett does not manage OPM (Other People's Money). He runs a public company. I am a Berkshire investor, have been for a long time.

    Did you read Doug Kass's article about Berkshire Hathway on today? check it out, you may be surprised to see where Buffett lost money last quarter.

    I invested in Janus funds because as a poor college student they were the only ones to take my $50/month contribution. Their message was their superb research and going above and beyond... After Graduate School I had more money to invest and I kept investing in them. I did not want to invest in the risky .com businesses to I trusted Janus with my money as they promised they wouldn't either... the funds I was in dropped 80% when the bubble popped... so much for trusting them to do their research and to keep their promise of staying away from horrible businesses. I did not stick around for the full 80% but did take a good beating any how.

    I invested in a hedge fund that had a spectacular life time performance. The manager promised risk management to me in person. First month after I invested it dropped 30% shorting oil. The manager promised to repent and to stick to the basic sound principles he'd employed earlier. Two months later the fund dropped 50% selling naked index puts. The fund folded and the manager is now running another one. Luckily I started with the minimum investment amount to feel the water. still it is a big hole to dig out from.

    The point is for those people your money is just a business... For me on the other hand, the money is the fruit of my 18 hour work days.

    Is there a money manager out there who would do better than me managing my own money? You bet there is. Would I want to keep trying till I find that person? You bet I don't.

  35. We're beating a dead horse.

    Jason B

  36. Thank you Hell, Thai, and born2code for your thoughtful responses.

    As for hedge funds, I was briefly (a one year minimum) in a "conservative" hedge fund (I imagine they didn't use the same degree of leverage that many of their fellow hedgies did ergo their "conservative" self description) that returned 15% percent (nothing to get too excited about for a hedge fund). They still send me monthly reports. Lets just say that based on their reports of late I'm very glad I'm out of that "investment."

  37. Communism before it[']s fall: hiding the books. Capitalism before it[']s fall: cooking the books (q Yoski). Is it how it works? (q Alessandro)

    Hopefully, by the profound theorems in number theory, those presented by Alessandro work as designed (or tell me in what way the numbers lied).

    But methinks that H misspelt "Hrowth" in 'Growth at all costs' (or debt is the only thing that has negative shrinkage?). H stands for "Hallucinal", btw.

    Looking back at the extension to the alphabetic soup of mess, including the timeless 'Hope Now' (or hope forever), it has all been a frantic *_space_* saving endeavor of Project "Worth less".

    We can all hope that it is not a Stagbi (stagbiflation) we are going to face.

    In case any reader of this blog is not aware of 'Calculated Risk' (most people are, I believe), please visit it ( today (May 17, 2008). There are a couple that won't disappoint.

    For one, it is in search for how HE got lost in today's financial labyrinth. Another immediately following is on 'Decoupling'.

    If you can afford to miss the two mentioned, please do not pass up the notions of bubbles (not babbles) by Mishkin. I am not sure if he means that interest rate is not a tool to prick one like the dot-com, or we (the worldly fed as an effective tool) are suggested to stop clicking (when googling) on seeing a bubble forming.

    We may still have time to launch Project "Open the Eye Wide" (to assist the Fed on the watch for bubbles?), so that Paul Kasriel's (also in today's CR) could have a diameter of a couple of hundred trillion lightyears.

    My only fear is that the probabilty is now greater than zero that Nourial Roubini's clock is going to be right this final time. (Pleasure to hope at a present moment, but pain to forevercast. Twice a day? Once seems to be a luxury. :))

    If I/we saw the peak of housing on May 1, 2005, we/I should also see something during the week of April 6, 2008.


  38. Here it is in numbers:

    The national debt in 2001
    $5.7 trillion

    The national debt in Jan. 2008 $9.2 trillion

    Increase: $3.5 trillion

    Total consumer credit debt in 2001
    $7.65 trillion

    Total consumer credit debt in 2008
    $12.8 trillion

    Increase: $5.15 trilliom

    Total increase in debt 2001-2008 (1st Quarter):
    $8.65 trillion

    2008 estimated GDP (nominal) $14.18 trillion

    2001 GDP
    $10.02 trillion
    Increase: $4.16 trillion

    So debt increased two-fold over GDP. Scary stuff huh kids?

    Compare our debt to this pittance:

    Total US exports 2001 $731.0 billion
    Total US exports 2007 $1,054 billion
    Increase: $323 billion

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