“Financial Depth” and sophistication or “diminishing Marginal returns” and Collapse

 

 

 

The thing about data is that it can made to say what ever you want it to say. A few weeks ago I read a quote to the effect – statistics is boring science fiction. It appealed to my sense of humour.

 

A few weeks ago I was looking through the latest report on Global Finance by the McKinsey Global Institute.- Mapping Global capital markets (the 5th edition).

In this report they present a concept they call the  “Map of Global Financial Depth”. Basically it is plot of per capita GDP of various countries versus the value of all the finance that was required to generate these GDPs (as a percentage of the GDP).

 

As their graphic indicates there appears to be a trend which they have called financial depth  – a mark of sophistication and modernity.

In essence, the data appears to be saying that countries with high per capita GDP can only achieve this with high financial depth. The very way that the graphic is presented, with a positive trend line that starts to increase vertically at the end, equated with a “mature” market, suggests that high “financial depth” is something to aspire to.

mckinsey-financial-depth-or-declining-productivity-of-debt

 

 

But hang on a moment. This data is saying something else too. It is saying that there are diminishing marginal economic returns.

 

 While Indonesian’s manage to generate one dollar of economic output with one dollar of finance for an annual per capita income of about $6.000 and the Czech’s generate $25,000 using $1.50 of finance to generate every dollar, modern economies require $4.50 of finance to generate every dollar of income.

 

Have a look at this data presented in a slightly different format and for one country – the USA – over an extended time period. The reality of the diminishing marginal productivity of capital is very clear – moreover it is trending “downwards” rather the Mckinsey “upwards ” chart. And,  if you take the liberty of projecting the trend line over time we might find that as soon as 2014 we are in a position where additional capital actual starts to destroy the economy!!

 

 

Diminishing marginal productivity of debt - usa

Diminishing marginal productivity of debt - usa

 

 

 

 

The USA economy could start start shrinking as early as 2014

The USA economy could start start shrinking as early as 2014

 

 

 

 

And the problem with this is that it was this  phenomenon that caused the collapse of 24 complex societies in the past. Joseph Tainter studied the development and subsequent collapse of 24 complex societies and came to the conclusion that as they became more complex they required an increasing amount of energy to run. Unfortunately he noticed that in each case, there was a diminishing marginal energy return As the complexity of each society increased problems arose that required solutions that were increasingly complex and increasingly expensive . At the point where the energy return on the energy invested in new solutions dropped below zero the society collapsed.  

 

The key driver of human progress has been our capacity to harness energy. For example, some estimates suggest that our current modern western lifestyle requires the equivalent of 140 slaves per person – the rate for the USA today is around 300. We have only managed to achieve this through cheap, non-renewable, fossil fuels. It is no coincidence that the industrial revolution and our capacity to harness coal as an effective energy source occur at the same time. 

 

Where will this energy come from in the future?

 

human-enegy-use-over-time1

 

My take on this data is that it indicates how we are, and have been,  “consuming our future” in an unsustainable way.

Free-market capitalism may have finally collapsed. The question of how this is about to play out in global society is unclear but I am expecting substantial societal collapse as a consequence.

Anyone who believes that governments will be able to rescue the world from a depression has not understood the economics and the psychology of the situation.

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2 Comments

Filed under Economics, Energy, Sustainability

2 responses to ““Financial Depth” and sophistication or “diminishing Marginal returns” and Collapse

  1. Pingback: New Treasury data suggests that the USA collapse has started « AlanMccrindle’s Weblog

  2. I read this piece of writing fully on the topic of the difference of hottest and previous technologies, it’s awesome article.

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