A casual glance at the United State's GDP or the stock market's upward swing suggests that America's economy is picking up steam. Sadly, this recovery is artificial; a look at American energy consumption and debt shows that it is more illusion than reality. 

When the Dow-Jones Industrial Average hit a new 'record high' earlier this week a score of analysts and pundits seized the moment to highlight the contrast between Wall Street's and Main Street's recovery from the 'Great Recession'. [1] Ashwin Parameswaran summarized these trends several months ago:

The most striking characteristic that defines the post-2008 economic recovery in the United States – the fact that when viewed through the lens of corporate profits the recession is already long over. The benefits of the current economic recovery have flown disproportionately towards corporate profits with wages and employment lagging far behind. Since 2008 we have seen a robust recovery in corporate profits, a modest recovery in GDP and a feeble recovery in employment and wages. [2]

The disparity between record profits on Wall Street and economic hardship on Main Street is troubling. Less noticed, but even more troubling, is different disparity that has emerged since the recession began in 2008.

Via Dave Cohen at Decline of the Empire comes the most unsettling info-graphic I have seen this year (click for larger image):

Source: Bloomberg New Energy Finance. Sustainable Energy In America 2013 Factbook. p. 7 

Both GDP and energy consumption fell in 2008 with the Great Recession and grew in 2009 as the government poured stimulus money on the American economy. When the stimulus ended so did energy consumption - but not GDP growth.

To understand the significance of this info-graphic we need to review the relationship between energy consumption and wealth. Wealth is a relative concept. Most definitions of wealth emphasize value ("property that has value," "abundance of items that have value", etc.), but economic value varies widely with culture, context, and time. Units of energy, in contrast, do not change with cultural context. These units can be used as a universal measure of human activity and production. As I noted in a past essay

Humans can accomplish nothing without expending energy. Breathing, sleeping, eating, physical labor, thinking – it all comes at a specific energy cost [read: energy consumption].... Living human beings are not the only things with an energy cost. The things we wear, eat, use for decoration, dwelling and worship, to entertain and protect ourselves, or to kill and maim other humans all have an energy cost. The stone tools of the Cro Magnon were created only through the energy expenditure of the cave men themselves. [3]
Everything that humans do or make can be measured in terms of energy consumption. Wealth is what we call the goods created and services rendered through our energy use. As the essay referenced above argues, the economic history of human civilization is really the history of humanity's capacity to capture increasingly large flows of energy and put it to use. For this reason, a tight correlation between energy consumption and wealth has been a feature of all human civilization [4].

Until now.  

The Bloomberg report that contains the info-graphic dissected above attributes this change to "advances in energy efficiency." This is nonsense. Energy efficiency has been improving for more than a century. History has shown that increases in energy efficiency lead to more energy consumption, not less.  History has shown that there is no historical correlation between energy efficiency and total energy consumption

Source: Institute For Energy Research."Is the U.S. Becoming More Energy Efficient?"

Notice how increases in energy efficiency - here measured as energy intensity, or the amount energy consumed per $1 of U.S. GDP - has steadily decreased while total energy consumption increased during the same time period.

What does lead to falling energy consumption is economic depression. Depressed economies produce less goods and provide less services and thus consume less energy. For these reasons energy consumption has been an accurate barometer of the United States' economic health for the last 150 years; when placed next to each other the connection between American economic production and energy consumption is easy to see (click on the IER graph below for an enlarged image). 

Source: Doug Short. "Government Spending as a Percentage of GDP."
Advisor Perspectives. 28 August 2012.
Source: Institute for Energy Research.
 "U.S. Consumption by Source v. Real GDP, 1845-2001"

The disparity between post-recession GDP and post-recession energy consumption leads us to an unsettling conclusion: the post-recession "recovery" of the American economy is largely an illusion. The artificially high GDP is maintained only through unprecedented levels of federal deficit spending (click on "Government Spending" graph for enlarged image). As Mr. Cohen remarks:

[this graph] illustrates the simple, uncontroversial conclusion that the American economy (and thus the GDP measurement) has remained highly dependent on extravagant deficit spending, even after the American Recovery and Reinvestment Act (2009) ran its course. This suggests that GDP growth in the absence of growth in energy consumption is largely a monetary phenomenon, for the government basically (outside of some defense spending) writes checks, which they make good with borrowed money. The Federal goverment does not manufacture things, it typically does not distribute goods, it does very little which is physical, as opposed to monetary. By contrast, there was a large physical ("shovel ready") component in the 2009 stimulus. [5]

Mr. Cohen understates just how far beyond 'rational' our monetary policy is.  The Wall Street Journal recently reported how America has been funding her post-stimulus expenses:

"China's holdings of $1.17 trillion in U.S. Treasurys in November 2012—the most recent date for which we have a figure—are virtually unchanged from two years earlier, when they stood at $1.16 trillion. Beijing has purchased a lot of Treasurys over this period but many have been redeemed. Net new investment is essentially zero....The largest buyer of new U.S. Treasurys during the past three years has been not China but the U.S. Federal Reserve. In fiscal year 2011, for example, the Fed bought more than three-fourths of all new Treasury debt." (emphasis added) 

Blogging at Chicagoboyz (a place far to the right from the folks at Decline of Empire), Carl from Chicago adds:
Here’s a challenge for you – try explaining to a child or someone unfamiliar with economics how it is that we can spend money that we don’t have, issue debt, and buy it back ourselves[6]

This is the foundation of America's post-recession recovery.

In sum: the recession reduced U.S. economic production and with it energy consumption. Elites have artificially divorced American economic growth from real production (read: energy consumption) by writing checks that are backed by debt that one section of the United States government bought from the other. Call it a bubble, call it an illusion - whatever you call it, it is not sustainable. Eventually the divorce must end and GDP will return to parity with energy consumption. More difficult to tell is just how hard of a fall that will be.


[1] These can be found in almost any liberal publication that focuses on economic issues. A well written example is Jason Linkins and Zachary. "Dow Jones Hits 'Record High Thanks to Strong Performances From the Smoke, Mirrors Sectors." Huffington Post. 9 February 2013.

[2] Ashwin Parameswaran. "Technological Unemployment Amidst Stagnation." All Systems Need a Little Disorder. Accessed 9 Feb 2013. Economist Emmanuel Saez provides some clear statistics on this point:

"From 2009 to 2011, average real income per family grew modestly by 1.7% (Table 1) but the gains were very uneven. Top 1% incomes grew by 11.2% while bottom 99% incomes shrunk by 0.4%. Hence, the top 1% captured 121% of the income gains in the first two years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011."
Emmanuel Saez. "Striking it Richer: The Evolution of Top Incomes in the United States (Updated with 2011 estimates)" http://elsa.berkeley.edu/~saez/ 23 January 2013.

[3]T. Greer. "Notes on the Dynamics of Human Civilization: The Growth Revolution, pt. 1." The Scholar's Stage. 4 August 2010.

[4] See the info-graphics presented in T. Greer, "Notes on the Dynamics of Human Civilization", for a global view. Utah University professor Tim Garret has managed to simplify the relationship between GDP and energy consumption to an equation. 

See Tim Garret, "Is it Possible to Decouple Economic Wealth and From Carbon Dioxide Emissions?" (video, 3 pts). Pacific Institute for Climate Studies Seminar. 31 May 2010. 

[5] Dave Cohen. "The Disconnect Between Energy and GDP in the United States." Decline of the Empire. 11 February 2013. 

[6] Timothy Beardson. "Don't Count on China to Bail Out the U.S." Wall Street Journal. 12 Feb 2013; Carl from Chicago. "It Feels Strange Outside Economically." ChicagoBoyz.net 14 February 2013.

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The idea of the close connection of energy and economy could be used to redefine the economic theory:

"Energy as the Numéraire"

July 12, 2013 at 3:50 PM

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