The good people over at Visual Capitalist recently released a big-ass graphic that has been making the rounds of late, to mark the fact that the global economy hit US$100 TRILLION in terms of total annual output. This is an amazing feat and a great milestone, to be sure – no doubt or question. However, it is the way in which those same people divided up that pie, which is the focus of my irritation and curmudgeonly commentary today.
Put simply, the chart itself is highly misleading and gives a totally skewed picture of the world that we live in today. If you actually take the time to analyse things properly, using something other than the highly manipulated and very unreliable nominal GDP statistics that make up this chart, then you come away with a RADICALLY different picture of the world economy and its key players.
The Source of the Problem
First, here’s the graphic.
It looks really rather impressive, does it not? According to this graphic, the USA is by far the world’s greatest economic power, China comes second, and then you have various Asian and European countries, and finally you have the insignificant shitholes of the rest of the world.
Notice, by the way, where Russia happens to sit in this list. It registers in this graphic as an economy that is SMALLER than Italy’s.
And that, right there, is precisely where the problems start.
No one who reads this site, or who follows my Telegram channel – join now to meet all the other loose cool cats hanging out there, and not just because I share videos of actual cats and dogs riding alongside Russian combat troops in 404 – can possibly think that this is true. I’ve gone over the issues with this reckoning repeatedly. Furthermore, I have pointed out several times that you simply CANNOT have an economy that produces as much as Russia does, in terms of commodities and raw materials and intermediate and finished goods, and still think that this is a small or inconsequential economy.
Using the Wrong Measuring Stick
The first big problem with the way that economists measure things. They are of course measuring in nominal terms, which does not account for regional differences in purchasing power.
Why is this important?
To state the rather obvious, the cost of living in different parts of the world is, well, different. A dollar in the USA goes a lot farther in, say, Plano, TX, than it does in New York F***ing Shitty, NY. (Been there. Seen it. Trust me, I KNOW the pain.) And a dollar in the USA purchases rather a lot less than a dollar’s equivalent would in, well, Moscow – or Beijing, or Djibouti, or Delhi, etc. etc.
So, if you want to compare output in a way that actually matters, in terms of what people can really buy in exchange for the stuff that they produce every year, then you have to equalise those output numbers to account for the radical differences in local purchasing power.
And once you do that, the picture shifts radically.
Take a look at that graphic above. It shows the world in Purchasing Power Parity terms – that is to say, it compares apples to apples, insofar as that is possible. And now, all of a sudden, we see that China and the USA are effectively equivalent in terms of pure economic output.
More than that, we see that Russia is now larger than virtually every European economy, except Germany’s. It is larger than any economy outside of Europe, other than India, Japan, and China.
This is NOT an economy that you can dismiss any longer. It is in fact every bit as big and powerful as Germany’s – and, in reality, it is actually far bigger, because it has VASTLY greater natural resources that it can extract out of the ground. Once you account for the total value of all of the “stuff” in the ground that Russia can extract and sell, the total value of the economy is no longer about US$4.2T in PPP terms – it’s closer to US$20T.
The Composite Index of National Capability
But we are not done yet. Economic output is an extremely important indicator of a nation’s real strength, to be sure, but it is NOT the only one, and it isn’t even a particularly good one. The kind of economic output that you produce, matters enormously – I’ll come back to this shortly.
Moreover, economic output alone does not determine true power. An economy that produces billions of dollars worth of high-quality finished goods, is not necessarily a military power – all you have to do is look at Germany for proof, where, thanks to the misbegotten tenure of Mutti Merkel and Ursula Van Der Loony, the German Bundeswehr ended up training with freakin’ BROOMSTICKS instead of actual rifles.
For a more accurate picture of true power, we need to turn to a concept called the Composite Index of National Capability.
This index can be defined mathematically as shown above. I could explain it further, but Grandpa Grumpuss is a lot more fun to listen to, and he actually uses it in his excellent book, Losing Military Supremacy: The Myopia of American Strategic Planning. So I will leave it to him to explain how and where it is used:
The original dataset is from 2007. The rankings from that year are as follows:
The latest year for which we have good data is 2020 – you can find the relevant ZIP file here. It is not difficult to download the CSV data, dump it into LibreOffice Calc (or Excel), and run a pivot table on it. (This is geekspeak for “do things with data”.)
Once you do this, and muck around with the CINC output a bit to sort it in descending order, you’ll find Russia in FOURTH place in terms of its CINC. And if you look at steel production alone, Russia, with LESS THAN HALF of America’s population, produces 90% as much steel as America does.
Keep in mind, this was back in 2020. The numbers in 2022 have almost certainly shifted further in favour of Russia.
Significantly, the first European power that appears in the 2020 data set of CINC, is Germany – in 7th place. It is behind Brazil in terms of raw national power.
This should give you some idea of just how badly unbalanced the GDP-based picture alone really is.
The Sum of the Parts
We now need to look more closely at another aspect of economic output that people overlook far too often – the actual breakdown by sector.
The slideshow above presents a series of graphs, the first three of which come from Statista and World Bank data, and the fourth of which comes from the US Bureau of Transportation Statistics. The first three graphs show the makeup of the US economy by sector, in the broadest terms possible.
What you see in the US is an economy that derives over three quarters of its output from services. Compare this to China, where the service sector accounts for only about half the economy, or Russia, where services account for less than 60% of the economy.
Even this, however, does not tell the full story. You have to look deeper into the actual makeup of the US economy by industry. And when you do, a rather surprising picture emerges.
As of 2021, the largest sectors of the US economy, in descending order, are:
- Financial services – 21.24%
- Professional services – 12.93%
- Government (local + state + Federal) – 12.06%
- Education, health, social services – 8.41%
- Retail trade – 6.03%
Think about that for a moment. The total size of the financial services sector in America is larger than the retail trade, durables manufacturing, and non-durables manufacturing, COMBINED.
To anyone trained to analyse a balance sheet properly, this points to precisely ONE possible conclusion – a highly leveraged, financialised economy.
In plain English, this means the American economy is essentially one that generates “money from money”. Its largest sector consists of one that pushes around funny money on spreadsheets and through computer systems, most of which is not actually linked to anything REAL at all. There is NO backing for any of this funny money, which amounts to TENS OF TRILLIONS of dollars worth of vapour.
THAT is the reality of the modern US economy – roughly one-fourth of it is either a net drain on the economy (that would be the government sector), or doesn’t actually generate any real value at all.
Illiterate, Innumerate, Hopelessly Stupid Economists
And now we get to the final target of my ire – a recent video by a chap named Max, who runs a channel called Stoic Finance. Now, I have referenced this channel approvingly in the past, during some of my Great Mondaydact Browser Mulcher instalments. I think that his commentary on financial matters, cryptocurrency, investing, and other related subjects is worth paying attention to – especially when he examines the real estate crisis in China right now.
But, in his recent episode, he tried to argue that Russia will collapse economically in the near future, because of its “failures” in 404. I started watching that video, and by the third minute in, I was yelling obscenities at my computer screen, because what he said was so blindingly STUPID.
I left a scathing comment on his video, which I have no doubt he has completely ignored, but the fact is that he simply did not do a very good job of analysing the real economy in Russia or the USA, and has absolutely no clue as to who is actually winning the economic war of attrition.
For all of the reasons that I have unpacked above, every single conclusion that he reaches is flat out WRONG. Russia’s economy is much larger than people realise, and it is much more powerful, with a far deeper “bench”, than anyone who hasn’t been there can possibly imagine.
The same myopia applies to the predictions made by mainstream economists about the future of global economic power. They just don’t get it, because their tools are entirely unfit for purpose. They do not consider the real economy at all in their discussions of true power. As a result, they come up with the most astoundingly stupid arguments, all of which can be dispensed with in about five minutes worth of actual thinking.
Conclusion – the Utterly Dismal Science
This is why Grandpa Grumpuss, among others, argues that studying economics in university is a colossal waste of time. Having studied the same subject at a school literally named after the discipline, I can only agree, wholeheartedly. The reality is that most modern “economists” are actually try-hard mathematicians who couldn’t hack it in a true applied mathematics or physics programme, and instead decide to apply differential equations and fancy econometrics to a subject that is fundamentally about human behaviour.
I do not write that lightly, by the way. One of my best mates from college is a senior lecturer in econometrics, and he got a Distinction in perhaps the world’s hardest programme in econometrics and mathematical economics. In terms of his abilities in mathematics, he was nearly without peer in his cohort. So I know what I’m talking about when I say that some incredibly intelligent people take these courses, and do very well in them.
But it doesn’t matter how smart you are, if you insist on using the wrong tools to measure and manage things. If you insist on using a spanner when you should use a hammer, then of course you aren’t going to do a very good job. And if you insist on assigning a measured value to something which, by definition, cannot be measured, then you run the risk of drawing some decidedly stupid and wrongheaded conclusions.
This is the reality of economics. It is a dismal science that uses easily manipulated and broken statistics, and then plugs those same statistics into overly complicated mathematical models which are completely divorced from reality. It then insists on drawing conclusions from the odoriferous excrement that drops out the other end.
Honestly, you’d be better off by consulting a shaman or witch-doctor picking through animal entrails than you would an economist, these days. At least the witch-doctor would provide some entertainment.