AN END TO TRADITIONAL GROWTH RATES

Stephen King book

Although the official unemployment figure remains at 7.6%, people who live in the real world outside of Washington know the rate is much higher.  It’s guesstimated to be over 20%.  Add in those who are under-employed and the figure is closer to 25%, which, incidentally, was the rate during much of the Great Depression of the 1930’s.  (It rose to 30%, still not bad when compared to the rate in 1896 – 50%).

How long will it be before there’s a realization that the old growth rates are not coming back?

An article predicting exactly that appeared in the Wall St Journal, Monday July 8th.

HSBC’s chief economist has the unfortunate name of Stephen King.  The difference between this Stephen King and the more famous one is that the economist writes non-fiction.  His latest book, however, reads like a real horror story.

When the Money Runs Out: The End of Western Affluence predicts that soon we will come to the full realization that we are not going to see 3.5% growth rates any more!

Mr. King shows that post-World War II, a number of developments gave us good growth rates.  Those factors no longer apply.  We’ve just gone through a “lost decade.”  Recent improvements are solely due to quantitative easing (printing money), which cannot go on forever.

Moreover, the increase in the money supply has given cheap money to big corporations, which makes its way back to shareholders, with the result that the income gap has widened, resulting in a greater gap between rich and poor.

“ . . . lower rates allow large U.S. corporations to borrow cheaply but in an environment of perpetually low growth they distribute the gains to shareholders via buybacks and dividends in lieu of hiring more workers.  And because the holders of financial assets who benefit from such transfers tend to be wealthier individuals with a “lower propensity to consume,” there’s little accompanying jolt to the wider economy from their wealth gains.

This plays out in the disparity between the stock market’s multiyear advance and the underperformance of the economy, which Mr. King said reflects “the growing gap between hope and economic reality.”  (Horror Story:  Rude Awakening Awaits Western Economies, by Michael J. Casey.)

This certainly explains in simple terms what’s wrong with the current financial picture.  We are constantly being told the economy is improving and in some areas maybe it is, but for many people there is a sense that things are getting worse.  There has been a 25% increase in the money supply since the crash of 2008, deliberate policy on the part of the Federal Reserve.  Some are benefitting from that largesse, but most are not.

And what’s going to happen when that 25% increase works its way through to the inevitable higher rate of inflation?  That will affect those who have not made gains more than those who have.  Once again, government policies will have made things worse.

A serious correction was needed in 2008.  Instead, we cranked up the printing press. That was the easiest option – the best way to get through to the next election.  Western governments effectively kicked the can down the road.  But it’s now slowing to a halt and somebody is going to have to deal with it.

How long will it be before western governments realize the old growth rates aren’t coming back?  That’s a good question.  A better one is:  “How long will it be before people realize that democracy is part of the problem?”

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One thought on “AN END TO TRADITIONAL GROWTH RATES”

  1. The Austrian economic theory of the business cycle is that malinvestment drives the boom-bust cycle of a capitalist economy controlled by a central bank that can print fiat money on command. For too long in the first decade of this century, the Fed under Alan Greenspan dumped too many money into the economy, which caused the housing boom and the subsequent crash once informed investors thought that they were paying too much for financial instruments based on the value of mortgages. A key reform to eliminate such booms and busts would be to put controls, such as through a gold standard, on how much fiat money can be printed up by central banks, assuming that the “creature from Jekyll Island” that emerged in 1913 should be kept alive. There’s so much bogus fear of deflation when the generation before 1914 shows that high economic growth is compatible with slow, gradual deflation, which was caused by productivity increases outstripping the money supply growth controlled by the amount of gold available. Unfortunately, the Fed’s current regime of pumping up the money supply is creating more bubbles, such as in Wall Street, much like the stock market boom of the late 1920’s. This money flows easily into stocks. Unfortunately, it will be hard for a democracy to fix this problem, since it’s very hard to cut back on the welfare state’s handouts to the dependent classes. It’s also hard for people to suffer through a rapid property deflation, when the prices of assets fall after a bubble bursts, such as occurred with housing in America. The Fed’s current reckless behavior in pumping up the money supply is threatening the U.S. dollar’s status as the world’s reserve currency, which was gained after World War I and especially World War II. When that collapses, America’s standard of living will fall with it, since we won’t be able to float our government debt with our own national currency and sell it to foreigners.

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