The Perpetual Economic Growth Machine

When first starting this blog, I had a thesis; that debt growth was the underlying cause of 'economic growth'. As the blog progressed, along with the breadth and depth of my analysis, I came up with the idea that the economic crisis had an underlying cause; a labour supply shock in conjunction with a lack of commensurate increase in commodity supply. It was an idea that I then used to develop the idea of hyper-competition. In light of this theory, I thought that the outcome would be clear. The Western economies were uncompetitive, and they would lose out in the face of the competition from the emerging economies. It seemed so screamingly obvious that I wrote a post in 2009, predicting that it was the year of the fall of the West (Japan was counted in the West, which I know is a little odd). It was a post in which I made a poor assumption; I thought that, one way or another, the underlying and obvious problems of the Western economies MUST be recognised.

The crash I predicted failed to take place, and I took a hit to my credibility.

When the predicted crash failed to materialise, I was heavily criticised by commentators on Reddit. I responded by saying that at least I was willing to put a date on the turning point, whilst others lack confidence in their theories and refuse to predict outcomes. I should have added that a theory needs to be tested by evidence; can it predict? If it cannot predict, then it fails. Most of what you read does not offer the confidence to predict outcomes, or leaves the timings of outcomes open. The authors shroud their thesis in ambiguity, and nothing they say can be held accountable.

My mistake at the time I wrote of the Downfall of the West was that I failed to see that there was plenty of extremes to which policy makers were willing to resort. In addition, I failed to see how entrenched views of the world were; the West was the heartbeat of the world economy, and NOTHING would ever change that. It a question of government action acting to support and shore up a world view that is resilient the the underlying facts. We would return to the status quo of the West living high on the hog, whilst those poor countries tried to catch up. The world economy would return to the natural order, once we just sorted out the fallout from the 'financial crisis'. It was just a problem in the financial system, and some policy action here and there would return all back to 'normal'.

If you have contrary evidence to your theory, you need to ask why you got it wrong. Perhaps, in the explanation I have given above, I am making excuses. I am highly self-critical, and do not believe these are excuses. In fact, as time has progressed, I have come to the view that I was right all along. Not right that there would be a terrific crash, but right in my underlying thesis. I expected drama, not the steady and relentless decline that has taken place. I argued that the West is 'poorer than we think' and we are steadily recognising this in the decline of the standard of living in many Western countries. We are slowly but surely seeing the middle classes being hollowed out, declining real incomes, growing unemployment (or underemployment). This is taking place against the backdrop of crazy levels of sovereign borrowing, money printing, and the related issue of extraordinarily low interest rates. None of this extreme policy seems able to lift the economies of the West.

Instead, whilst governments rack up debts, and money is pouring forth from central banks, we are just getting poorer. I have to emphasise the point that governments are creating mountains of debt, and we are still in day-to-day terms, getting poorer. We are already poorer, but how much poorer will we be when (assuming we actually pay it) we start to bear the load of the debt being accumulated now. Tax must rise at some stage to pay for it. The opposite view is that economies will return to major growth, and this will cover the debts. It is a promise that has been made for a long time. However, even as governments borrow, as money is printed, there is no real growth. There is only the anaemic growth that is following profligate borrow and spend policy.

It has never been complicated. If I borrow money, and use that money to pay for consumption, it generates activity in the economy. The borrowed money circulating through the economy creates activity, and that reflects in the GDP figures. Take away the borrowing, and GDP falls. We see this in Greece and Spain, and start to see what takes place when an economy reliant on borrowing stops borrowing. The evidence is there in plain sight. Nevertheless, there are many who argue that the problems of overly in-debt countries is to borrow more, and they convince many people. Borrow 1 billion, and it will produce 3 billion of activity in the economy, and the tax income from that activity will allow the economic growth to pay back the debt through increased tax revenue.

Just think about this. A country borrows money to produce revenue to pay back the borrowing. The problem is simple; resources are being consumed along the way. The view that borrowing more is going to solve problems is based upon the idea of a perpetual motion machine. There is no loss of energy, or in this case no loss through the consumption of resource. Borrow and spend is a perpetual motion machine. Borrowed money comes in, generates revenue to pay back the borrowing, and revenue then pays the borrowing. Nothing is lost. No resource is consumed. It is the perfect system. Except that it is impossible.

The perpetual borrow and spend, create revenue, repay borrowing machine is a truly unique idea. It is unique in that so many people have persuaded themselves of its possibility. We laugh at the perpetual motion machine, but many view this perpetual economic growth machine as possible. No loss. Just gain. Here is how it can work. Every year, we can increase our borrowing, and increase the activity in the economy. As the activity increases, we can increase our revenue, and that increases our ability to service our debts. In fact, we are not borrowing enough. If we accelerate our borrowing, we will increase our revenue, and we will be in an even better position to repay our borrowing. The more you borrow, the better you are able to pay back the borrowing. No loss, just growth in revenue, as nothing is apparently being consumed in the process.

If only the perpetual economic machine were true. We could forget having to compete and just borrow our way to prosperity.

I now return to my failed prediction of the 'downfall of the West'. We are growing poorer. And we are consuming based upon growing debt. Real resource is being consumed through debt accumulation. All would be good if there were a perpetual economic growth machine, but it is a fantasy. Nevertheless, that fantasy has real currency in the real world. It has prevented a crash, but we are nevertheless getting poorer. My error of thought was to believe that illogic would be uncovered. Instead, debate and discussion takes place, and the perpetual economic machine is the winning argument that drives belief.  Policy will make the economies of the West return to their natural and rightful position. If in doubt, just keep borrowing towards wealth.

The exceptions, the Spain and Portugal examples, just need to abandon austerity, and they will return to growth. The perpetual economic growth machine will deliver. It WILL deliver, because it MUST deliver. It is a costless machine. Nothing is consumed.

Update just after publication: Just a little note as I left my  thread of thought behind as I wrote (yet again). I missed making a key point. How could anyone predict that people might believe in a perpetual economic growth machine? But people do..... this was a crucial fault in my prediction. Sorry, but I was distracted from the point I was trying to make. I could not accept that the perpetual economic growth machine could be a foundation of belief, and the belief therefore might avoid the crash which I predicted. What we are looking at in the world economy is the contradiction between the perpetual economic growth machine as a belief, and the reality that it cannot and does not work (barring the exceptions such as Spain where we can see the idea collapsing). Reality and belief are bumping together, and reality is slowly winning out.

2nd Update just after publication: Long term readers will have seen my prediction, but still come back. I have always left it in place as I think my record of what I have got wrong is as important as what I have been right about (notwithstanding that I argue here that I was not so wrong). I do not believe that bloggers should 'airbrush' their record, and have left all of my posts as live.  I encourage new readers to dig into the archives. See where I have been right and wrong. Make a judgement on  whether I have something interesting to say based upon my record. I am obviously biased, but I think my record overall puts me in a strong position.....despite my admission/s that I have got things wrong (there is one case where I presented a detailed analysis of an economic forum, only to have an astute reader point out that I was a year out of date; I was analysing the meeting and output of the previsous year, but the post and apology is still online).