Is infinite growth possible??

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Is infinite growth possible??

Post by doodle » Fri Apr 29, 2011 8:03 am

I do a lot of reading over at theoildrum.com and an interesting article appeared challenging the notion that future economic growth at the rates that we have grown to expect over the last 100 years are simply not possible in a resource constrained world:

http://www.theoildrum.com/node/7848#more

Here is a brief bit right below which I found interesting. What I cannot figure though is whether these resource contraints point to an inflationary or deflationary future. What is your take?

Failure to Appreciate the Impossibility of Sustained Compound Growth

Our lack of numeracy as a species has played a large role in our willingness to ignore the effects of our compounding growth in demand on limited resources. Four years ago I was talking to a group of super quants, mostly PhDs in mathematics, about finance and the environment. I used the growth rate of the global economy back then – 4.5% for two years, back to back – and I argued that it was the growth rate to which we now aspired. To point to the ludicrous unsustainability of this compound growth I suggested that we imagine the Ancient Egyptians (an example I had offered in my July 2008 Letter) whose gods, pharaohs, language, and general culture lasted for well over 3,000 years. Starting with only a cubic meter of physical possessions (to make calculations easy), I asked how much physical wealth they would have had 3,000 years later at 4.5% compounded growth. Now, these were trained mathematicians, so I teased them: “Come on, make a guess. Internalize the general idea. You know it’s a very big number.”? And the answers came back: “Miles deep around the planet,”? “No, it’s much bigger than that, from here to the moon.”? Big quantities to be sure, but no one came close. In fact, not one of these potential experts came within one billionth of 1% of the actual number, which is approximately 1057, a number so vast that it could not be squeezed into a billion of our Solar Systems. Go on, check it. If trained mathematicians get it so wrong, how can an ordinary specimen of Homo Sapiens have a clue? Well, he doesn’t. So, I then went on. “Let’s try 1% compound growth in either their wealth or their population,”? (for comparison, 1% since Malthus’ time is less than the population growth in England). In 3,000 years the original population of Egypt – let’s say 3 million – would have been multiplied 9 trillion times! There would be nowhere to park the people, let alone the wealth. Even at a lowly 0.1% compound growth, their population or wealth would have multiplied by 20 times, or about 10 times more than actually happened. And this 0.1% rate is probably the highest compound growth that could be maintained for a few thousand years, and even that rate would sometimes break the system. The bottom line really, though, is that no compound growth can be sustainable. Yet, how far this reality is from the way we live today, with our unrealistic levels of expectations and, above all, the optimistic outcomes that are simply assumed by our leaders. Now no one, in round numbers, wants to buy into the implication that we must rescale our collective growth ambitions.
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Re: Is infinite growth possible??

Post by MediumTex » Fri Apr 29, 2011 9:05 am

Of course it's not possible.

That's one of the problems with the international financial system--it presupposes that infinite economic growth is possible.

The problem with the OilDrum analysis, however, is the same as with so much other analysis--even if it's right in its conclusions, it may be wildly off in its timing.
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Re: Is infinite growth possible??

Post by doodle » Fri Apr 29, 2011 1:56 pm

Another thing to consider regarding this is the ultimate reality that we will have to improve efficiency in the way that we use all of our natural resources (energy, wood, arable land, water etc.) This does create investment opportunities for companies that position themselves to create products which allow us to squeeze more out of less.

This does not necessarily mean alternative energy companies, but rather companies that squeeze more energy and product with less input.

Has anyone done any research into how to take advantage of this long term trend?

Many investors are plowing money into commodity funds as a way to play this. I am looking for an equity alternative of non commodity based companies that work on designing our way through the problem.

As for the inflation vs. deflation side of this story, I think ultimately we are headed for an inflationary spike as governments try to print our way to growth and prosperity that will be followed by a long deflationary period of low growth in the west....at least for traditional companies that operate in the housing, auto, durables sections of the economy. This deflationary period I think will be caused not only by an aging population, and lower growth rates, but also by constraints from higher commodity input prices.
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Re: Is infinite growth possible??

Post by BearBones » Sun May 01, 2011 3:22 pm

The answer is intuitive and implied in your posting, of course. Yet, isn't that what our debt-based economy is based on, particularly fractional reserve banking? While I certainly agree with MT about the timing, for me it is tempting to to estimate the probability of a collapse of our economic systems during our lifetimes, if not during the next decade or two. It is not as much any one economic danger that worries me as it is the convergence of multiple, potentially leading to a complex scenario that even HB did not fully envision:

1. A fiat currency that divested itself from any tangible backing in 1971, combined with a debt-based economic system that demands exponential growth.
2. Exponentially mounting federal and state debt plus staggering unfunded liabilities such as Medicare, SS, and pension obligations.
3. A real potential for the "peak oil" phenomenon well before we have developed adequate means for oil independence (which will likely take decades to develop and implement, as has been discussed on this forum before).
4. A real potential for a "peak empire" phenomenon. Whether one agrees with the specific policies or not, it can certainly be argued that the military and economic dominance of the US after WWII has promoted and maintained relative world peace and the economic stability necessary for world trade. Empires last only for so long. And many/most think that this US dominance is waning, potentially leading either to a power vacuum and/or the the dominance of nations with even less effective or benevolent hands.
5. Resource depletion and environmental degradation from population growth combined with consumptive-based economic systems.
6. Finally, exponential world population growth, potentially nearing world carrying capacity, particularly in an environment of resource depletion and/or ailing economic systems.

All considering, I guess that I am betting on stagflation, then severe deflation, then currency collapse, then at least a few years of confusion and turmoil, then something entirely new and unpredictable. I'm not a very good gambler, though, and I'm not sure how I'd intelligently play that bet, so I'm still liking the PP over all others...  Thanks for posting this thread.
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Re: Is infinite growth possible??

Post by LifestyleFreedom » Tue May 03, 2011 2:04 pm

Besides all of the rosy upside forecasts, there is also the possibility of nasty downside surprises (e.g., After Armageddon: http://www.youtube.com/playlist?p=74FC82D3BC97E5CE).  The actual future will probably fall somewhere in between these two extremes.

Should there be a future that comes anywhere close to the one depicted in the worst-case simulation, gold and cash will probably outperform stocks and bonds.  The After Armageddon version of the Permanent Portfolio might be:  gold, guns, food, and initiative
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Re: Is infinite growth possible??

Post by MediumTex » Tue May 03, 2011 2:38 pm

LifestyleFreedom wrote: Besides all of the rosy upside forecasts, there is also the possibility of nasty downside surprises (e.g., After Armageddon: http://www.youtube.com/playlist?p=74FC82D3BC97E5CE).  The actual future will probably fall somewhere in between these two extremes.

Should there be a future that comes anywhere close to the one depicted in the worst-case simulation, gold and cash will probably outperform stocks and bonds.  The After Armageddon version of the Permanent Portfolio might be:  gold, guns, food, and initiative
Interestingly, one of the worst one-two punches of disaster in modern times was World War I and the Spanish Flu Pandemic.  What was the legacy of this Armageddon?  Almost nothing.  A few years later the U.S. was in the middle of the Roaring Twenties, far from what one would have expected looking forward around 1918.

Even Armageddon events frequently don't happen the way we expect they will.
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Re: Is infinite growth possible??

Post by LifestyleFreedom » Tue May 03, 2011 3:31 pm

MediumTex wrote: Even Armageddon events frequently don't happen the way we expect they will.
It's true that the future ain't what it used to be.  I read somewhere that on the eve of World War I, a lot of people thought a war would be impossible.  The modern world had steamships that crossed oceans in days instead of weeks; telegraphs and telephones that sent messages over vast distances in a matter of seconds; electricity that allowed us to light up the darkness cleanly and safely at night; railroads that allowed people to cross continents in a matter of days instead of months; indoor plumbing; refrigeration; and so forth.  Compared to how people had to live from the beginning of time, it would be completely irrational for anyone to want to destroy the conveniences and comforts of modern life.

Then people figured out how to automate the gun to make the machine gun; how to use submarines to destroy shipping lanes; how to use airplanes to destroy factories and homes; and so forth.  World War I was the bloodiest war up to that point in time (World War II ended up being worse).  The bugs that created the Spanish Flu Pandemic of 1918 bred in the trenches of Europe during World War I and then got transmitted to the rest of the world by the soldiers returning home.  Luckily, the flu bugs mutated after a few months of the flu, so that they stopped jumping as much from human to human and the flu died down.

Every once in a while, we still find a stone-age tribe living somewhere on this planet.  When we give them guns, they soon figure out that guns are more effective in getting rid of their enemies than throwing stones at them are.  I always laugh at the concept of a "limited nuclear war" because as Einstein (or someone) once said, if World War III is fought with nuclear weapons, World War IV will be fought with sticks and stones.

But all of this is conjecture.  I don't know how the future will unfold.  A lot of smart people predicted a couple of years ago that the world economy would be collapsed by now.  Maybe they weren't wrong; they were just early.  Or maybe they were just wrong.  But it can't hurt to be somewhat prepared for bad things to happen because someday, they might very well happen.
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Re: Is infinite growth possible??

Post by Lone Wolf » Tue May 03, 2011 3:44 pm

LifestyleFreedom wrote: Every once in a while, we still find a stone-age tribe living somewhere on this planet.  When we give them guns, they soon figure out that guns are more effective in getting rid of their enemies than throwing stones at them are.
This reminds me of an amusing (?) anecdote I read once.  The very enlightening book "War Before Civilization" talks about a tribesman who had never seen a plane before.  He was given the opportunity to ride along for a flight in one for the first time in his life.  He immediately asked if he could bring along some rocks to drop on enemy villages as they flew overhead.

So within minutes, a man who had never used anything beyond stone-age tech intuitively suggested going from "airplane" to "air force".

P.S.  Yes, the pilot refused this request.
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Re: Is infinite growth possible??

Post by LifestyleFreedom » Wed May 04, 2011 3:55 am

I found this newsletter from Jeremy Grantham (of GMO) on why commodity prices are going to increase:
http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf

Note that I lived through the "Era of Limits" and stagflation of the 1970s.  Then I lived through the economic expansion and disinflation of the 1980s and 1990s.  Grantham makes a lot of sense and maybe he's right.  Perhaps the world really has changed this time.

My strategy is to drive an economical car and not live too far from work.  If economic growth permanently slows down and we have commodity price inflation as a result, I'll have a better chance of survival the less I have to depend on scarce resources.
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Re: Is infinite growth possible??

Post by MediumTex » Wed May 04, 2011 9:17 am

LifestyleFreedom,

I really appreciate your contributions.  I think that one person who has actually lived through something is worth ten people who have read about it a lot.

I was just old enough in the 1970s to soak up a bit of the economic "mood", and it was a very peculiar time.  Once a large number of people begin to be drawn into a certain way of viewing the world (broadly speaking, it tends to be either optimistic or pessimistic), it can become their reality for a very long time. 

I think that one of the things that Bernanke is desperately trying to do right now is prevent a 1970s-style malaise from descending on the country.  Manipulating such a subtle aspect of the broad economic psychology may be foolish to even attempt, but I don't blame him for trying.
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Re: Is infinite growth possible??

Post by LifestyleFreedom » Wed May 04, 2011 1:40 pm

I entered the workforce in the 1970s and was responsible for supporting myself, so the mood and events of that decade made a big impression on me in terms of how the world really worked.

There was inflation and the Nixon price controls, along with the Ford WIN (Whip Inflation Now) button.  New York City went bankrupt because it was borrowing long-term money to pay its current operating expenses.  There were gas lines twice in the decade, along with even/odd gas rationing at times (in California, the last digit of your license plate determined whether you could buy gas on the even or the odd days of the month).  Real estate prices soared, resulting in California's "Prop 13" law that restricted how much property taxes could be increased each year.  There was a beef shortage (no idea why) and a coffee shortage (freeze in South America wiped out the crop).  The dollar was taken off the gold standard and Americans could own gold again.  Gold and silver prices skyrocketed (along with the prices of other hard assets such as commodities).  The role of the Fed was debated -- control inflation or maintain employment (raising interest rates curbs inflation at the cost of increasing unemployment).  Things were in a funk and nothing seemed to work.  Jimmy Carter's "misery index" (inflation rate + unemployment rate) got him elected in 1976 and then unelected in 1980 when the index had doubled during his term of office.

The Club of Rome came out with reports about how the world was running out of resources.  The world's population was growing faster than the food supply and there would soon be widespread famine.  A cover of Time magazine in the 1970s featured "global cooling" and how the earth was slowly getting colder.  The CIA predicted the U.S.S.R. would become a net importer of oil by 1995 and would get into a conflict with the U.S. over mid-east oil.  There were credible scientists and organizations supporting these claims and some public officials were also talking about these themes to start getting the public on board.  Tax credits were established for solar energy use (at least in California), for example.

So how did the world turn out?  Car mileage standards set by Congress caused improvements in fuel efficiency (and people responded by living farther from work, partly because they could afford the longer commute and partly because the only home they could afford was in a more remote location).  The 55 MPH national speed limit set in the 1970s to save energy was repealed in the late 1990s.  The Alaska and North Sea oil (along with the disunity within OPEC) caused gas to become plentiful and cheap.  The U.S.S.R. no longer existed by 1995 and Russia is a net exporter of energy resources.  A new strain of rice was developed in the late 1970s that made the world famine scenario not happen (it was dubbed the "Green Revolution").

My takeaway from all this:  Be aware of future possibilities, but treat them as scenarios for planning and not history.  They haven't happened yet.  In business school, I learned SWOT (strengths, weaknesses, opportunities, threats).  Treat these trend possibilities as opportunities and threats relative to your strengths and weaknesses as you make your plans and go about your daily business.  Adjust your plans regularly because the world and its predicted future is constantly changing.  Disruptive events (e.g., Internet, 9/11) also happen all the time that change the future outlook.  During the same summer when Neil Armstrong walked on the moon (1969) is when DARPA did its packet switching experiment.  No one knew at the time that packet switching would lead to the Internet we have today.

Harry Browne came to prominence as a writer in the 1970s, so I imagine he was influenced a lot by that decade also.

P.S., People who retired in 1969 did what people did for the previous two decades -- buy long-term government and corporate bonds and live on the interest.  They never saw the coming inflation and many portfolios were wiped out by the end of the 1970s.  The message that I get from this is style diversification.  Even if the Permanent Portfolio appears to work under all kinds of different macro scenarios, something may be lurking out there we don't know about yet that will turn it into a disaster.  That's why only a portion of my assets are in the Permanent Portfolio and why I will always have "profitable hobbies" as side businesses I run in retirement.
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Re: Is infinite growth possible??

Post by Wonk » Wed May 04, 2011 2:51 pm

LifestyleFreedom wrote: I entered the workforce in the 1970s and was responsible for supporting myself, so the mood and events of that decade made a big impression on me in terms of how the world really worked.

There was inflation and the Nixon price controls, along with the Ford WIN (Whip Inflation Now) button.  New York City went bankrupt because it was borrowing long-term money to pay its current operating expenses.  There were gas lines twice in the decade, along with even/odd gas rationing at times (in California, the last digit of your license plate determined whether you could buy gas on the even or the odd days of the month).  Real estate prices soared, resulting in California's "Prop 13" law that restricted how much property taxes could be increased each year.  There was a beef shortage (no idea why) and a coffee shortage (freeze in South America wiped out the crop).  The dollar was taken off the gold standard and Americans could own gold again.  Gold and silver prices skyrocketed (along with the prices of other hard assets such as commodities).  The role of the Fed was debated -- control inflation or maintain employment (raising interest rates curbs inflation at the cost of increasing unemployment).  Things were in a funk and nothing seemed to work.  Jimmy Carter's "misery index" (inflation rate + unemployment rate) got him elected in 1976 and then unelected in 1980 when the index had doubled during his term of office.

The Club of Rome came out with reports about how the world was running out of resources.  The world's population was growing faster than the food supply and there would soon be widespread famine.  A cover of Time magazine in the 1970s featured "global cooling" and how the earth was slowly getting colder.  The CIA predicted the U.S.S.R. would become a net importer of oil by 1995 and would get into a conflict with the U.S. over mid-east oil.  There were credible scientists and organizations supporting these claims and some public officials were also talking about these themes to start getting the public on board.  Tax credits were established for solar energy use (at least in California), for example.

So how did the world turn out?  Car mileage standards set by Congress caused improvements in fuel efficiency (and people responded by living farther from work, partly because they could afford the longer commute and partly because the only home they could afford was in a more remote location).  The 55 MPH national speed limit set in the 1970s to save energy was repealed in the late 1990s.  The Alaska and North Sea oil (along with the disunity within OPEC) caused gas to become plentiful and cheap.  The U.S.S.R. no longer existed by 1995 and Russia is a net exporter of energy resources.  A new strain of rice was developed in the late 1970s that made the world famine scenario not happen (it was dubbed the "Green Revolution").

My takeaway from all this:  Be aware of future possibilities, but treat them as scenarios for planning and not history.  They haven't happened yet.  In business school, I learned SWOT (strengths, weaknesses, opportunities, threats).  Treat these trend possibilities as opportunities and threats relative to your strengths and weaknesses as you make your plans and go about your daily business.  Adjust your plans regularly because the world and its predicted future is constantly changing.  Disruptive events (e.g., Internet, 9/11) also happen all the time that change the future outlook.  During the same summer when Neil Armstrong walked on the moon (1969) is when DARPA did its packet switching experiment.  No one knew at the time that packet switching would lead to the Internet we have today.

Harry Browne came to prominence as a writer in the 1970s, so I imagine he was influenced a lot by that decade also.

P.S., People who retired in 1969 did what people did for the previous two decades -- buy long-term government and corporate bonds and live on the interest.  They never saw the coming inflation and many portfolios were wiped out by the end of the 1970s.  The message that I get from this is style diversification.  Even if the Permanent Portfolio appears to work under all kinds of different macro scenarios, something may be lurking out there we don't know about yet that will turn it into a disaster.  That's why only a portion of my assets are in the Permanent Portfolio and why I will always have "profitable hobbies" as side businesses I run in retirement.
There's a heckuva lot of wisdom in this post, LF.  Thanks for sharing your perspective.  The only experience I've had with the 70s is having my diapers changed.  Always interesting to hear of what those times were really like along with ruminations on the future.
MediumTex wrote:I think that one of the things that Bernanke is desperately trying to do right now is prevent a 1970s-style malaise from descending on the country.  Manipulating such a subtle aspect of the broad economic psychology may be foolish to even attempt, but I don't blame him for trying.
I actually think he's trying for a 70's malaise.  Asset values became so inflated by 1999 (in stocks) and 2006 (in real estate) that the only alternatives were to let them crash to reality (a deflationary depression) or create a slow, grinding stagflation so that values depreciate in real terms, but not nominal terms.  There are no other choices.  Values must get back to reality one way or the other.  Fortunately (or unfortunately, depending on how you look at it), most people don't look at prices in real terms--only nominal terms.

I've been very critical of The Bernank, but if he can succeed in debasing the currency slowly without losing the market's confidence in the USD, I'll give him credit for dancing on a high wire.  That act has yet to be played out...
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Re: Is infinite growth possible??

Post by moda0306 » Wed May 04, 2011 3:06 pm

Wonk,

Not to hijack this thread, but you obviously are of the opinion that letting the crash happen to liquidate bad investments is the best idea... I'm definitely more than sympathetic to this view, as trying to reinflate assets seems like a much less efficient way of improving the balance sheets of Americans.

My one "big if" though is the crash's effect on the system as a whole.  Right now, we have xx number of bankruptcies per year, xx forclosures, xx defaults, etc.  That amount would increase by such a large amount if we were to "liquidate away" instead of "inflate away" our debts that I question our legal system's ability to handle it efficiently, fairly and effectively.  I think once the public started noticing those strains on the system, it would cause another layer of deflationary collapse based on the fact that private property rights, bankruptcy laws, collateral seizing, etc can't even be trusted to be enforced properly.  The whole idea being that maybe the economy won't find a floor in prices and bounce back again but instead keep hitting new levels of doubt not only about an asset's value in a normal world, but an asset's value when our legal system is completely overburdened.

Maybe this should be a new "What the government would have let the market go in 2008" thread, but rack my brain about this constantly.... thought I'd just throw it out there.
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Re: Is infinite growth possible??

Post by moda0306 » Wed May 04, 2011 3:22 pm

To build on my previous post, if the whole idea is that there is a FMV that things tend to (and should) settle at on their own in an economy is legit, surely those prices depend somewhat heavily on the unemployment rate (often an outlook of future prosperity for a vast majority of Americans) and an efficient, fair legal system to protect your property that isn't overburdened.

If in reaching that "perfect price set by the market" you put millions out of work and put huge strain on our legal system, all of a sudden that "perfect price set by the market" becomes markedly lower, and you're chasing a moving target and aren't going to have that crash and quick bounce that Austrians think will happen when the government takes its hands off the wheel.

Maybe I'm wrong and our legal system is built to handle such a collapse.  
Last edited by moda0306 on Wed May 04, 2011 3:27 pm, edited 1 time in total.
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Re: Is infinite growth possible??

Post by TBV » Wed May 04, 2011 4:20 pm

moda0306 wrote: To build on my previous post, if the whole idea is that there is a FMV that things tend to (and should) settle at on their own in an economy is legit, surely those prices depend somewhat heavily on the unemployment rate (often an outlook of future prosperity for a vast majority of Americans) and an efficient, fair legal system to protect your property that isn't overburdened.

If in reaching that "perfect price set by the market" you put millions out of work and put huge strain on our legal system, all of a sudden that "perfect price set by the market" becomes markedly lower, and you're chasing a moving target and aren't going to have that crash and quick bounce that Austrians think will happen when the government takes its hands off the wheel.

Maybe I'm wrong and our legal system is built to handle such a collapse.  
One can focus on the shock of corrections or the enormity of the bubbles that lead us to widespread unemployment in the first place.  Bubbles are more likely when promoted by govt. easy money, and recessions tend to last longer when govt. tries to ease the pain.  I think that looking for the cause rather than the effect is the same form of counter-intuitive thinking that the PP is based on.
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Re: Is infinite growth possible??

Post by moda0306 » Wed May 04, 2011 4:38 pm

TBV,

I can agree that the govt caused a lot of the problems to begin with... I try to think of the "before the accident" and "after the accident" approach to a car accident as a possible example... if you get in a car accident and are injured, it could very well have been caused by alcohol, unsafe driving, and a car without airbags.  That said, after the accident has happened, going to AA, driving classes, or buying a car with airbags are pretty pointless.  The patient is dying and worrying about the causes are irrelevent in the short-term (uh oh, I think the ghost of Keynes has inhabited me).  

The point is, if we're being asked to believe the argument that the economy will bounce back quicker and stronger after an allowed collapse, then it's worth asking the questions I asked (don't you think) right along side of "what got us here."  I think this is especially true when our sovereign currency allows us a back door in printing money to monetize debts and inflating away our private-sector balance sheet problems as opposed to a gold-standard system or Euro where we don't have that option.  We can argue that the policy of rescuing failing institutions and expanding government is wrong, but I think we have to be honest with ourselves regarding the implications of taking our hands off the wheel.  How long will unemployment stay bad before it gets better?  Will the distribution of wealth swing wildly into the hands of the wealthy, or the other way, or stay about even?

You can still be for allowing the collapse... I guess I just want to know the economic ramifications.
Last edited by moda0306 on Wed May 04, 2011 4:41 pm, edited 1 time in total.
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Re: Is infinite growth possible??

Post by MediumTex » Wed May 04, 2011 4:59 pm

moda,

Debts taken on to fund malinvestments (and by "malinvestment" I mean projects that do not produce cash flows sufficient to service the debt taken on to undertake them) must be liquidated.  The liquidation process can be fast or slow, but NOT liquidating the bad debts isn't an option.

What do we do now?  If a person comes to you starving, would you feed him?  If you would, for how long?  What if he left and came back with 100 more hungry people?  Would you feed them?  For how long?  One reading of what the government thinks of as backstops against worse economic outcomes could be that the government is simply vastly increasing the number of people and companies who depend upon the government for their continued survival.

In other words, what starts as a helping hand can turn into dependence, which turns into a sense of entitlement, which can make it impossible to get the patient off of life support...ever.

Look at the banks.  What a mess.  These institutions will probably never be able to exist without substantial government assistance as long as they are sitting on portfolios of assets that are worth a fraction of what the banks' books say they are.  The government is not doing these institutions any favors by making it impossible for them to exist without continued government assistance (see Japan).

I heard someone say a while back that the U.S. isn't in the midst of a recovery, it's in the midst of a salvage operation.  Unfortunately, there are many seemingly delusional people picking around the broken bits of the economy without realizing that there can be no recovery until all of the debris from the bursting of the credit bubble is cleared from the playing field.  If we choose to conduct this salvage operation one thimble full of bad debt at a time, it's going to be a long time before we're done (see Japan).
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Re: Is infinite growth possible??

Post by moda0306 » Wed May 04, 2011 5:15 pm

MT,

Everything you say makes a lot of sense and I see all that.  I may doubt some of the way things play out on a macro level regarding malinvestment, but that's irrelevant to my main question.

Due to the point mentioned about the strain on our legal system in liquidating the debt that exists, how long would the collapse hurt us?  How long would unemployment stay at 20% after the collapse?

Austrians say it'd be quick (Ron Paul says his policies will result in full employment.... how long until that kicks in?), and Keynesians say it'd be devastating and lasting.  MT, you do a great job of telling a very convincing story of where the U.S. might end up given our demographics, debt, etc.

Can you try to think through (and explain) some of the economic ramifications of allowing the market to collapse in 2008?  It's easy to say "liquidate bad debts," but it's another to actually think through having 50% of people going through foreclosure or refinance negotiations on their home while 10% of the population is going through bankruptcy and 20% of the population is unemployed.  How do even the best-run business and best-made investments survive the next wave of defaults as people completely stop spending money on anything but what they absolutely need.  I just don't see this "quick liquidation" and reset that some insist would happen.

Regarding Japan, it's argued by Keynesians that they didn't spend enough, and they use WWII as proof that massive Keynesian stimulus is not only fiscally doable, but will result in a self-sustaining full-employment scenario (see post-WWII economy all the way through the 60's)... but that's another discussion... I'd rather concentrate, for now, on the implications of collapse... cuz I feel like we're lying to ourselves a bit if we think the collapse would have resulted in anything but a sustained period of self-fulfilling mysery (not that we're not headed there anyway).
Last edited by moda0306 on Wed May 04, 2011 5:26 pm, edited 1 time in total.
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Re: Is infinite growth possible??

Post by MediumTex » Wed May 04, 2011 5:33 pm

Why would it necessarily involve a "collapse"?

The problem we have isn't collapse, it's the political considerations involved in wiping out certain classes of shareholders and bondholders in many large institutions.

The savings and loan crisis showed us that we can have massive bank failures and it won't wreck the economy, so long as there is an orderly process for winding up the affairs of the insolvent institutions.  This orderly process, however, necessarily involves shareholders and debt holders of these institutions taking a total loss, which is the risk they signed up for when they invested in the first place.

The market never "collapses"--it merely re-orients itself in light of evolving supply and demand dynamics.  Any time you are talking about collapse, it merely means that the economy has gotten way out of whack in the first place, and what is perceived as a "collapse" is actually just getting re-acqainted with reality.

If I go crazy and jump off a building because I am convinced I can fly, my ability to fly doesn't "collapse" when I hit the ground; rather, the fact that I never had the ability to fly in the first place is merely being exposed by the first hard thing that gravity brings me in contact with.  The whole "collapse" paradigm would merely be a figment of my imagination and a product of the same defective internal logic that made me think I could fly in the first place.

With all that said, if you look at periods such as 1920-1921, where the government took a relatively hands-off approach to a deflationary depression, the world didn't end, and the country returned to prosperity relatively quickly.
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Re: Is infinite growth possible??

Post by moda0306 » Wed May 04, 2011 5:33 pm

The placement of this discussion I started may seem like I'm all-for trying to maintain growth forever in our country, unnaturally via debt creation.  I'm not.  I have huge doubts about a debt-based economy and continued bailouts.

I just want to know the full implications of collapse, and what will happen, how bad it will hurt, how long people will be jobless, how bad the distribution of wealth will skew, if at all... that's all.  Cuz when my favorite Republican candidate for president (Ron Paul) says his policies will result in steady full employment and fewer booms/busts (aka, a more stable economy) I don't think he's being honest about how much pain will have to be gone through before we reach that point.
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Re: Is infinite growth possible??

Post by moda0306 » Wed May 04, 2011 5:37 pm

MT,

To liquidate us to where we belong, then, you think we have more than enough capacity in our legal system to handle the renegotiations on millions of mortgages, millions of bankruptcies, etc, all while having 15-25% unemployment?

I really like what you said about the term "collapse" and how that's probably not the correct term for certain reasons, but it's just semantics for the transition from "debt based economy" to "MT's hard-money no-debt wonderland" that I was using.

I'm going to read up more on pre-1929 recessions, as I've heard some rebuttals to your point on that issue that I found intriguing.
Last edited by moda0306 on Wed May 04, 2011 5:39 pm, edited 1 time in total.
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Re: Is infinite growth possible??

Post by MediumTex » Wed May 04, 2011 5:41 pm

moda0306 wrote: MT,

To liquidate us to where we belong, then, you think we have more than enough capacity in our legal system to handle the renegotiations on mortgages, bankruptcies, all while having 15-25% unemployment?
Why does it have to lead to 15-25% unemployment?

It seems to me that there would be a lot of jobs created in the bankruptcy industry to soak up some of the displaced mortgage brokers and real estate agents.

Also, if individuals could get out from under the current crushing debt loads, it would lay the groundwork for much more disposable income going forward.
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Re: Is infinite growth possible??

Post by moda0306 » Wed May 04, 2011 5:51 pm

MT,

I thought it was pretty universally accepted that not issuing some kind of rescue in 2008 would have resulted in some 15%+ unemployment, and the disagreement was how long it would stay that way.

Would you mind sharing your insight on how unemployment got so bad in 1930-31 before FDR's policies?

I think this is maybe where we fork in our predictions.  I tend to agree with the vast majority of economists that think our unemployment would be much worse if we hadn't bailed out financial institutions... even if it would be temporary and worth it (where most of the disagreement seems to occur).

If you truly insist that you think we'd probably had little-to-no dip in employment, debts would have been quickly and efficiently liquidated, and we'd be sitting with glowing private-sector balance sheets right now this is where I really, really disagree with you.  No big deal though... I can think of no better place to hash out disagreements on such a topic.
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Re: Is infinite growth possible??

Post by MediumTex » Wed May 04, 2011 6:51 pm

moda0306 wrote: If you truly insist that you think we'd probably had little-to-no dip in employment, debts would have been quickly and efficiently liquidated, and we'd be sitting with glowing private-sector balance sheets right now this is where I really, really disagree with you.  No big deal though... I can think of no better place to hash out disagreements on such a topic.
I'm not saying unemployment might not have been worse, I'm just saying it wouldn't have necessarily been worse.

I don't think things would be rosy right now if the government had done less.  Historically, a real financial crisis takes 5-10 years to recover from (at a minimum), so things would still feel pretty weak right now no matter what. 

I'm thinking more in terms of what the next 10-20 years are going to look like, and that's what concerns me about many industries only being viable with extraordinary levels of public assistance.

If you are wondering about the difference between 1920-1921 and today, 1920-1921 was a malinvestment sitation without excessive leverage, 2008-forward is malinvestment PLUS incredible levels of leverage.
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Re: Is infinite growth possible??

Post by Wonk » Wed May 04, 2011 10:28 pm

moda0306 wrote: Wonk,

Not to hijack this thread, but you obviously are of the opinion that letting the crash happen to liquidate bad investments is the best idea... I'm definitely more than sympathetic to this view, as trying to reinflate assets seems like a much less efficient way of improving the balance sheets of Americans.
I think liquidation is the most honest way of dealing with it.  It's a choice of immense pain for 12 months or a bad ache for 12 years.  Which would you choose?  That said, I understand the political ramifications of a 1920 or 1929 style liquidation.  As we know, politicians don't agree with "honesty is the best policy."  Debasing the currency is the preferred method of dealing with these things because most lay people can't pin the tail on the donkey.  They know something is wrong and they feel it, but they don't know who is responsible.  Politically, it's a safe move for the ruling class.  Also--in a cruel twist of irony--usually the people who vote for their self interest rather than what is principally right don't have enough financial literacy to protect their purchasing power from inflation.  So, they pay for what they vote for.  Maybe not the bailouts, but other stuff.  I feel bad for the good people who aren't financially literate.  They really get screwed.
moda0306 wrote: My one "big if" though is the crash's effect on the system as a whole.  Right now, we have xx number of bankruptcies per year, xx forclosures, xx defaults, etc.  That amount would increase by such a large amount if we were to "liquidate away" instead of "inflate away" our debts that I question our legal system's ability to handle it efficiently, fairly and effectively.  I think once the public started noticing those strains on the system, it would cause another layer of deflationary collapse based on the fact that private property rights, bankruptcy laws, collateral seizing, etc can't even be trusted to be enforced properly.  The whole idea being that maybe the economy won't find a floor in prices and bounce back again but instead keep hitting new levels of doubt not only about an asset's value in a normal world, but an asset's value when our legal system is completely overburdened.
Well, that's the threat: complete destruction.  If you can't call that bluff, you will forever be held hostage to bankster demands.  I don't believe the entire system was at risk.  I think, as MT said, we would have had a massive reorganization.  Shareholders and bondholders would have been wiped out in some pretty big financial institutions.  Money and credit would have contracted.  If you look at PE10 from the depths of the Great Depression, it was about 8 in Jan '33.  Fair value is around 16.  So we can assume that if all hell broke loose, we'd have a low of 450ish on the S&P.  Maybe 20 or 25% unemployment...tough to say exactly but it most definitely would've been higher than what we've had.  But the thing is, after the liquidation we would've had a quick recovery--just like all the other liquidations in history.

And if the system really was at risk of total meltdown?  Ok, it blows up.  But that means the system needed to blow up and start new.  It sounds crazy, but would you want to live in a world where failure is unacceptable for the politically connected, but ok for the rest of us?  I don't.  I'd rather face the hardship of letting a broken system fail and start over.  Otherwise, you're enslaved forever.  But like I said, I don't think it would've failed. 
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