The problems with growth dependency

I've been trying to put my thoughts to words on this for a while as it relates to the current economic crisis.  Yet, before I do, I'll make two definitions and distinctions that I think are very important.

  1. Free Market:  A system where individual make choices as to what products/services they wish to use and how much to pay and charge for products and services they make.
  2. Capitalism:  A system whereby economic growth is the target of society composed of fractional reserve banking and a dependency on moderate inflation.

I'm not saying what I describe above are the 'true' definitions of such terms if they even exist.  But for the purposes of this blog, that is what I mean when I talk about the free-market versus capitalism.

The problem we are facing now is a problem with capitalism.  Our entire society is dependent on growth.  Our pension system requires constant growth.  Our banks are dependent on ever growing debt and profit.  Our society expects people to constantly get raises.  Our society expects home prices to go up...

Yet, growth is not something guaranteed.  It is merely something that happens once in a while when it needs to.  Like a Christmas Bonus, it is nice to have, but it is not something you would want to be dependent on.  Yet, we have all but institutionalized growth dependency into our societies and we seem incapable of having a discussion on anything that tries to remove this dependency.

Our corporations are try and keep growing and growing and growing... which is fundamentally impossible.  Once you have a market satisfied... what happens?  You either enter new markets or you live with a good normal profit.  This is why I don't foresee much real growth in the overall market.  You will probably see various companies taking over, some rising, some falling, but overall, the markets are satisfied.

Now you will get new industries and new innovations, but overall these are not going to be grand markets and they will simply steal market share from other markets.  So the overall shape of the market itself is stable.

Let's ask a simple question.  Why save the housing market?
If home prices are too high that people are foreclosing... maybe home prices should drop.

I would dare say that within the next 100 years, the fundamentals are such that entire housing market will collapse.  This is because housing is a simple function of supply and demand.
Supply being the number of homes/condos...
Demand of course being the number of people.

The population is stabilizing throughout the world.  And this is very good.  Everyone recognizes the benefits of lower/stable populations.  Too many people results in too much poverty like in India/China.  Most of the developed world would be in population decline were it not for immigration.  So a collapsed housing market is not a bad thing. 

Imagine everyone affording  a home on the cheap.  Wonderful no?  Of course what would happen to the banking, mortgage, and housing industries?

Technology itself is in a constant state of collapsing prices.  I work in the industry... it is pretty much everything we do is to make things more efficient and cheaper.  And again, this is also very good.  Cheap TVs, cheap communication like cell phones... It is great no?

In economic terms, both are forms of deflation.  Deflation sounds good no?  Lower prices are great.  So why do economists and pretty much every government say it is bad?  Well again... we are dependent on debt as per capitalism.  Debt is very bad once deflation kicks in.

Suppose I take out a loan for $300 000 for a house and I'm earning $100 000 per year.
But deflation kicks and things get cheaper... but if things get cheaper... that also means my salary gets lower as everyone is being paid less.

So in 10 years.

I have this huge mortgage with say $220 000 left on it, and now I'm earning 50 K/year and the house in only worth $200 000.

That's not lasting long.  Someone is going to have to eat this loss.  Either I keep paying on this loss, or I foreclose and the bank eats the loss.

This affects anyone who is in debt... and who are the biggest debtors but government.
Let's say a government has racked up a debt of 1 trillion dollars with a GDP of 2 trillion dollars.
Meaning it's DEBT/GDP ratio is 50%.  Not bad.

Now suppose deflation kicks in and GDP drops to 1 trillion dollars.
Suddenly DEBT/GDP ratio is 100%!

Keep it going and it will be impossible to pay off that debt.
Such is the problem economists and governments and others see with deflation.  They are damn right it is bad.

So what do government want to do.  They want to inflate... by pumping money into the economy to make old debts worth less.  So is inflation bad?  Well it raises prices.  But monetary inflation does not need to do this IF YOU CAN KEEP COSTS GOING DOWN while inflating the monetary base.

For example, let us say an apple cost $1.
The government uses monetary inflation which devalues your money so now it costs $2.00.  Well people would see that and freak out and you will end up with Zimbabwe or Argentina or WW2 Germany.

Yet, what if the government uses monetary inflation... but then via technology progress or simply cheaper labor, the cost of the apple goes down.  So it still costs $1.00.

That is the idea.. and to an extent it can work as long as the rate of price decrease matches the rate of monetary inflation.  Yet once again, there is a limit.  Technology only moves so fast :) 

But remember, deflation is not bad by default.


The kind of deflation we face is a deflation of reality.  People are reaching their needs.  They have the housing they need.  They have the entertainment... that they need.  The markets aren't growing.

Once your population reaches a certain standard of living, your citizens aren't going to spend infinitely on things they don't need.  I might buy 3 new jeans each year.  That's enough for me.  I don't need any more. 

Now a free market adjust to all these things quite easily.  Demand goes down, wages go down, life goes on.  Deflation is not a problem for a free market society.  Those who are in debt, just have to eat their losses.

But once again, the problem we face is we have institutionalized debt dependency in our capitalist society in the western world.... so we are incapable of transitioning to the new reality of deflation.
In this sense, modern capitalism faces the same problem of any centrally planned economy...

What?  Am I comparing modern capitalism to Soviet style central planning.  You betcha!

The principle problems with any centrally planned system are two fold.
  1. The inability of the planners to predict the future and account for it accurately.
  2. The inability of the planners to take on special interests dependent on the present
Both of these are problem with modern capitalism.  They did not see the big recession.  Our governments certainly don't plan for it... just look at our pensions, deficits... that are all dependent on growth and thus don't take into account any possibility of deflation.

Government, public sector unions, and big banks are the big players in most western countries and they are all completely dependent on the current debt based system.  They cannot change without suffering and they prevent any change that is needed for society to move forward.

In a way this explains why it is we haven't achieved the more 'relaxed' society that robotics and automation promised.

For example, as we automate more and become more efficient, we should theoretically, be able to allocate more people to be nurses, doctors, farmers and we would all be richer as a society. We would all 'get more stuff' and 'have better services'.

The problem is that we do not let the free market push labor in such a direction. The public sector expects to earn a premium over other people. This was fine when the autoworker made 80K then they can be taxed and the teacher can make 80k, and they can both feel well off buying the labor of the restaurant worker making 25K.

When the autoworker is automated, the gap between the teacher and the restaurant worker must drop.
This is not allowed to happen.
Ideally, as we automate more... the 'public sector' jobs should begin job sharing as that is where the 'need' is... but it won't happen is public sector unions always expect pay increases and a premium position in society. They will never accept the deflationary aspect that technological progress and efficiency guarantees.

I should emphasize again that this is not just a problem with the public sector.  The banking sector is equally trapped in this.

A recent trend for example has been for government to try and simulate their economy via the banks.  They try and ensure banks are lending to companies to try and force growth.  However, as I said, with so many markets satisfied, it is not really doing anything productive.

So what is the way forward?  I don't know.  Our society is so dependent debt and inflation, that I think we'll just keep fighting reality to force it to meet these dependencies.  We'll inflate our debt away, we'll prop up the housing market, we'll force immigration just to drive the housing market.... knowing full well we'll have to face the stabilizing of population eventually... just not now :P

It's like a giant ponzi scheme, and every country has invested too much to cut its losses.  They will just keep trying to prop it up until it explodes in a giant catastrophe.


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