Sunday, August 7, 2011

Into the Fog of Growth

In February of this year, Professor John Van Reenen, a leading British economist, addressed an audience in Hong Kong on the future of economic growth. In that lecture he highlighted areas from which growth was most likely to emerge. Among other things Professor Van Reenen stated growth would best manifest itself via: "...trade policies, relaxed planning, less distortionary taxation, proper subsidization of research and development, and improved management...”

The point that struck me as I pondered this lecture and other readings online about growth from a macroeconomic perspective was that there was no mention of emerging opportunities or a novel transition from service-based economies to whatever might come next, if anything. If
the service-economy is the summit of economic evolution then we are in big trouble, no matter how optimistic many trendy economists might wish to frame things. Professor Van Reener was using the old accounting trick of simply moving numbers and agreements around without anything new actually being produced.

Presently, there is a huge (and
healthy, if dysfunctional, in my opinion) debate going on in America and around the world on the role of government in an economic downturn. Most economists follow some variation of Keynesian theory, in which governments relax intervention policy during times of economic growth and step in with an infusion of debt during times of recession. That has certainly guided economic policy in the US (and most of Europe) through every presidential administration regardless of political affiliation for the past three generations.

The Keynesian approach is not the only economic theory, of course. There is an
Austrian Economic School which I personally find more appealing. And there are many others, including the largely (though not completely) discredited Marxist alternative.

Here in the US we just went through the most fierce
Debt Ceiling debate in our history. The results will likely to affect domestic policy in our country for many years to come, possibly changing the prevailing Keynesian landscape itself. Long-time readers will know that I consider public debt to be the worst kind of economic sin and I also believe that years ago we reached an unsustainable trajectory of public debt that could destabilize the US economy.

If
40 cents of every dollar goes toward servicing our debt then this is a most inefficient means of generating wealth. It fundamentally means you have to grow the economy by roughly 40% in order to balance out the weight of the debt. Forty-percent growth is simply not in the cards. As the percentage rises it makes a dollar earned through the marketing of goods and services worth less than a dollar earned without the weight of the debt. It is a built-in drag on valuation and simple buying or capital investment power.

Add to this
the interconnected nature of globalization and you can see that the weight of our debt is tied to the (for now) far worse European Debt Crisis involving Greece, Italy, and Spain along with the threat of systemic contagion of that crisis. The US credit rating was recently downgraded from AAA credit rating to AA for the first time in its history. This will not be something to turn-around overnight. Meanwhile, we are experiencing a degree of political polarization in the United States that has not been seen since the 1920’s and the 1850’s before that. The American consumer, the world’s most potent driving force of economics has recently cut back on spending, increased savings, in reaction to times of uncertainty. These are all the necessary ingredients for what Jurgen Habermas aptly terms a “legitimation crisis.”

The semi-holy concept of “the American People” constantly mentioned in the routine rhetoric of our politicans is
largely dissatisfied with the politics of paralysis so superbly exemplified by the current Congress and the Obama Administration. Traditional American compromise has so far eluded us in the historic, ugly polarization that is a direct result of the 2010 mid-term elections.

The Tea Party, for example, refuses to bargain even within their own party.
They are ideologues and have thusly exposed all the many cracks in the Republican Party making matters very difficult for the party’s leadership to accomplish anything short of the theoretical utopia so naively believed in. Nothing exemplifies this better than their staunch advocacy of a balanced budget amendment. That idea, coming as it did during the brinksmanship of the US debt default deadline, had no time for serious debate let alone actual passage.

But, from my point of view, the fundamental problem is going unexpressed by any political party or media source. Perhaps they just can’t see the forest for the trees. Simply put, there is presently no alternative to service-based/information economic growth and, to that extent, this represents
a very thick fog of uncertainty. In service-oriented economies such as the United States, for years now no business sector has emerged that requires or demands mass employment. Until such a business sector emerges, all the tax breaks to businesses advocated by neocons and the would-be continuing government stimulus advocated by liberals is absolutely irrelevant.

There exists no boom industry to hire enough human beings to significantly lower unemployment. If historically
5% unemployment has been an acceptable figure of a dynamic developed society then 9% or 10% is probably the new 5%.

To understand why we have look at the way economies actually evolved through time. History teaches us that
virtually all genuine economic growth has been a progression from agriculture to industrialization to consumer services. Beginning in the 1980’s, the personal computer launched an explosive industry that sustained terrific growth in the United States from the end of the Bush senior political era through the Clinton era to the beginning to the Bush junior era.

Broadly speaking, the wheel, the plow, and fertilizers led to
tremendous growth in agrarian economies. These then either languished or evolved into industrial economies due to the discovery of coal and advanced engines of steam and oil. Each of these stages created massive new demand for employment and the opportunity for capitalism to replace centuries of feudalism as the driving force of prosperity. The next phase was reached by retailing and marketing to the consumer class that eventually developed as a by-product of a manufacturing economy.

More recently, however, outside of
the growth of the silicon economy and various services made possible through the invention of the PC there has been nothing but decline in manufacturing and private agricultural aspects of the US economy. Meanwhile, second-world countries such as China and, more recently, Brazil, experienced strong manufacturing growth. Today these nations are poised where Britain and the US were over the last two centuries.

So, it doesn't matter what the US government might try to do to "stimulate" the economy. If there are no new opportunities for growth comparable to the industrial revolution and the computer revolution then the US cannot possibly experience the growth of the 1990's or the 1920's. It is a physical impossibility to grow economically without some specific sector demands for employees. Various retread industries like transportation infrastructure and outsourcing opportunities for businesses to improve productivity can fill some of the gaps but they will not bring long-term demand for more jobs.

What we need is whatever comes after the service economy.
Human innovation will be our only way out. Until something like our understanding of the human genome or nanotechnology or some other fringe industry matures (the plow, the internal combustion engine and the microprocessor were all on the fringe of their times initially) every nation that moves from manufacturing to service-based economies will face the murky fog of no market to grow exponentially.

It will take exponential growth to get America back to 5% unemployment. Of course, the fact that human innovation is the primary requirement for such future growth is in itself uncertain. Innovation cannot be planned for or tangibly forced. It is an art not a science, spontaneous not regimented. Innovation is an inspired flipping of a switch. You never know when, or to what extent, it will happen.

This is the 800-pound-gorilla no one will talk about because they don’t even conceive it. It will not enter into any politician’s thinking because there is absolutely nothing they can do about it. It will not be part of the traditional Keynesian paradigms of growth because, to my knowledge, no economic theory presently considers the fact that every economic model eventually requires human innovation and transcendence to a new model of growth (farming to industry to services to {?}) or otherwise face stagnation.

Stagnation is precisely what
Japan has experienced for the past two decades. It is precisely what the United States and Europe have entered. We have been in stagnation for the past decade. “The Lost Decade” in the American economy is due to the fact we have improved upon efficiency and productivity of the service economy to the point where there is no demand for employment. That is the bottom line. Period.

In researching various books about our current situation I found that most authors on the subject want to address economic growth in terms of the transfer of knowledge and/or capital and/or technology. Many wish to frame the economic discussion in terms of "wealth" and "poverty". These perspectives, in varying degrees of validity, all miss the mark. The greatest poverty facing us today is the poverty of novel growth opportunities. Consumer services and information technology no longer produce the demand for jobs.

The much-vaunted
Green Economy sounds like a possible paradigm shift. It has produced about 2.7 million jobs in the US. Perhaps there is the potential for more growth here. But, once again, this isn't really "growth" in the historical sense of what we saw in the new agrarian and new industrial economic paradigm shifts. It is merely a further diversification of the goods and services economy. It is nothing new and it cannot produce what we need to genuinely revolutionize the need for more employees.

The fact is that the Green Economy is growing even slower than the rest of the economy. This might just the birthing pains of a new way of doing business. But, it is not the kind of new business model that will generate the demand for jobs that the steam engine and the microprocessor created.

So, here we are. Massive debt in America and Europe following the bursting of bubbles in housing and stocks and other things.
China and Brazil are actually raising interest rates to slow their red hot manufacturing economies down. The US is in a politically “dysfunctional” mode. Unemployment remains high. Consumer spending is not increasing. There is no momentum to drive anything and “steroid money” has created a false bull market that will eventually be fully corrected, possibly to levels beyond the 2008 financial crisis.

But, I want to make clear that nothing currently would point to
a stock market meltdown or even a double-dip recession. Despite the recent wipe-out of all gains in stocks YTD in 2011, the severity of events is nowhere near what it was back in 2008. Yet. It is just that we are moving into a Fog where Growth in any sector is uncertain and nothing is leading the way. Well, perhaps Japan is our leading indicator but not toward a way out of this, paradoxically deeper into it.

“The world has seen this before. Two decades ago, Japan’s economic bubble popped; since then its leaders have procrastinated and postured. The years of political paralysis have done Japan more harm than the economic excesses of the 1980s. Its economy has barely grown and it regional influence has withered, As a proporation of GDP, its gross public debt is the highest in the world, twice that of America’s and nearly twice Italy’s. If something similar were to happen to its fellow democracies in Europe and America, the consequences would be far larger.” (
The Economist, July 30, 2011, page 9)

Most experts agree there is currently
not much in the way of hope for the dramatic change to avoid the debt levels experienced by Japan. I disagree. I think there is hope but that hope lies in the allowing the weight of debt and the natural ebb and flow of the markets to express itself. That entails pain, however. Pain to the tune of perhaps even higher levels of unemployment and an extended period of recession/stagnation.
I hope we will find the political the leadership to withstand the pain. I hope human innovation will lead to something beyond the current completely consumer-oriented economy.

Is it not a prejudice to think that “
Audacity of Hope” can only be upbeat? Can’t Hope also reside in what is natural and necessary (the cleansing of debt from the market space) however difficult? I hope so. Because, sooner or later, neocons and liberals be damned, that is what is going to happen.

The Japanese economy has been out in the Fog of Growth for 20 years. This can happen to you. America may yet know the Fog of Growth across half a generation of time. We have already been in the fog for ten years now and in a further decade the Japanese still might not have come out of their malaise in the thick gray mist. They call back to us from ten years ahead of us and say they see no sign of the fog breaking. Nevertheless, we drift with them deeper into the fog.


To date my GLD buy in January (and all the rest of my rather large position in gold) has returned 24.4% (38% over the past 12 months). GLD closed Friday at $161.75. Gold is overbought, stocks are way, way oversold. There should be some kind of rally soon and gold will be pressured. Hopefully setting up another buying opportunity. Why not profit off all this uncertainty instead of getting your investment for the year wiped-out in a couple of weeks?

Jen's smart call on silver doubled our money. We sold half on the recent correction but missed the first buy opportunity to reinvest our original money at a lower price. Waiting on another buy opp here.
Gold will pull Silver upward.

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