Growth, Financial Crises and Opportunities

It is clear that every American politician and every American economist agrees that America was recently in a "credit crisis", and that the only solution to the US "credit/debt" problem, exacerbated by US Government (USG) intervention to solve the "credit crisis", is to grow our consumption faster than our government expenditure.



Despite the whining of Republican newly minted "deficit hawks", the US Congress and the US Central Bank (The Fed) have recently pumped trillions of dollars into American banks and billions of dollars into "Main Street America".  The ostensible purpose of these actions was to

• Reduce the unemployment rate caused by the credit crisis
• Ameliorate the effects of unemployment on the families of the unemployed
• Invest in the "infrastructure" required when "normal growth" returns.  

These activities have indeed saved the financial system from an immediate implosion, reduced the potential unemployment rolls, and massively increased the debt of the US Government (USG).

Now what do we do?  

As the earlier posts made clear, the USG, and all the most influential world economic bodies are forecasting a return to "normal" consumption growth for the US and the world in the 2010-2011 time frame.   This consumption growth increase, we are told, will allow us to service the huge debt load we incurred in the recent past, and the debt we are now incurring as a result of the "bail outs" of American banks.  If we assume a return to "normal growth" or "Business as Usual" (BAU), the mathematics of these beliefs are quite reasonable.

However, not only are we planning on "normal growth" returning, but, as earlier charts and the chart below show, Americans have been told by their leadership, via the FY 2011 budget document, and various other fora, to expect a rebound to a faster rate of growth in the next decade than we have seen in the last two decades.

But

   1. Is there any plan, anywhere, to handle the effects of slow or no consumption growth?
   2. What are the constraints on a “return” to 3% CAGR, and what are the effects of not achieving it ?
   3. Can a nation as wealthy as the United States provide a decent life for its citizens without depending on doubling its consumption growth every generation, and if so how?


My answers to these questions are:

   1. Nowhere, in any of the public literature, is there any indication that there is any plan for America to regain economic health and "full" employment without a consumption growth rate of the order of 3%.  Our economists, our politicians, and the colleges which produce them have convinced themselves that unless we are on a path to double our consumption approximately every generation (about 3% CAGR), we are in big trouble -- whatever that means.  The Obama administration is leading the chorus that consumption growth will solve our financial and social problems.  There is no fall back plan if consumption growth stalls.  "Without growth, we cannot begin the process of restoring fiscal responsibility," said Treasury Secretary Tim Geithner today to the House Budget Committee. And ".... before the federal government can begin attacking soaring deficits and a massive national debt, it needs to increase jobs and ensure economic growth."

    2. I will spend most of my blogging time investigating questions 2 and 3.  I will be considering the constraints on consumption growth caused by our current financial system, and the even more fundamental constraints caused by potential shortages of natural resources on which we depend for consumption growth.  I will attempt to forecast resource shortages and discuss possible ways to deal with them.

  3. I answer question 3. with a resounding “yes”.  I do not accept the idea that Americans and other wealthy industrial countries must double their consumption every generation for their citizens to live satisfactory and happy lives.  In fact I believe just the opposite.  I believe there are enormous opportunities for young Americans, and the citizens of other industrial countries to live full and happy lives in a relatively "no consumption growth" environment.  However it is obvious the "growth paradigm" is deeply embedded in our industrial culture, and that our leaders currently have no intellectual "fall back" plan if the growth of the last few decades begins to stall.  We will require a major rethinking of our economic models to exorcise the "growth demon" if we are to live in what could become a very slow growth world.

It is also clear that the 80% of humanity which comprise the "non industrial" world cannot achieve a decent life without increasing their consumption.  I plan to spend a lot of time meditating on new economic paradigms, new sources of energy, new ways to share the world's perhaps dwindling resources, and the opportunities all these changes present to the young university grads entering the work force.