Keynesian economists, whom are the majority of economists, and of whom most government economic policy is based upon, have an illusion of continuous economic growth year upon year, and that without growth, we will have major problems; the latter part of that statement being true, but only within this system we build ourselves into.
We’ll get into the ridiculousness of this perpetual growth fantasy in a bit, but first I want to go over why growth is so vitally important in this Keynesian epoch.
Money, as I’m sure everyone knows, doesn’t just pop out of nowhere. Before we had the printing press, we used gold, silver, and various other tangible goods; such as tea in Siberia or cheese in parts of Italy.
So, once the printing press arrived and we moved to the modern incarnation of the fiat standard at the beginning of last century, we had to have a limit on our ability to create this money. Thus was born the era of debt.
The modern economic debt instrument was borne out of a need to put a limit on how much money could be put into circulation. For a government or private bank to borrow credit from the central bank, it has to be borrowed at interest. Whether that interest is at 1%, 2% or 5% etc.
So what effect does this interest have in restricting the money supply? As we all know, a loan has to be repaid eventually; the principal + interest. As the more astute among you may have figured out by now (I didn’t until it was shoved in my face) is that the principal + interest is greater than the original loan amount, which is just the principal, and all money can only come from a nations central bank.
Therefore, the Central Bank of any country is always technically owed more money than in circulation. Then the private banks that were allowed credit at the central bank, re-loan and multiply that credit via the process of fractional reserve banking to private citizens and businesses also at further interest.
Fractional reserve banking works on the premise that not all people need access to their money all the time. So they loan out your money to other people and businesses while it is parked in a savings account; this is where your interest comes from, their interest repayments. Except, that not only do they loan out your money, they can create credit on top of their reserves equal to 90% of your deposit, essentially creating more money and extra interest that doesn’t exist. This is called the money multiplier effect and is used as one of many signals of the health of an economy.
When money is being multiplied, the economy is seen to be expanding partly through inflation, and when it is not, it is perceived as contracting. This is why in a lot of recessions money seems to disappear. It actually is disappearing; as it didn’t really exist to begin with. This is also why wealth has become extremely consolidated in the 1%. The fiat system is literally, accidentally or not, a way to funnel money upwards, a pyramid scheme if you will. The poor pay off their loans for their entire lives, while the rich park their money into a savings account, and the interest from the lower and middle classes flow into it.
Generally, this system can work well if left to its independent vices and machinations, though it can’t work forever, especially with the human desire to constantly meddle. Name one person who hasn’t bent, or tried to bend his surroundings, be it work, home, social standing to his or her own benefit, and you may begin to understand why politicians, bankers et al manipulate the system to favour their friends, donors and family; worse still, this susceptibility is only magnified in a position of power.
The number one abuse is the bailout system, even if it is a loan. Inflation has about a 12-18 month lag time once new credit is introduced into the system. So these big banks and companies that get this money are essentially getting a portion of it for free as they can turn around and use it to pay down debt, expand operations etc before the inflationary effects of this new funny money actually erodes the purchasing power of every other currency unit in circulation. By the time it has circulated its way to the lower classes, it has lost some of its value, and prices have risen, hitting the poor with a double whammy of ‘Suck it, I’m a banker, you’re not!’.
The monetary system already isn’t very fair, but that’s normal because life isn’t fair. Not all Lion’s get the same opportunities, not all trees receive the same quantity of sunlight and some Gazelle’s get eaten by Cheetah’s. This cruelty, if you can call it that, is part of the diversity of life, and without this diversity there wouldn’t be any life to begin with, since diverse conditions are what allow for the formations of life and its continued diversity is an underlying mechanism of evolution, never allowing the rot of stagnation to creep up.
But this extra kick in the face of the poor and middle class in a fiat currency system is a step beyond Mother Nature’s system of fairness which begets evolution through diversity and unequal opportunities and amounts to a cruel joke making the poor poorer, and the rich richer in a system rigged beyond necessity to the upper echelon. So yeah, that’s where we are now.
Finally, moving on to necessity of growth. There is a very specific reason that economies must constantly keep growing, and by constantly, I mean 100% of the time. Recessions happen when economies stop growing, or contract due to burst bubbles. Sometimes central banks try to pre-emptively boost the economy in anticipation by lowering interest rates, but as we can see from the previous example, this just gives the upper echelon free money, and throws dirt in the eyes of the poor, so it’s a double-edged sword which history has shown us will usually end in greater income inequality, a recipe for social unrest. Not to mention that it only delays the recession as the funny money creates a misallocation of capital, which will require a recession to fix anyway.
The real reason that an economy needs to grow is so that new credit can be issued, and circulated throughout the economy to pay down the debt from the old credit. Every currency unit in every economy is owed to someone by someone else. So if you have no growth, when loans come due, there is no money to pay it down. You must always borrow more new to pay down the old. Depressions happen otherwise.
The great depression is the only recession in modern history in which the central bank of a nation restricted the money supply thereafter and hello 30% unemployment. This action, coupled with many other government interventionist policies then exacerbated the recession, which turned what would have been a recession into the great depression.
So let’s discuss perpetual growth now. Most economists wet-dream is continual 5% expansion, and since humans have the funny habit of always thinking that they live at the apex of civilization, especially those of us in the west; as a result we tend to project out that our institutions and economic models will be around for all time. So let’s play with the numbers of compounded growth and see where that will get our apex’ed society.
For the following examples, I am only going to use 2% year on year growth as an example. Just try to imagine 5% growth.
If we were to have an economy of $1,000,000 at the time of the crusades, approx. 1,000 years ago; at 2% compounded year on year growth, the economy would have grown to about 5,368,709,120,000% it’s original size. Remember, this is an economy that is only 0.00000015% the size of current world GDP (approx. $60 trillion). I’m afraid to even run the numbers for today, seriously. That’s a 5 trillion percent expansion.
Compound Growth Methodology:
To arrive at that number, you take 70 and divide it by the percentage growth per year, in this case 2% and you get 35; this is logarithmic math. Therefore, every 35 years, the economy doubles. 1000 years divided by 35 means that the economy doubles 28.6 times. Then it’s a simple matter of algebra.
Just to further nail the point home, the following is a paragraph from an essay by Jeremy Grantham; a respected hedge fund manager with $97 billion in assets under management. The scenario is a fictional re-telling on what would happen to the ancient Egyptians if they had the same economic fantasy as us.
“Let’s try 1% compound growth in either their wealth or their population,” 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”
So, who still thinks we are the apex of human civilization? The very way our economy is designed to work ensures that it either destroys us, or the planet or both. Even if it fails, it will still hurt. Both Option Status Quo and Option Yes We Can will both result in innumerable damage, though of course, letting the system fail is much preferred, for the longer it goes on unhinged, the worse the eventual outcome will be for us commoners, so better to get it over with now. Not to mention of course, that it will fail. That is a mathematical certainty.
That’s why, one way or the other. The current status quo of bailing out the banks with taxpayer money is only going to hurt us in the end, and the banks will still collapse eventually anyway. So… what’s the point? Why just not reset it now and save us all the bother.
Keynesian economists are delusional. The fact they perpetuate this fantasy is all the proof you need.
If you enjoyed this post, you may enjoy this others:
- Are We Responsible Enough to Govern Ourselves
Filed under: Economics, Finance, Future, General, Governance, Politics
