Destined to Fail – Magical Thinking at the G20
The G20 meeting has revealed two important things that tell us something about our combined economic future. First we learned that the US lost the battle to try to get everyone back on the Keynesian print-a-thon bandwagon. This tells us something about US leadership in these troubled times. Once upon a time, the US could dictate such things, but those days are apparently over (which deserves to be noted.)
I am a supporter of austerity as the least worst of two paths which I will outline below (the other being printing), but I want to be sure to give the global rejection of the US position on stimulus the proper attention it merits. Here’s the relevant information:
TORONTO — Despite President Obama’s pitch at the summit meeting for developed nations here for continued stimulus measures to prevent another global economic downturn, the United States will go along with other leaders who are more concerned about rising debt and join in a commitment to cut their governments’ deficits in half by 2013, administration officials said on Saturday.
(Source – NYT – all quotes below from same article)
In the lead-up to the G20, the US was lobbying heavily for a very different outcome. The US wanted continued stimulus and thin-air money printing and made its plea for this policy stance very publicly in the days and weeks leading up to the G20 meeting.
The reasons for this stance are numerous and complex, but one stands out prominently: Elections are coming up. If you are an incumbent, now is not the time to cut off the stimulus efforts.
The story here is that the US wants to stay on the path of printing, borrowing, and government stimulus, but a significant portion of the rest of the developed world has decided this is not a direction that makes sense. Such fundamental splits in philosophy are what great historical turning points are made of.
The second thing we learned is that, despite these differences in how to fund future growth, there is nothing yet to indicate that any the world leaders are aware that the very concept of perpetual growth is an unworkable fallacy. It’s obvious, hopefully to even the most casual of thinkers, that someday, sooner or later, whatever growth one is engaged in will have to stop. Nothing grows forever; everything has a limit.
But apparently the concept of limits is not part of the magical framework of modern economic thinking (emphasis mine):
Mr. Cameron and Mr. Obama, in their first private meeting since Mr. Cameron took office, acknowledged their different approaches toward balancing the need to promote greater economic growth and job creation in the short term with the long-term desire to reduce national debts, which reached dangerous heights during the downturn. But they played down those differences.
It’s funny how these things are always expressed as a “need.” We “need” economic growth and job creation. Have you ever wondered why this is? Why is it that we “need” either? Needs are not negotiable; wants are. How sure are we that job creation and economic growth are actually needs?
Well, we need job growth because there are more and more people entering the work force each year due to population growth. If there were no population growth and everybody already had a job, then there would be no “need” to create jobs. Zero percent job growth is the right amount for a stable population. No growth = no need for new jobs.
So we can therefore reduce the politicians' statements about the need for jobs to its more basic level and discover that they are really saying we “need” population growth. It's certainly been a very real and dominant factor for a very long time, but it is not a need. There are many who would even say it shouldn't even be considered a “want.” We can trace an enormous number of the problems or predicaments we face to overpopulation or to the strain that results from accommodating the needs of a growing population.
It seems to me that if job creation is a ‘need,’ then we’d do well to ask ourselves if we’d prefer to spend our time trying to figure out how to create an ever-larger number of jobs in perpetuity or if we’d like to spend our time figuring out how to create a stable population. While this may be an uncomfortable topic for some, it also happens to be reality.
Since it’s logically true that eventually population growth will have to stop, it’s entirely probable that we’d gain more bang for our buck if we expended our efforts towards creating a stable population than trying to build a perpetual-motion job creation machine.
And what about the “need” to grow the economy? Where does that come from?
If you’ve watched the Crash Course, you know that this imperative for economic growth comes from the money system itself. Debt-based money requires growth. If we had a stable population engaged in stable and sustainable activities using non debt-based money as their freely circulating medium of exchange, then there would be no “need” for economic growth. Zero percent economic growth would work just fine.
But we’ve got a growing population, and we’ve got debt-based money, and that’s the long and the short of it. Hence, we are stuck with the political reality that we “need” growth in the economy and job creation, even though these “needs’ are self-inflicted by our decisions, not due to some fundamental law of the universe like gravity.
Knowing that something is wrong with this perpetual growth narrative, we've taken to adding a few comforting words around ‘growth’ to make it seem as if our thinking is actually very clever and mature:
“But we are aiming at the same direction, which is long-term sustainable growth that puts people to work,” Mr. Obama said.
“Long-term sustainable growth” that “puts people to work.” Sounds good, doesn’t it? Who could be against that?
The problem is that the first part of the statement is an oxymoron. There’s no such thing as “long-term sustainable growth.” Heck, in the long run, there’s no such thing as “sustainable growth.”
Sooner or later, whether its bacteria in a Petri dish, mice in the pantry, or humans on a globe, growth stops. The only question is whether you cease that growth by design on your own terms, or by disaster on some other terms.
Whenever you hear the words “sustainable growth,” I invite you to recall this line of thinking and ask yourself if such a thing as sustainable growth is even possible. If it is, I have certainly never seen any workable plan, not even sketched onto a napkin in crayon, that explains how growth can be sustainable. Growth always ceases; the only question is when and under what terms.
Some more quotes from the G20:
Mr. Cameron added, “Those countries that have big deficit problems like ours have to take action in order to keep that level of confidence in the economy which is absolutely vital to growth.”
The Obama administration did have allies at the meeting in opposing rapid moves to withdraw governments’ stimulus measures. The Brazilian finance minister, Guido Mantega, told reporters that the debt-reduction targets could compromise economic growth
Trying to bridge the differences among leaders here, [Timothy Geithner] said: “Our challenge, as the G-20, is to act together to strengthen the prospects for growth. This will require different strategies in different countries. We are coming out of the crisis at different speeds.”
The setback underscored the difficulty Mr. Obama has had in making the case for stimulus. At home as abroad, Mr. Obama is confronting the limits of the consensus that took hold after the economic crisis began in 2008, which favored bigger deficits to spur job creation. At stake, as the administration sees it, is continued global recovery or a relapse into another recession.
Recovery, growth, and jobs. This is what the world in unison seems to want, and this is something we can easily understand and appreciate, given the fact that all the world’s leaders were born and raised during a period without limits.
Now that we can clearly see a wall of limits right in front of us, the question remains as to which countries will be able to navigate the treacherous shoals of change as we try to find a different set of understandings upon which to build a new world that can offer prosperity without growth.
It’s a big challenge. I am keeping my fingers crossed that somehow we’ll manage to figure out that our current trajectory is unsustainable and that we need entirely new thinking, centered on reality, to enter our global discourse. The alternative is to default into the comforting arms of growth, only to discover, much to our dismay, that it was prosperity that we wanted after all. Growth and prosperity are very different things. In a world of limits, one steals from the other. My preference would be to have prosperity be the thief and growth the victim, but our leaders seek the opposite.
This theme of what we might expect in a world of limits is a dominant portion of the analysis that I perform for my enrolled members. We live in a world where things will not suddenly run out, but over time, there will be less and less that must be shared by more and more people, and there will be more and more debt.
Running an analysis of all three E’s - the Economy, Energy, and the Environment - and tying these to personal actions and financial implications is one unique service I that I provide. The other is being your information scout.
The Challenge For The US
Now, back to the more immediate challenge for the US:
Yet even within Mr. Obama’s administration there are fault lines on how much additional stimulus is desirable.
Some news reports in recent days suggested that Peter R. Orszag, the budget director who recently announced that he would be leaving in late July, was resigning partly out of frustration that he had lost the argument for deeper and quicker reductions in projected deficits.
The apparent rift here is between Orszag, who wants the US to begin to live within its economic means, and the staunch Keynesians Geithner and Summers, who want to print and spend to achieve political aims. As a card-carrying member of the green eyeshade club, Mr. Orszag knows that their path represents the eventual and probably catastrophic bankruptcy of the US.
Rather than continuing to duke it out with the “print now, pay later” club, Orszag has opted to leave for greener and friendlier climes. In full disclosure, Larry Summers is among my least favorite people on the planet. I cannot figure out how he manages to get to such prominent positions, given the fact that his track record is a nearly unblemished trail of poor decisions and economic ruin. Everything in his record suggests that his only form of competency is political ambition, yet somehow he keeps getting his ideas enacted. It’s a real mystery, and not the good kind (like where that extra $20 in your pocket came from). In my view, Summers is a gigantic liability for this country and the current administration, and the sooner he is sent packing, the better. Geithner, too, for that matter.
At any rate, the G20 plan calls for the US to cut its existing budget deficit to only 3% of GDP by 2013. For the US, this would represent a decline from a $1.4 trillion deficit to a roughly $420 billion deficit, or ~$1 trillion in cuts in just three years.
Without getting too technical, this is just not going to happen. Cutting a trillion in federal spending would cut 7% from the GDP.
And even if we were willing to undertake a 7% hit to GDP, where would the trillion come from? It turns out that much of the US deficit is now structural, meaning that it sits in the “mandatory” column, as opposed to the “discretionary” column. To help frame the predicament, I’ll note that Obama recently proposed a three-year freeze on all non-defense discretionary budget spending, which – drum roll please – constitutes only $447 billion out of a $3.5 trillion budget.
In other words, finding a trillion is simply out of the question, if the only part of the budget that can be controlled right now (because it is both discretionary and politically viable in an election year) is only $447 billion. You can’t squeeze blood from a stone, and you can't save a trillion from a budget of less than half a trillion. And that’s only part of the problem.
One path to getting the deficit to 3% from its current 10% of GDP is to cut spending. However, this path carries the seeds of its own failure. Government spending is a big part of GDP, so cutting spending shrinks the GDP. The more spending is cut, the more GDP shrinks, which makes the deficit ratio less favorable. Adding insult to injury, government revenues expand and shrink in proportion to GDP, so cutting spending actually leads to reduced revenues, which leads to higher deficits, which lead to more cutting, which results in an endless spiral into the dumpster.
The other path consists of elevated government borrowing and spending, done with the hope that eventually GDP will climb up over time, thereby reducing the deficit-to-GDP ratio. The US sees this as the only viable option, but Europe has figured out that this path, too, has its own ‘endgame,’ which is the eventual collapse of sovereign debt and the high likelihood of associated political and social chaos.
Neither option is really attractive at this point, and that is the definition of a predicament.
My final analysis is that because we have such political animals as Summers driving the ship of state, the US will tell the G20 that it agrees to the plan, but it will not honor those words. At least not during this election year. And probably not next year, either, because it will be inconvenient then, too, for some reason or another. And probably not ever, unless forced by external circumstances, because the political class in the US seems unable to confront the idea that limits apply.
And so the US, and its ever-compliant side-kick Japan, will continue to spend wildly, even as Europe dutifully wrestles with the new reality. At first it will seem like the US is the place to invest, because its ‘growth prospects’ will appear stronger. But someday, not too terribly far in the future, it will dawn on the financial markets that the US is a hopeless basket case, saturated with debts that cannot ever be paid back under current terms. This is already true, but for some reason financial markets seem ignorant of this reality. Someday there will be a sudden revolt in the Treasury markets, a new equilibrium will be found, and vast quantities of wealth, as well as our national standards of living, will disappear seemingly overnight.
And that’s only if those other two E’s don’t thunder out of the chute and into the arena for all to see. Then all bets are off.