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.

This is a companion discussion topic for the original entry at https://peakprosperity.com/destined-to-fail-magical-thinking-at-the-g20-2/

Thanks for the great report, Chris!  I was wondering what was going on at the G-20, and appreciate being able to read your insight into how it is playing out!
 

[deleted double post]

You can’t squeeze blood from a stone and you can —> CAN’T save a trillion from a budget of less than half a trillion.’
It’s not a typo – you were only channeling the magical beliefs of the average KongressKlown. Laughing

Speaking of predicaments, what is actually going to happen when the irresistible force of fiscal austerity crashes headlong into the immovable object of popular fury over a stagnant economy?

Fiscal policy, I would say, has more inertia than monetary policy. Budgeting is an annual exercise, and it has to go through the byzantine gates and wickets of the parliamentary process. ‘Mid-course corrections’ are possible – we’ve seen plenty for supplemental war spending and extensions of unemployment benefits – but rarely amount to more than a fractional percentage of GDP.

Monetary policy, by contrast, is set by a committee of central bankers, who aren’t democratically accountable. Overnight, they can reset policy interest rates, change reserve ratios, and buy securities in open-market operations. So monetary policy, I claim, has less temporal and institutional inertia than fiscal budgeting.

In another thread, I posted a chart showing the recent -5.7% y-o-y decline in the ECRI leading economic indicator, which correlates (based on past experience) to probable GDP growth of only +0.8% in the second half of 2010. If such stagnation comes to pass, unemployment will stay high. Deficit-slashing attempts could easily push the economy over the edge into double-dip recession.

‘Helo Ben’ Bernanke is not unmindful of these downside risks, as the FOMC’s latest announcement hinted. He can’t cut the policy interest rate, since it’s already flatlined at zero. What he can do is ‘hail Mary’ coupon passes – scarfing up another trillion or two of notes and bonds, which could temporarily shove the T-note yield back down to 2.5%, and maybe shrink mortgage rates, which key off the T-note yield, into the high 3’s.

Some would denounce this as ‘pushing on a string,’ and it might be. But a Fed chair who fancies himself a student of Depression I is not going to stand idly by as contractionary fiscal policy sends the economy spiraling back down into shrinkage. Something has to give, and the Fed is the weakest link – a thin reed to lean on, to be sure.

Even as parliamentarians impose austerity, they will fecklessly castigate central bankers for the parlous state of the economy, and threaten to horn in on their lucrative seignorage racket. Central bankers, backs to the wall, will buy, buy, buy. After all, with unlimited thin-air money at their disposal, they face no fiscal constraint. Thus central banks, reacting with greater alacrity than parliamentarians, will renew their desperate attempts to reinflate via ‘unconventional measures.’

How will we know? If this view is correct, gold will keep climbing to fresh records, in tandem with the monetary base bloating sublimely to rival the Magellanic clouds. ‘We are the Universe,’ so to speak. Ommmmmm …

 

“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.”
And again it comes down to, who’s in charge of this country and their ultimate goal.  This is why one particular topic that continues to get taken for CT, needs to be added to any real discussions concerning all 3 E’s.  

No one in their right minds would think that the current path that our Federal Reserve and Treasury have put us upon, will work.  No one.  So there has to be an ulterior motive.  Anyone?

“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.”
Not a mystery to me!

AGAIN, who does he work for and who has benefited the most from his being in these positions???  Connect the dots!  It’s not that difficult!  But because so many have decided to close their eyes to the TRUTH that’s right there, they dismiss it!  Sort of like the JFK assassination, where’s the magic bullet? 

Thank you.  Fixed.

Even as parliamentarians impose austerity, they will fecklessly castigate central bankers for the parlous state of the economy, and threaten to horn in on their lucrative seignorage racket. Central bankers, backs to the wall, will buy, buy, buy. After all, with unlimited thin-air money at their disposal, they face no fiscal constraint. Thus central banks, reacting with greater alacrity than parliamentarians, will renew their desperate attempts to reinflate via 'unconventional measures.'
You and I are in complete agreement on this front.  Austerity represents pain now.  Printing represents pain later.  Humans are hard-wired for immediate gratification.  This is why I lean strongly into the camp that is anticipating more printing as the most probable future outcome. That and a lot of history.

I had been thinking that another business cycle stood between us and the next serious downleg which might activate your banker-politician split scenario, but I’ve recently revised my view.  I now think that all we’re going to get for our trillions of stimulus monies  is merely this temporary abeyance we’ve been enjoying.

Maybe more will do the trick?  If we fail here,perhaps it’s only because we didn’t try hard enough?  That’s what Krugman recently argued, he a past recipient of the no-bell prize.  If we can’t rely upon such luminaries to guide the way, who can we trust?

 

[quote=cmartenson]
I had been thinking that another business cycle stood between us and the next serious downleg which might activate your banker-politician split scenario, but I’ve recently revised my view.  I now think that all we’re going to get for our trillions of stimulus monies  is merely this temporary abeyance we’ve been enjoying.[/quote]

Ouch!  Chris, any expounding on the shift you see in the potential timeline on the next serious downleg would be of great interest!  I know that predicting the timing of events is hard and is not necessarily accurate (easier to predict the trend than the timing of the trend).  But still, any insight into what you are perceiving -with whatever caveats you feel are necessary given the uncertainy of the situation -would be greatly appreciated be me, and I am sure by others on the site!

Another excellent report Chris.  I particularly like the way you analyze current events through the lens of your long-term thesis.  This explains what is really happening now and reinforces the soundness of your thesis and what it predicts.
Update - Machinehead posted about the typo while I was still composing.  I can see where he got his name.  I liked his comments too. 

In other words –

My parents spent $10 trillion on their Wall Street holiday

AND ALL I GOT WAS THIS CRAPPY T-SHIRT???

CoolLaughingSurprised

Sadly, hopeful programs like these will be the first to be cut in the budget-slashing zeal –

http://www.stumbleupon.com/su/1OcBCe/digitalartempire.com/2010/04/209-stunning-and-hilarious-illustrator-designs-by-glenn-jones/

Good write on sustainability and growth. Thank you!
As for us: We are scr#wed or we are scr#wed. The deficit is there, will remain there and will only grow. If Bernanke doesn’t QE the difference between falling revenues and what the rest of the world is stupid enough to loan us to what we pay out each month it’s game over. If he does it’s game over. Default or hyperinflation: Which bullet do you want to get whacked by?

The only irony is we have a moron in the White House who has the motto let no crisis go to waste. They could have turned a lot of bad with this crisis into good (figured out what to use energy on, created massive Manhattan Project for sustainable living and other energies.) Instead the brightest thing they can try is to re-inflate the housing bubble, which will NEVER happen because the chunk that drove demand insane was created by fraud (read: millions of new buyers who should have remained renters were added to the market and now we have lost good buyers also with the ensuing collateral damage.)

 

LogansRun, I am with you.  Call it conspiracy theory or truth, I’ve read enough to convince myself that these puppets are only the front group for the real controllers.
Ed:  Deleted website link.  Completely inappropriate.

Oh, have no fear, I’m certain population control will come the second we are faced with gas rationing. I have no false delusions that an arrogant empire won’t hesitate to wipe another population off a continent. PO & Peak every other resource solved (the wrong way).  

Chris,
It sounds like the only way out of the predicament is a new monetary system to replace the current debt based system in place now - a new system that favors prosperity over growth.

By the way, I especially enjoyed the Q&A following the presentation of the short version of the Crash Course at Yahoo!  One comment - you mention that the only way to pay off the difference between total debt ($87? trillion) and total money ($14? trillion) is to borrow the equivalent.  While true, isn’t it also possible for the debts to be extinguished with assets to be exchanged for the debt?  I’m not suggesting this as a course of action - just an observation of the current system.  I believe the whole system is a Ponzi scheme, and therefore a fraud, so foreclosing on collective assets is illegitimate. 

While I’m comfortable that expanding awareness is the order of the day (followed by understanding and then solutions) it really would be great if we could have our sights set on some sort of solution (i.e. how a new monetary system could work to usher in a world of prosperity).  I know that there are lots of really smart people that could devise something once they set their minds to it (right now they are just busy working on other projects in the work/personal lives unaware of the challenge facing us).  However should hyperinflation come to pass there will be so much firefighting that getting a new system up and running will be overwhelming to say the least.  I suppose getting to work on complementary currencies now is something to ease the transition.

Perhaps we’ll just look to Europe who are seeing issues with the Euro, choosing austerity, will likely see this not work out too well, and bring along a new monetary system that the rest of the world can adopt as and when the time comes.

Cheers,

James

I am very disappointed at Chris for hinting at population control, which has resulted in brutal and inhumane policies or consequences, as anyone can see in China or in Europe.  For someone who’s avowed to be neutral, Chris’ subscription to regarding human life as a disease is beyond disappointing, but appalling.

Ed: Rest deleted for lack of apropriateness, usefullness, clues.

Logans Run
I wish more people would take your comments seriously. If you are to be believed ( which I do) you have dealt with these people closely for a number of years. It is no mystery to you how people like Summers and Geithner get to play god.

Nor it is any mystery to Damon Vrabel who worked in the money pit.

The continued reference to these people as morons is not only absurd but it is distracting from possible solutions. People like Summers, Bernanke, Geithner , Bush, Cheney , Obama etc. are not stupid by any stretch of the imagination. We here talk about preparations for what is likely to transpire. We talk about permaculture, communities, gold, and guns etc. These people talk about how to extract more time , energy and wealth from us. Who is stupid?

They are doing their own preparations. They own the gold, they own the guns, they have estates in places like Paraguay, Argentina, etc. They are paying peasants there with money they extracted from peasants here to plant fruit trees, gardens , raise animals and build their compounds .

The biggest preparation is the monopolization of water. He who controls water controls all of life on this planet. This is the silent preparation very few are aware of.

These people are not morons. They are sociopaths. The sooner we realize this fact the sooner solutions will be forthcoming. If you don’t realize this then there is a real possibility that you are the moron.

In 2008 Bill Clinton was on Larry King right after the bailout fiasco. Larry started to say how bad things were and in a rare moment of honesty Clinton told him " Larry you and I are going to be fine , none of this is going to affect us". According to the late Aaron Russo Nicholas Rockefeller said to him " Why are you worried about all of these other people? Just take care of your own family" This sums up their thinking very nicely.

We were warned about foreign entanglements by our founding fathers. Yet here we are 234 years later with the idea that  a group called the G 20 should determine our economic future. I am looking forward to the 4th of July so I can fantasize about the 15 seconds before the ink dried on the Constitution.

V

PS Logans Run I for one would love to sit over a cup of coffee sometime and here some of the stuff that does not get posted here. 

 

I’m going to leave this comment up as an example of exactly the sort of behavior we do not seek to attract around here.  Full of assumptions, projections, beliefs and degrading verbiage, this type of commentary is neither helpful nor appreciated.

If you would prefer to bring out some facts, then your views and comments will, of course, be welcome.

Facts like these:

  • Human population has doubled in the past 40 years and is still growing rapidly.
  • in 2007 more babies were born on US soil than in any other year in its history, including the infamous peak of the baby boomer years.
We really don't have time around here, or anywhere, to engage with simplistic, ill-though out, belief-oriented material.  There are lots of sites where you can waste yours and everybody's time with pseudo-arguments, but this isn't one of them.

[quote=pinecarr]

Pinecarr - you caught my sneak preview for a Martenson Report that is coming out on Monday.  Enrolled members will get to hear lots more about my thinking here. 

The timeline is something that I did not commit to the report, but I would be happy to discuss in the comments below after it comes out.

Augustine-
Where did Chris say anything about ‘population control’?  All that I found was him drawing a connection between population growth and economic growth, and that the latter relied on the former.  He’s making a statement of fact.  Whatever is making you uncomfortable lies predominantly in your own mind, not in his words.  Are we not even allowed to mention the problems and consequences that result from growing or shrinking populations?  These kind of slippery-slope accusations don’t help or accomplish anything.

  • Nick
The continued reference to these people as morons is not only absurd but it is distracting from possible solutions. People like Summers, Bernanke, Geithner , Bush, Cheney , Obama etc. are not stupid by any stretch of the imagination. We here talk about preparations for what is likely to transpire. We talk about permaculture, communities, gold, and guns etc. These people talk about how to extract more time , energy and wealth from us. Who is stupid?
This is exactly why they are stupid....they are missing the bigger picture of prosperity & sustainability. Where they are taking us is going to be destructive for all.