The evidence for a long-term economic decline

This blogger thinks the economy is into a long-term down trend. It could be that not everyone sees this; it may depend upon the color of hat you wear. If you are retired with a good defined benefit pension it may be more difficult to see a down trend than if you are a young person trying to find an unskilled job that pays enough to cover rent, food, entertainment and a little saving to get married and buy a house.

Some of the evidence relates to the resource base. There are lots of energy and mineral resources left on the planet. The problem is that we have used up the easiest accessible resources and what is left is difficult to extract and will take so much energy they are useless. Another type of evidence is geographic and long-term in nature. This includes famine, epidemic, uncontrolled migration, state failure and climate change.

dog-3277416_1920One of the difficulties is that we are used to seeing the economy as a straight line going up. Economics students learn about regression analysis which takes a number of data points and calculates the best straight line that indicates their direction. Using the slope of this line one can project the trend into the future. It is assumed the trend is up.

Another approach about which I did not learn until after I had completed my formal study of economics is fractal analysis. Fractals are lines that go up and down with a series of ups an downs within each. Like a seashore. Fractal analysis tries to identify major turning points in the ups and downs. The mathematics is not well-known. It involves the concept of fractal dimension which can be calculated by the formula two minus the Hurst exponent. If economists used this approach it would be much easier to accept the possibility our economy is going into a long-term down trend and their forecasts would be more accurate but not always what most people want to hear.

What then is the evidence for the long-term future?

In economic theory changes in prices are signals to producers to increase or decrease production. Increasing prices also indicate a shortage of a good and we have been experiencing a lot high prices for some basic goods. It may be that we need more information about prices relative to each other. Maybe our economic data collection has been to support our views on economic growth and is not sufficient to give us a clear picture of relative prices.

In recent discussions about energy a lot has been said about peak oil and solar. Maybe we do not have to worry about oil shortages because the cost of solar has been coming down and will soon be able to replace oil. This may well happen and it may have an interesting effect on economic decision-making. We as individuals will be able to make the basic decisions about solar use in place of bankers who now decide what oil projects go ahead and who gets to do them. The down side of this is that if a lot of oil infrastructure becomes obsolete and has to be written off a lot of the money supply will disappear and the lack of money will cause a lot of suffering to a lot of people.

In spite of all the talk about a service economy we still need lots of minerals for food, shelter and transportation. High prices indicate we have used up the most easily available mineral resources. The future may depend upon recycling and here the picture is cloudy. Recycling takes a lot of energy and the high cost may force us to reduce our use of minerals. Water is another issue. There are parts of the world where water shortages are becoming a serious problem.

Another indication of a declining economy is the trend to tiny houses, shared accommodation, young people continuing to live with their parents and even homelessness. It used to be that non-union working people could expect to live in a detached house with a front and back garden.

Most of the evidence for a down economy identified in the first part of this post has to do with the availability of energy and mineral resources. There are also some long-term geographic trends which could also cause mankind some serious problems.

The guideline here comes from a book by historian Ian Morris called Why the West Rules – For Now: The Patterns of History, and What They Reveal About the Future.

Morris’s book is a good summary of the long-term history of the world. Using evidence from a number of disciplines he shows how geography has influenced the rise and decline of civilizations. His perspective is much longer than most of us are familiar with.

He identifies what he calls the five horsemen of the apocalypse – famine, epidemic, uncontrolled migration, state failure and climate change and shows how these have combined to produce disastrous, centuries-long collapses and dark ages. Are we exempt from the consequences of these problems?

We are already familiar with these trends. The question is are they strong enough to cause us problems or are they gaining strength?  For me, a retired person living in Canada, they are mostly academic but for many people around the world they are very real and very serious.

Some people argue this planet is capable of providing enough food for the current population, especially if we reduce waste. Even so the situation is rather precarious and we should be paying a lot more attention to what is happening in agriculture. Monoculture, factory farming of animals and the use of pesticides could easily threaten our food supply.

The threat of epidemics is always with us and the more people are crowded onto this planet, the greater is the threat. We are lucky public health practitioners have been able to quickly control recent outbreaks.

Migration has been a big problem for Asia, Africa and Europe. It is also an enough of an issue for some Americans to want to build a fence and take children from their parents.

Climate change was a major issue until we realized how many plastic straws we are using. Stopping the use of plastic straws will be a lot easier than dealing with climate change but will not stop the changes from taking place. At least people will be doing something.

This blogger has found the concept of state failure difficult, fascinating and intriguing. It is a complex issue because justice is one of the most important functions of government. At the same time many people demand of government legislation that is exploitive because it restricts competition. This is a conflict of government responsibilities in which the exploiters tend to win. The balance between the two is by degrees and changes through time.

You will notice I said justice rather than law and order. I believe one of the indicators of state failure is that so many people, including The Economist and the Supreme Court of Canada, talk of law and order rather than justice. Law and order is easier to define and enforce. If some government were to pass legislation saying police are required to kill a thousand people at random each year, would we still be supporting law and order. The president of the United States has been quoted as encouraging police brutality and to me this sounds like encouraging them to kill at random. Maybe Trump is an indicator of American state failure.

There are lots of laws that are not just. Anything that tries to force the values, morals or religion of one group on everyone has to be unjust. There are lots of laws that are not written but which are enforced ruthlessly by the public, the media and the courts. For example, men are evil and any expression of male sexuality should be punished. Fathers are expected to walk away from their children without emotions. Men should not be emotional under any circumstances.

Governments like to reward their supporters and to purchase votes and/or support. It is easy to get governments to pass exploitive economic legislation and to get them to provide handouts to protect people from natural disasters and their own stupidity. A lot of government is supporting and encouraging special interests, often at the expense of everyone. Some people want minimum government but want their own interests protected,

As the economy goes more and more into decline it will be more and more difficult to provide handouts and this will be seen as state breakdown. Governments around the world are facing riots as fuel and food subsidies become difficult to maintain.

This conflict between justice and the exploitive demands of special interest may be pushing all governments into a state of failure.

In this post we have looked at a number of resource based and geographic indicators that the economy is on a down trend.

Here are some other indicators:

Unemployment

High public debt

The rise of radical left and radical right political movements

High interest rates

Non-performing loads held by banks

Falling standards of living – however one defines them

Expensive education

High crime rates

Crowded public transportation

Homeless people

People are losing confidence in their banks

Business people are will to exploit their customers for the sake of profit

Every time I read a news report at least one item supports the idea that the whole world is going into a long-term down trend. There are loads of problems with the resource base and if we go short we will not be able to sustain the standard of living to which we have become accustomed.

There are always positives and negatives. In terms of economic growth the negatives appear overwhelming. This guy has read about hunters and gatherers and believes it is possible for people to arrange their production of goods and services for long-term sustainability. It will require a major rethink of values. It will be a challenge.

 

 

 

 

This blogger thinks the economy is into a long-term down trend. It could be that not everyone sees this; it may depend upon the color of hat you wear. If you are retired with a good defined benefit pension it may be more difficult to see a downtrend than if you are a young person trying to find an unskilled job that pays enough to cover rent, food, entertainment and a little saving to get married and buy a house.

Some of the evidence relates to the resource base. There are lots of energy and mineral resources left on the planet. The problem is that we have used up the easiest accessible resources and what is left is difficult to extract and will take so much energy they are useless. Another type of evidence is geographic and long-term in nature. This includes famine, epidemic, uncontrolled migration, state failure and climate change.

One of the difficulties is that we are used to seeing the economy as a straight line going up. Economics students learn about regression analysis which takes a number of data points and calculates the best straight line that indicates their direction. Using the slope of this line one can project the trend into the future. It is assumed the trend is up.

Another approach about which I did not learn until after I had completed my formal study of economics is fractal analysis. Fractals are lines that go up and down with a series of ups an downs within each. Like a seashore. Fractal analysis tries to identify major turning points in the ups and downs. The mathematics is not well-known. It involves the concept of fractal dimension which can be calculated by the formula two minus the Hurst exponent. If economists used this approach it would be much easier to accept the possibility our economy is going into a long-term down trend and their forecasts would be more accurate but not always what most people want to hear.

What then is the evidence for the long-term future?

In economic theory changes in prices are signals to producers to increase or decrease production. Increasing prices also indicate a shortage of a good and we have been experieincing a lot high prices for some basic goods. It may be that we need more informtation about prices relative to each other. Maybe our economimc data colllection has been to support our views on economic growth and is not sufficient to giive us a clear picture of relative prices.

In recent discussions about energy a lot has been said about peak oil and solar. Maybe we do not have to worry about oil shortages because the cost of solar has been coming down and will soon be able to replace oil. This may well happen and it may have an interesting effect on economic decision making. We as indiivuduals will be able to make the basic decisons about solar use in place of bankers who now decide what oil projects go ahead and who gets to do them. The down side of this is that if a lot of oil infrastructure becomes obsolete and has to be written off a lot of the money supply will disappear and the lack of money will cause a lot of suffering to a lot of people.

In spite of all the talk about a service economy we still need lots of minerals for food, shelter and transporttation. High prices indicate we have used up the most easily available mineral resources. The future may depend upon recycling and here the picture is cloudy. Recycling takes a lot of energy and the high cost may force us to reduce our use of minerals. Water is another issu. There are parts of the world where water shortages are becoming a serious problem.

Another indication of a decling economy is the trend to tiny houses, shared accommodation, young people continuing to live with their parents and even homelessness. It used to be that non-union working people could expect to live in a detached house with a front and back garden.

Most of the evidence for a down economy identified in the first part of this post has to do with the availability of energy and mineral resources. There are also some long-term geographic trends which could also cause mankind some serious problems.

The guideline here comes from a book by historian Ian Morris called Why the West Rules – For Now: The Patterns of History, and What They Reveal About the Future.

Morris’s book is a good summary of the long-term history of the world. Using evidence from a number of disciplines he shows how geography has influenced the rise and decline of civilizations. His perspective is much longer than most of us are familiar with.

He identifies what he calls the five horsemen of the apocalypse – famine, epidemic, uncontrolled migration, state failure and climate change and shows how these have combined to produce disastrous, centuries-long collapses and dark ages. Are we exempt from the consequences of these problems?

We are already familiar with these trends. The question is are they strong enough to cause us problems or are they gaining strenth? For me, a retired person living in Canada, they are mostly academic but for many people around the world they are very real and very serious.

Some people argue this planet is capable of providing enough food for the current population, especially if we reduce waste. Even so the situation is rather precarious and we should be paying a lot more attention to what is happening in agriculture. Monoculture, factory farming of animals and the use of pesticides could easily threaten our food supply.

The threat of epidemics is always with us and the more people are crowded onto this planet, the greater is the threat. We are lucky public health practitioners have been able to quickly control recent outbreaks.

Migration has been a big problem for Asia, Africa and Europe. It is also an enough of an issue for some Americans to want to build a fence and take children from their parents.

Climate change was a major issue until we realized how many plastic straws we are using. Stopping the use of plastic straws will be a lot easier than dealing with climate change but will not stop the changes from taking place. At least people will be doing something.

This blogger has found the concept of state failure difficult, fascinating and intriguing. It is a complex issue because justice is one of the most important functions of government. At the same time many people demand of government legislation that is exploitive because it restricts competition. This is a conflict of governement responsibilities in which the exploiters tend to win. The balance between the two is by degrees and changes through time.

You will notice I said justice rather than law and order. I believe one of the indicators of state failure is that so many people, including The Economist and the Supreme Court of Canada, talk of law and order rather than justice. Law and order is easier to define and enforce. If some government were to pass legislation saying police are required to kill a thousand people at random each year, would we still be supporting law and order. The president of the United States has been quoted as encouraging police brutality and to me this sounds like encouraging them to kill at random. Maybe Trump is an indicator of American state failure.

There are lots of laws that are not just. Anything that tries to force the values, morals or religion of one group on everyone has to be unjust. There are lots of laws that are not written but which are enforced ruthlessly by the public, the media and the courts. For example, men are evil and any expression of male sexuality should be punished. Fathers are expected to walk away from their children without emotions. Men should not be emotional under any circumstances.

Governments like to reward their supporers and to purchase votes and/or support. It is easy to get govenrments to pass exploitive economic legislation and to get them to provide handouts to protect people from natural disasters and their own stupidity. A lot of government is supporting and encouraging special interests, often at the expense of everyone. Some people want minimum government but want their own interests protected,

As the economy goes more and more into decline it will be more and more difficult to provide handouts and this will be seen as state breakdown. Governments around the world are facing riots as fuel and food subidies become dificult to maintain.

This conflict between justice and the exploitive demands of special interest may pushing all governments into a state of failure.

In this post we have looked at a number of resource based and geographic indicators that the economy is on a down trend.

Here are some other indicators:

Unemployment

High public debt

The rise of radical left and radical right political movements

High interest rates

Non-performing loands held by banks

Falling standars of living – however one defines them

Expensive education

High crime rates

Crowded public transportation

Homeless people

People are losing confidence in their banks

Business people are will to exploit their customers for the sake of profit

Everytime I read a news report at least one item supports the idea that the whole world is going into a long-term down trend. There are loads of problems with the resource base and if we go short we will not be able to sustain the standard of living to which we have become accustomed.

There are always positives and negatives. In terms of economic growth the negatives appear overwhelming. This guy has read about hunters and gatherers and believes it is possible for people to arrange their production of goods and services for long-term sustainability. It will require a major rethink of values. It will be a challenge.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fake promises in the next presidential election

It appears the next American presidential election will be a battle of fake promises as Donald Trump and a left-wing democrat appeal to American emotions.

Trump will almost certainly bases his campaign on the formula that worked last time; vague general promises (make America great again) and some easy to keep promises that appeal to his core supporters (move embassy to Jerusalem.). Most of his promises will be appeals to emotions.

White House Flag Democrates RepublicanThe democrats will base their campaign on a promise of full employment as reported in this recent article in The Economist. Full employment has been an American policy goal for a long time, If it were possible it would have been attained a long time ago. To promote it now is an emotional appeal to counter Trump’s emotional promises. And it is destined to failure and will probably destroy the economic future of a lot of Americans.

One could probably predict that both Trump and the democrat will come out of the election with DBS degrees. (The D stands for doctor and the rest all English speakers should know).

The main issue, which will not be acknowledged during the campaign, is the size of the resource base for future economic activity. This blogger believes there are loads of energy and mineral resources left on the planet. However, we have cherry picked those which are readily available. Those which are left are so difficult to extract they are for the most part useless for future economic development.

If this analysis is correct then promises of full employment will be impossible to keep. Attempting to keep them will accelerate the use of the remaining energy and mineral resources and bring forward a major economic collapse.

Another factor when employment is an issue is our commitment to the work ethic. Some people believe their salvation depends upon their working hard and others worry that some people will receive benefits which they have not earned or to which they are not entitled. Everyone must do their share.

This blogger believes the material standard of living to which we have become accustomed is based on the agricultural surplus which allows a few people to produce enough food for everyone. As this surplus is the result of several millenia of technological development it should be a part of our inheritance. All of us should be entitled to a standard of living equal to everyone else regardless of what we do with our time.

With our standard of living dependent upon jobs and with our psychological well-being also dependent up on our having a job, promises of full employment will have a very strong appeal to many Americans. The success of the promise depends upon the ability of the economy for even more growth. This blogger has serious doubts about that. I am old enough to remember when people were saying we will just have to get used to an unemployment rate of three per cent.

The economic challenges facing the people of this world are overwhelming. Solutions will required a major rethinking of values about work and economic growth. An American presidential election would be an ideal time for a serious debate about the economic future.

The toughest part of this issue is how to deal with it. In the past I have voted for candidates with the least chance of winning because they have been the most honest. I have also deliberately spoiled by ballots. Both of these seem like a cop-out. I do not have the personality nor the skills to be a candidate let alone convince people of my economic policies. I do not even have the skills to go to election meetings and challenge the candidates. I also believe any candidate who tried to be honest would be nailed to the cross by fake election promises and appeals to emotions.

 

 

 

 

 

Hiding from the economic crisis

Why are interest rates so low?  It’s a question which has apparently been occupying a couple of North America’s top economists but this blogger sees the discussion as a screen hiding some very important economic issues.such as the root cause of the economic crisis and values which will guide us in trying to  find a solution.

On the surface the answer is simple.  Interest rates are the price of money and are determined by supply and demand.  They are low  because that is where the two balance.  They appear low because we are used to high returns on our investments and are reluctant to give them up.  There is no reason why interest rates could not be zero and maybe they should be.

To understand the root cause of the economic crisis we need to go into a macro economics classroom and watch the lecturer draw his basic diagram on the blackboard.  It is in the shape of an”x” with one side representing the financial side of the economy and the other the real or physical side.   This is important.  As we measure the physical part of the economy in financial terms it is easy to forget the distinction and analyze economic problems only in financial terms.  We need to ask what is happening to the physical side of the economy because it could be that is where the problem is.

This blogger figures the problem is with the resource base.  There are lots of energy and mineral resources left on this planet but we have exploited the most easily accessible.   Those that are left take a lot of time and energy to extract and this is causing a lot of economic problems.  It could even force us into negative growth.  This is a much more serious problem than why interest rates are low.  It is also an extremely difficult problem because it challenges some deeply held beliefs and values.  It’s a lot easier to talk about why interest rates are low.

Some ideas about how to fix the economy are included in the essay “LETS go to market: Dealing with the economic crisis” on this weblog.  A major feature of that essay is a proposal to change the way in which we create  money.

The emotions surrounding money make it a such a difficult subject that few people understand the economics of money and banking. This is unfortunate as money is so essential to how we exchange goods and services.  I encourage you to take a look at the essay.

While I prefer to see low interest rates as a symptom rather than the problem here are  some observations.

Money should be considered a tool to facilitate exchange rather than as a commodity with a value of its own As the quantity of goods and services we want to exchange varies up and down  so does the amount of money supply we need,  If there is too much money there will be inflation and if there is too little money there will be deflation.   Some people believe there should be mild inflation but this reduces the value of savings and should be  considered theft.

Quantitative easing has been an attempt to stimulate economic activity by increasing the money supply.  It has resulted in a rising stock market but has done little for the real economy.  That has to be a sign of a serious problem which has not been identified.

The way in which we create money, known as fractional reserve banking, is a heavy-duty problem because it is based on loans on which interest must be paid.  If all debts had to be repaid at one time there would not be enough money in the economy.  It is a Ponzi scheme on a grand scale and it is no wonder we experience frequent financial crisis.  For more on this topic see these previous posts on this weblog.

I believe we are facing a serious economic problem in that it is not clear there can  be a return to economic growth.  Dealing with this will require some major changes in our way of life.  It is disappointing that two of our most well-known economists are protecting us from having to deal with this with a frivolous argument. It’s as if they are playing in the turkey poo on animal farm and producing gobbledygook.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Milton Friedman and Money Mischief

I have just finished reading Money Mischief, Episodes in monetary history by Milton Friedman published about 20 years ago.

Friedman is remembered for his interest in the economics of money and banking. However, I have two concerns about omissions from this book.  The first is that he places too little emphasis on the T or Q in the quantity theory formula and the second is that he has missed the significance of interest in the creation of money.

Any discussion of money in economics has to include the formula MV=PT because this shows how the real and financial sides of the economy are connected.  This formula states that the stock of money times the velocity with which it changes hands is equal to a price index times the total of transactions or the quantity of goods and services exchanged.

Friedman uses this formula to support a claim that inflation is purely a monetary thing.  Prices go up when there is too much money in the economy and governments control the total amount of money.

My concern is that he does not appear to recognize the potential of T (or Q) to disrupt the economy.

In the chapter on money he suggests T could go down because workers are “paying less attention to their work and more to the stock ticker.”  A few pages later he states: “What happens to output depends on real factors: the enterprise, ingenuity and industry of the people; the extent of thrift; the structure of industry and government; the relations among nations; and so on.”

He may be excused on the grounds that throughout recorded economic history downward changes in T have not been an obvious problem.

However, there is some evidence that the resource base is now being depleted, or at least the most easily extractable, of the resources are gone.  This is certainly going to impact on the T in the formula.  Other things which could impact the formula are climate change, natural disasters or disease epidemics.

MY second concern relates to the role of interest in the creation of money.  Friedman didn’t see this and I have not come across any other economist who has recognized it.

During the 20th century there was a change in the nature of money from that based on a commodity (gold or silver) to money based on fractional reserves and credit.  (For a more detailed discussion of fractional reserve money and its problems, please see my essay “LETS go to market.”)

So long as money was based on gold the total supply was limited by the amount of gold and could be increased only as more gold was dug out of the ground.  If you look at the formula it is easily seen that this could cause problems in a growing economy.

With the switch to fractional reserve money the problem became reversed.  Now there is the potential for too much money to be available.

One of the differences between commodity money and fractional reserve money is that with the latter as new money is created the creators (the banks) demand that interest be paid on that new money.  I see this as a  built n force requiring that even more money be created to pay interest.  I see this as a sort of Ponzi scheme which from time to time collapses into a financial crisis.

Friedman provides a different take on why the money supply is increasing.  “Whatever may have been true for money linked to silver and gold, with today’s paper money it is governments and governments alone that can produce excessive monetary growth, and hence inflation.”

I have to take issue with him.  Fractional reserve money is not paper. It is entries in the computers of the banks.  Governments are involved in its creation when their bonds are purchased by central banks.  It might be good for governments to stop issuing bonds but I am not sure it is fair to blame them for inflation.

However we create money, the formula makes it clear that if the goal is price stability the money supply or its velocity must be easily variable.

The blackboard and the economic crisis

This week’s edition of The Economist has a series of articles focusing on the European financial crisis.

If we want to understand what is happening in Europe and the rest of the world I suggest we need to start by going back to the blackboard.

When my economics professors stood in front of the blackboard most of them drew a graph with two lines in the form of an x.  The macroeconomic professors usually labelled  one as representing the economy in financial terms and the other as representing the economy in  real or physical terms.  This is an important distinction which tends to be forgotten when we analyze problems away from the blackboard.  It is to easier to look at an economy in terms of its currency.

It is important to note that these two lines intersect so that what happens on one side will influence what happens on the other side.

So we need to ask if the current European crisis and if the crisis in the rest of the world is really a financial crisis or is it a crisis  on the physical side, in the resource base, which is showing up in financial terms.

There are some people who believe we are using  up resources at a rate which is  beyond sustainability.  If this is the case it is no wonder the people of this planet are dealing with a multitude of economic problems.

The Economist is pushing for policies which its  writers believe will restore growth.  It may be that instead we need to look for policies to manage negative growth.  The problem with policies to create more growth is that they will probably lead to even more using up of resources and will thus bring forward an even worse economic crash.

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