Mish Mashes the WEF

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My com­rade-in-out­rage Mish Shed­lock has also tak­en a swipe at the World Eco­nom­ic Forum report More Cred­it with Few­er Crises, and point­ed out a key weak­ness that I omit­ted ref­er­ence to: their inabil­i­ty to under­stand expo­nen­tial growth.

Mish’s post is here:

World Economic Forum Endorses Fraud; Steve Keen Mocks the WEF Report, So Do I; The Purported “Need to Double Credit in 10 Years”

Mish attacks the report on many fronts, but the one that I’ll high­light here is the fol­low­ing: its state­ment that:

This means that the world’s stock of cred­it out­paced GDP growth by less than 2 per­cent­age points a year – not a wide mar­gin. In the­o­ry, there is noth­ing unsus­tain­able about this pic­ture: as long as cred­it grows broad­ly in line with eco­nom­ic growth, the cred­it is put to good use and bor­row­ers can meet inter­est oblig­a­tions and repay prin­ci­pal.”

The Amer­i­can math­e­mati­cian Andrew Bartlett claims that “The great­est short­com­ing of the human race is our inabil­i­ty to under­stand the expo­nen­tial func­tion”, to which I’d add that that short­com­ing almost defines neo­clas­si­cal eco­nom­ics. 2 per­cent per annum does­n’t sound like a lot, but over 36 years that means the ratio dou­bles, over 72 it quadru­ples, over 144 it becomes 8 times what it was, and so on.

Mish pro­vides some nice graphs to illus­trate this process:

For the record, the actu­al rate of growth of the pri­vate US debt to GDP ratio was rough­ly 2.9% p.a. from 1945 till 2008. That means that the ratio dou­bled every 25 years, from 45% in 1945 to 90% in 1970, 180% in 1995, and if it had kept going, it would have been 360% in 2020.

Instead it fell over in 2008, and is now going back­ward at a rate of knots. Here’s an extrap­o­la­tion of the trend that the WEF says is “noth­ing unsus­tain­able about”, from the time peri­od they should have start­ed their analysis—not 2000 but 1945—and focus­ing on the key problem—private debt:

Noth­ing unsus­tain­able about” it, eh?  This naivety by neo­clas­si­cal econ­o­mists about growth and expo­nen­tial process­es in gen­er­al is pos­i­tive­ly dan­ger­ous for the human race. I’ll let Mish take over from here.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.