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.

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.
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  • Tel

    We’ve been through this before but this time you are going to need to argue with the food prices rather than me. Just insist that they are not ris­ing, please set the USDA straight, they seem con­fused.

    http://www.foodnavigator-usa.com/Financial-Industry/USDA-predicts-rising-food-prices-in-2011

    http://www.financetalks.co.uk/traders-shocked-by-food-price-rise-in-usa-4980/

    But since all the com­modi­ties are ris­ing, it’s just eas­ier to accept that the buy­ing power of the US dol­lar is falling.

  • Tel

    A con­spir­acy is, by def­i­n­i­tion, a group of peo­ple who organ­ise them­selves in order to com­mit crime.

    From a strictly legal stand­point, if part of that organ­i­sa­tion is to sys­tem­at­i­cally manip­u­late the word of law such that they can achieve their ends legally then there is no crime, thus can­not pos­si­bly be a con­spir­acy.

    How­ever, from the some­what looser stand­point that some behav­iour is just evil (regard­less of whether it can slip through a legal loop­hole) it might be rea­son­able to claim that a large scale delu­sion which not only causes many peo­ple to lose their sav­ings unfairly but which prop­a­gates itself and per­pet­u­ates itself is indeed a crime, and does have some struc­ture of organ­i­sa­tion to it.

  • Tel

    Just to con­tinue, as a fur­ther thought… the uni­verse (to the extent that we can mea­sure it) does not allow any free lunch. That was cod­i­fied in the phys­i­cal laws of ther­mo­dy­nam­ics, and no one has yet fig­ured out a way around those laws. To some extent (from an eco­nomic stand­point) new tech­nol­ogy gives the appear­ance of a free lunch because it brings new effi­ciency and new path­ways to a sys­tem that was pre­vi­ously restricted.

    Part of the delu­sion of cen­tral bank­ing is that gov­ern­ments can leg­is­late a free lunch. Yes, gov­ern­ments are pow­er­ful enti­ties, but not pow­er­ful enough to repeal the laws of ther­mo­dy­nam­ics. This delu­sion hurts peo­ple in as much as it encour­ages them to get their lunch by bang­ing on the table and demand­ing some­one bring them the free lunch that they deserve — rather than work­ing for it. When a small num­ber of peo­ple bang on the table we either feed them to shut them up, or ignore them until they give up. As the num­ber of peo­ple doing this gets larger, they sta­bil­ity of soci­ety grad­u­ally becomes more at risk.

    To some extent, a coun­try like Aus­tralia is blessed with coal, iron and gold reserves that are not exactly avail­able for free (some­one still needs to dig it, refine it, work the machines, etc) but at any rate they rep­re­sent a sig­nif­i­cantly cheaper lunch than if we didn’t have those reserves. This bless­ing is good, unless it fur­ther rein­forces peo­ple believ­ing that the state of affairs will last for­ever, and they are owed some­thing sim­ply because they are stand­ing here.

  • Tel

    The whole idea of hav­ing small banks is that they can go bank­rupt now and then. That’s the mech­a­nism that pro­vides reg­u­la­tion to the sys­tem as a whole… and it’s the ONLY mech­a­nism that can do the job. Avoid the “too big to fail” men­tal­ity, and also avoid the “invest­ment should be risk free” men­tal­ity. No free lunch, even with gov­ern­ment reg­u­la­tion, still no free lunch.

  • Tel

    Here’s a good quote, it’s from Soros so it takes a bit of decod­ing:

    Every one of the 15 com­modi­ties from ara­bica cof­fee to zinc cov­ered in a Bloomberg sur­vey of more than 100 ana­lysts, traders and investors last month was expected to increase this year. Com­mod­ity assets under man­age­ment rose to a record $354 bil­lion in Novem­ber, accord­ing to data com­piled by Bar­clays Cap­i­tal.

    A year ago you had the prospect of infla­tion but the real­ity actu­ally in the devel­oped world of defla­tion­ary pres­sures,” Soros said. “Well because of the com­mod­ity boom, which was basi­cally a lack of con­fi­dence in all cur­ren­cies, not just the dol­lar, but there’s no alter­na­tive to the dol­lar, bet­ter to own com­modi­ties.”

    In my read­ing, what Soros is say­ing is there is infla­tion but he won’t call it infla­tion, so let’s just call it ris­ing prices and lack of con­fi­dence in the dol­lar. Per­son­ally, I just feel more com­fort­able dis­pens­ing with the dou­bletalk, but then again, I don’t have a house of cards to keep propped up either.

  • I am in total agree­ment with Steve; the peo­ple who are mak­ing the deci­sions just do not have the essen­tial and nec­es­sary tacit knowl­edge, intel­lect and integrity to frame a con­spir­acy (which i have stated many, many times) and more to the point, none of these peo­ple at the higher lev­els, jus­ti­fi­ably, trust each other.

    The rea­son for the pref­er­ences of secrecy, is merely, in the last moments, total shame and guilt.

  • juk

    Infla­tion is theft. Theft of the time, intel­li­gence, thought and effort of those who spend their days doing pro­duc­tive work in exchange for money. Money which is later deval­ued by the infla­tion (theft) of a cor­rupt gov­ern­ment.

    For a gov­ern­ment or any­body to tar­get a rate of theft of any­thing above zero should result in them being locked away.

    I can’t for the life of me under­stand how so many peo­ple can be fooled by the real nature of infla­tion. Our jails are full of peo­ple who try to steal, destroy or mis­ap­pro­pri­ate some­one else’s wealth or prop­erty, but when the gov­ern­ment does it, well that’s just fine as long as it’s only a lit­tle bit (2%).

    Mr Bartlett may well have been right if it wasn’t for the decep­tion that is infla­tion.

  • Tel

    I was per­fectly spe­cific in my def­i­n­i­tion: “when com­modi­ties and food both go up in price, that’s more com­monly known as infla­tion.”

    If you are so big on spe­cific terms, why use a phrase like “old chest­nut” which means noth­ing what­so­ever?

    As for the def­i­n­i­tion on money, per­haps this is a lit­tle more com­plex but money is what­ever peo­ple use as a medium of exchange. Of course, many things can be money, depend­ing on the peo­ple and depend­ing on the cir­cum­stance. There is no par­tic­u­lar rea­son why money must be one par­tic­u­lar thing only, other than it must be widely accepted amongst peo­ple who wish to trade. Pre­cious metal has by far the longest his­tory of ful­fill­ing this func­tion, has the widest accep­tance, is very dif­fi­cult to cheat on and is highly resis­tant to infla­tion.

    Credit is a promise, I will give you some­thing you want in the future if you give me what I want now. There is a place for this, but not to be con­fused with money. Money set­tles debts, credit defers the set­tle­ment into the future.

  • Dave

    I’m sorry but that arti­cle is pure techno-opti­mist vapour­ware”

    Yes it is opti­mistic to assume that our car cen­tric way of life can be eas­ily con­verted to one pow­ered by hydro­gen fuel cells/batteries.

    How­ever long dis­tance mass trans­port of goods and peo­ple is still pos­si­ble and proven through elec­tric rail. Elec­tric rail ben­e­fits not only from using mul­ti­ple energy sources (and so can adapt to chang­ing avail­abil­ity of renew­able or fos­sil resources) but also use some­thing like one tenth of the energy as con­ven­tional inter­nal com­bus­tion engions to do the some job.

    To assume we can tran­si­tion to an era of elec­tric cars/trucks con­tin­ues the dream of expo­nen­tial growth of extrac­tion finite resources in a world on the brink of severe resource/energy con­trac­tion.

    We could equally take a page out of China’s book, and make a change to elec­tric bicy­cles. Using one myself in my daily tran­sit to work uses 0.5kWhrs for 45km, or about the same as the energy my com­puter uses in 2 hours. An elec­tric car on the other hand would use about 5kWhrs (or roughly 100 times the energy of the bike), to cover the same dis­tance.

    Once you realise how inef­fi­cient and costly it is to move 1000kg of bat­tery and vehi­cle as opposed to 20kg of elec­tric bicy­cle, you see that if you are hooked on inde­pen­dent trans­port, in the cen­tury of ter­mi­nal declines, you might have to look at the alter­na­tives.

    Avi­a­tion as we know it will die with the end of cheap oil, and return to being a priv­i­lege of wealthy elites. Ship­ping on the other hand has many alter­na­tives it can use, like coal, oil, or even dare I say it wind/sail power.

  • Another option is the Sky­Tran pro­posal for com­bin­ing low cost mag­netic lev­i­ta­tion with com­puter bus design to pro­vide an urban trans­port net­work with a cost of US$10 mil­lion per mile (one tenth that of light rail).

    The web­site http://www.unimodal.com is down right now but this archive still has info:

    http://web.archive.org/web/20080729054058/http://www.unimodal.com/

    Wikipedia has an entry:

    http://en.wikipedia.org/wiki/SkyTran

    This old link con­tains info on the eco­nom­ics of the project:

    http://www.skytran.net/03Economics/s14.htm

    And a col­league of mine Trond Andresen will present a sem­i­nar on the con­cept at the Syd­ney Uni Insti­tute of Trans­port and Logis­tic Stud­ies on Tues­day 22nd, for any­one who can attend uni sem­i­nars and has the time for this one.

  • Dave

    The Sky­Tran looks excit­ing! Per­haps you would appre­ci­ate this post on ‘The Energy Bul­letin’

    Its all about the his­tory of rope­ways, and their pos­si­ble redis­cov­ery in an energy/environment chal­lenged world.

    http://www.energybulletin.net/stories/2011–01-26/aerial-ropeways-automatic-cargo-transport-bargain

    Maybe we will all fly one day!

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