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.