The Growth Illusion

Ilargi, over at The Automatic Earth, posted an interesting article this weekend about the failure of “the current economic order” and the illusion of growth.

It has been an article of faith among mainstream economists that the way out of our current financial debacle (indeed, any financial downturn) is to promote policies that return us on a path to economic growth. Of course, as Ilargi points out, it is, at this point, an exercise in absurdity to put our trust in mainstream economists.

The same forces who've had an interest in keeping the growth illusion alive until now are now trying to make us believe that a little tweaking of the system here and there is all that's needed to restart the growth machine, that the engine hasn't failed, it's merely temporarily sputtering. Nothing a mechanic with a good manual can't fix. But there is no good manual, something that has repeatedly been admitted, willingly or not, by various parties to the decision making process. The fact that the only people who have correctly predicted the situation we now find ourselves in were, and still are, standing on the periphery, literally on the outside looking in, while those in the center have consistently been embarrassingly wrong, yet remained where they were is ample proof that there is no manual.

Many in the peak oil movement believe that global peak in oil—a peak we are now more than likely atop—is the ceiling of economic growth. Ilargi, quoting derivatives expert Satyajit Das, who makes the point economic growth in the West actually peaked more than 30 years ago. “There are all sorts of means to measure this,” Ilargi writes, “and Das provides a nice one: the amount of dollars in debt required to achieve $1 in growth.”

Or as Das puts it:

“The ability to sustain high rates of economic growth, decreed by governments and central bankers, is questionable. The aggressive increase in debt globally resulted in a sharp increase in sustainable growth rates. $4 to $5 of debt was required to create $1 of growth. Approximately half the recorded growth in the US over recent years was driven by borrowing against the rising value of houses (mortgage equity withdrawals). As the level of debt in the global economy decreases, attainable growth levels also decline.

The world used debt to accelerate its consumption. Spending that would have taken place normally over a period of many years was squeezed into a relatively short period because of the availability of cheap borrowings. Business over invested misreading demand and assuming that the exaggerated growth would continue indefinitely creating significant over-capacity in many sectors.”

The idea that the economic growth my generation has experienced was mostly illusory (i.e., debt based) comports with our seemingly contradictory perceptions about economic life. On the one hand, the PC and Internet revolutions seem to have brought us incredible increases in standards of living. Houses have gotten bigger and consumer goods cheaper.

On the other hand, the cost of housing, education and healthcare has never been more staggering, and whereas 30 years ago in the U.S. a family could be comfortably middle-class on one income, that hasn’t been the case for a long, long time. Now, of course, even the illusion is coming to an end. So what happens next?

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