Is the US Approaching the End of an Economic Growth Spurt?

by Bill Bonner.Posted May 20, 2011.

As you know, we’ve been wondering about the exhaustion of the Industrial Revolution innovation…and the bankruptcy of the Social Welfare state as a result.

We take for granted that a healthy economy ‘grows.’ Our governments depend on it to pay the bills. Our investments depend on it too; we buy investments that we hope will become more valuable as sales and profits grow along with the economy. But what if all of our assumptions about what is ‘normal’ are wrong? What if the growth spurt we have known for the last 300 years was the exception, not the rule? And what if it were now coming to an end?

We traveled to Switzerland yesterday. What a great town Zurich is! Clean…prosperous…charming. And last night, it seemed like there were more people enjoying the warm May evening than there were townspeople. The sidewalk cafes, restaurants and bars were overflowing. Everyone was outside…strolling…chatting…drinking. The Swiss must have it made.

“Well, yes, it’s a great place to live. But not if you live on a salary,” a banker explained. “There are so many Germans moving here – because it’s a beautiful city…and because people leave you alone here – prices have gone up. An ordinary citizen can hardly afford to live in Zurich anymore. And when I walk down the Bahnhofstrasse I rarely hear our local language spoken. I hear High German, or Russian, or Turkish, or English.”

We can confirm that prices are high. Not by DSK standards, but high for us. Our hotel near the train station was not particularly fancy. But our modest room still cost about $700 a night.

Our friend Rolf Dobelli of getAbstract interviewed us. He challenged our ‘end of progress’ theory.

“It’s hardly a theory,” we covered our tracks. “It’s just an idea. We don’t know if we believe it. Or like it. We’re just trying it on to see how it fits.”

“Yes, but people take ideas seriously. They might have come to the same conclusion in 1979,” he said. “They might have thought that the boom years were over then. But as it turned out, there were still huge growth dividends to be paid – principally from electronic communications and the efficiency gains they bring.”

“Maybe,” we replied. “But most of the above-trend, real growth since 1979 has been in the energy economies, that are still increasing their energy use per person. The mature economies have realized incremental improvements since then, but much of that was phony – driven by increases in debt and government spending. And it’s not clear that advances in communications bring real wealth improvements. Think of the television. It’s been around for more than half a century. It has probably actually depressed wealth since then. Now, with all those emails to answer…and Facebook and Twitter to keep up with…it could be that they are more of a nuisance than a wealth-producer.

“It’s like anything else. You get the big gains in the beginning. You invent a bow and arrow, for example. You hunt more effectively. Then, you can improve it. But there are only so many improvements you can make. After the bow and arrow, humans waited a long time – with little or no progress – until the firearm was invented. And note that guns, like every other major forward move in human history, were effectively a way of using more energy. You sent a projectile further, faster by drawing on condensed energy sources. Broadly, energy is wealth. The more you use, the richer you are.”

“But what about conservation measures…efficiency gains? Most European nations have stabilized or even reduced their use of energy in recent years.”

“That’s my point. You get big productivity and wealth gains from the first increments of oil-based energy. Then, you eventually reach a point of diminishing returns, where gains are few. You become more efficient. You become better at using it. But your ‘growth’ levels off too.

“We’re seeing a reflection of this in population figures. Fertility rates are high in the emerging economies – where energy use is increasing rapidly. They are low in countries where energy use is topping out. In Germany and Japan – probably among the world’s most efficient energy users – there has been zero population growth for the last 10 years. And now, the population in Japan is actually falling. The Japanese economy is collapsing too. It’s gone nowhere for 20 years, and now – in the first quarter of this year – it’s shrinking at a 3.7% rate.

“As countries use more energy their birth rates decline. I’m not sure there is a cause and effect link, but that’s what happens. It is as if people knew, subconsciously, that they are reaching the limits of their new, oil-fired habitat. The latest population estimates show world population still rising…but at a slower and slower rate…until growth comes to an end in about 2050 with about 9 million people on the planet. Most likely, that is about when gains from additional energy inputs level off too.”

Meanwhile, the news yesterday brought nothing special. US stocks rose a bit. Oil remained below $100 – still three times what it was 5 years ago. Gold fell to $1,492.

The Fed pumps in more and more money. Stocks float. But key parts of the US economy are made of lead. Housing and unemployment, mainly. The New York Times tells us today that debt-burdened college graduates are having a much harder time finding suitable work. And when they do find a job, the starting salary will be an average of 10% lower than it was 5 years ago – not including inflation.

Even when new jobs are created, they’re rarely the ‘middle class’ jobs that can support the housing market. So more than 1 out of every 4 homeowners is underwater…with more sinking every day.

Curiously, many of these drowning homeowners are actually helping to support the consumer economy. More than 4 million of them aren’t making regular mortgage payments. The typical foreclosed mortgage hasn’t been serviced in more than 17 months. That leaves millions of people in houses they aren’t paying for…giving them more money to spend.

Bill Bonner
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.

Frans

…until growth comes to an end in about 2050 with about 9 million people on the planet. ???

You mean 9 Billion people I think.
gman

“These areas can still make rapid progress as they catch up. They’re like tribes that hadn’t taken up the bow and arrow. When they got it, they could make progress. You ought to be able to participate in their progress, too, simply by buying companies that are operating in these growth areas.”

participate? you mean, 1) find out what people need, 2) buy it before they do, and 3) make sure they can’t get it unless they pay you first?

I begin to understand ….

does that make me a bad person?
Ed Voll

The real take from all this “progress” is the the developed world depends on the other contries to make their goodies. The US keeps shorting the dollar and these countries keep getting less.
http://www.investorsfriend.com The InvestorsFriend

Wealth is anything that anyone is willing to pay for. $1.00 of potatoes cannot be judged to be more valuable than $1.00 worth of text messages about whether the IMF chief is guilty or not.

If someone is willing to pay for it, it is wealth. Period. Free stuff can be wealth too. But definitely anything anyone will pay for is, by definition, wealth.

In a differant and time and place the potatoes could be worth their weight in Gold. But as of today some mindless texting and a mindless T.V. show are worth more than a sack of potatoes. The best indicator of wealth possible is, what is the market willing to pay for it?

An NO, Growth and progress are not at an end. The world is still in the midst of a HUGE growth spurt. (Just like my Nephew, his brain especially clearly has a LOT of growing to do yet)
Scott Walker & the lame ducks

“……and the bankruptcy of the Social Welfare state as a result.”

Whew. The USA dodged a bullet there. They’ve never been a “Welfare State”. Maybe a “Warfare State”, but welfare, never.

……er, what happens to “Warfare States” over time?
Jack

Most folks seem to absolutely refuse to face reality. The very thought that ‘growth’ is the exception rather than the rule is alien to them.

As energy dwindles economic growth becomes ever more difficult; a permanent headwind. Taking on net debt the last few decades has masked symptoms to a certain degree, so has U.S. hegemony in world political & economic affairs. The big four U.S. banks have hundreds of Trillions in derivatives taken out mainly to prevent interest rates from rising. The U.S. now depends on an ever increasing policy of easy money. It’s incapable of pay-as-it-goes.

Think about our money system itself.
What we currently refer to as ‘Money’ is created when a loan is taken out, however the Interest is not created. The system HAS to expand to create the necessary interest. In a world of finite resources an exponential monetary system is inappropriate.
http://www.investorsfriend.com The Investors Friend

Money is indeed created when a loan is taken out and deposited into a bank account by the borrower or the person from who the borrower buys something.

Tha’t simply becasue the definition of Money is cash plus bank deposits.

But no wealth was created when the loan was taken out. The bank got no new net wealth and the borrower got no new net wealth.

It’s just the way banking works.

Do worry about the United States borrowing too much.

Do not worry that banks create money when they make a loan. That has gone on for at least 1000 years and is no problem whatsoever.
gman

“Do not worry that banks create money when they make a loan. That has gone on for at least 1000 years and is no problem whatsoever.”

that’s right. nothing to see here debt slaves, get back to work.
Young buck

This is the Obama economy. The man is a Muslim criminal who needs to be impeached, tried, convicted and executed for treason.
http://www.investorsfriend.com The InvestorsFriend

gman, Any debt slaves signed up for that voluntarily…

My post was that it is not a concern that money is created when a loan is taken out. (There really is NOTHING to see there)

Now when someone borrows and can’t pay it back (the United States?), that of course is a concern to the borrower and to the bank.

I am part owner of the Wells Fargo bank. If any of you owe us money, please be sure to pay it back on time.
Lord_Blanfein

But who really cares, if the debt slave doesn’t pay you back, his master, uncle sam will make you whole.
gman

“gman, Any debt slaves signed up for that voluntarily…”

yes, if by “voluntarily” you mean “haven’t the slightest clue about how badly they are being ripped off but who would probably go postal if they did know so make sure they never find out.” yeah.
Le Petomane

Young Buck
Obama inherited the economy from his neanderthal predecessors just as you inherited your brain from your neanderthal predecessors.
CT

Where is Richard when you need his insights on the subject of money?
http://www.investorsfriend.com The InvestorsFriend

gman responded to me saying:

“gman, Any debt slaves signed up for that voluntarily…”

yes, if by “voluntarily” you mean “haven’t the slightest clue about how badly they are being ripped off but who would probably go postal if they did know so make sure they never find out.” yeah.

gman what are you talking about? Interest rates are at historic lows. How is that ripping off those in debt?

Some people in this world were born to whine, others get on with life and making and EARNING their opwn piece of the pie. What are you?
Zack

Interesting thoughts.
Could be correct. Maybe, way ahead of its time.
If energy is wealth, then wealth is neither created, nor destroyed, but only transformed.
Is the lack of growth a mere consequence of the engine getting old, or are its resources being irresponsibly being redirected?
Perhaps, D.C. and the Pentagon are draining our resources.
Or, maybe, they are on the brink of untapping the vast natural resources of Afghanistan, which is one of the poorest countries in the world, but has one of the highest birthrates.
How can the pinnacle of technological innovation be calculated?
We could be on the verge of energy efficient breakthroughs, or, we could be on the verge of another Western dark age.
Use your time to send a fax, while, fielding sales calls, and checking your business Inbox; or, spend your energy updating your Facebook page.
Who is to know?
Its the beautiful mystery of, tomorrow.
There is nothing new under the sun.

There is much to marvel in the world.
Terrible, wonderful.
But none greater than humanity. -Antigone
Jack

Everyone … note how banker ‘Investor Friend’ evaded my post.

Interest is NOT created when a loan is taken out. In fact, Interest is only created by having the fractional reserve banking system EVER EXPAND.
In other words … a ponzi.
We all know how ponzis end.

Our current money system based on money=debt is flat out the wrong choice going forward.

Folks… pull out a dollar bill and ponder what it really is. It isn’t a unit of wealth, rather it’s a bond. A bond of zero duration that pays no interest.
It’s a promise to pay. And who is it backing up this promise to pay? Why its the PRIVATE banking organization that resists audits, otherwise known as the Federal Reserve, You know, the one with 2.6 Trillion of junk on its balance sheet.
gman

“Some people in this world were born to whine, others get on with life and making and EARNING their opwn piece of the pie. What are you?”

someone who is just beginning to realize that all this time he has BEEN the pie.
gman

“We all know how ponzis end.”

not yet we don’t. but we’re gonna.

so how does one withdraw from a debt currency pyramid scheme? can it be done gracefully or will there be much wailing and chewing off of legs to escape the trap?
C. Leon

Something that I think has been overlooked here: population growth is not necessary for economic growth. Most production is done by organizations heavily invested with machinery overseen and run by digital equipment. People are necessary mostly as consumers and it is easily demonstrated that one individual’s ability to consume is virtually unlimited. Hence: the absolute number of individuals is of little significance to production.
gman

“People are necessary mostly as consumers”

oink oink. moo. baa.

“it is easily demonstrated that one individual’s ability to consume is virtually unlimited.”

well there’s the little issue of payment for that consumption. is their ability to pay unlimited?
http://www.investorsfriend.com The Investors Friend

Jack I can’t fix your paranoia about fractional reserve banking. A system that has been around for hundreds of years.

And I don’t know what your complaint is about the fact that interest is charged on loans. That has been a fact of life for millenium untold. 10,000 years ago it would have been. Hey friend lend me 10 meals today and I will pay you back 11 next week. Interest rates have never been lower.
http://www.investorsfriend.com The InestorsFriend

Jack, you are right that a dollar used to be a promise to pay. It was of course a promise to pay a certain weight of gold on demand.

But a U.S. dollar is no longer a promise to pay the bearer anything other than a another dollar.

The dollar is a medium of exchange and a way to settle debts. And a SHORT term store of value.

Say you have $1000 in U.S. paper money. Some will gloom that it is fiat money, only worthless paper. But there is an unlimited number of people who will give you all manner of things in exchange for your fiat paper. Anyone who thinks our fiat currency has no value is delusional.

Now what does the government promise? It promises that the U.S. dollar will remain the official legal tender and medium of exchange. Further it promises that it will try to control inflation to a modest amount so that the value of paper money will not decrease by the time you spend it. Now if you are dumb enough to keep your money in a tin can for 50 years, yes it will depreciate in value.

An now you know…
gman

“The dollar is a medium of exchange and a way to settle debts.”

the dollar’s primary function is as a medium of theft. it is created by incurring debt. the only way any given debt dollar can be repaid is to incur more debt, and all the while the bankers print more dollars every single day making every dollar you have worth less every single day. meanwhile the debt pyramid must grow or the whole system collapses.

the banks that loan you this debt money loan you nothing of their own. they simply print it up and hand it to you. in return you must perform real work for years and decades to “repay” this “debt”. they push a few buttons on a computer and in exchange you must do real work for years. it is a fantastic unbelievable scam the likes of which the world has never seen before.

the money is fake. the debt is fake. the obligation is fake. it is a slaver system with one purpose – to transfer whatever wealth you have or generate to those at the top, to those who print the “money” and to any lackeys they need to make the system work.
Bloomer

The concept of using one’s home equity as an ATM was doomed to failure from the beginning. Although it seemed like a good ideal at the time, as an attempt to stimulate the economy. Now that shell game is over. The Federal Reserve is busy with its printing presses buying up U.S. Government treasuries to hold down interest rates and desperately trying to breath life in a fledging economy. Unfortunately, as QE 2 winds down the same problems emerges. Employers are not creating jobs and consumers aren’t buying.
Exporting good paying jobs is and has always been a zero sum game. Employers gained on lower labour costs, employees lost out on jobs, wages and purchasing power. As workers are also consumers, Companies have collectively cannibized their own customers. Government can not resolve this situation, only the business community can.
Henry Ford believed in paying decent wages so his employees could afford to buy his cars. Big Business has to follow suit and take that first step with investment and job creation, if we are ever going to see a growing economy again.
http://www.investorsfriend.com The InvestorsFriend

gman, for god’s sake man, take a large loan from that Bank and buy bank shares. Apparently they are a license to print money.

(Actually they don’t print up money, they loan out depositors money, but you are too far gone to understand that…)
gman

“(Actually they don’t print up money, they loan out depositors money ….”

no they don’t. deposits serve merely as a banks reserves. the bank does not loan out its reserves, it loans out printed money based on how much reserves it has. in the u.s. the modern legally-required reserve/loan ratio is 1/133. that’s right, for every $1 on deposit in a bank it can print up and loan out $133. for more information look up fractional reserve banking. also look up banking reserve requirements. then you will understand why last year banks were pushing to do away with reserve requirements – they want to print money without any limit at all. then you will understand why china is trying to control inflation there by raising bank reserve requirements – higher reserve requirements limits the amount of new money they can print which then slows down inflation.

“Apparently they are a license to print money.”

that is exactly precisely what they are. that is their function and purpose. that is what they do.

when they give you a “loan”, they don’t give you anything they own or have. they just print up something new (actually they type it into a computer data base). but you are then expected to spend years working to “repay” them. it’s an amazing scam.
http://www.investorsfriend.com The InvestorsFriend

Banks don’t loan out printed money…

Here is how it works:

Imagine you ask me for a loan of $1 million for one year, but you promise to let me hold onto the $1 million. I don’t need any money to do this deal. You pay me 5% on the loan and I pay you 2% on the same money I am still holding onto for you. I make $30,000 on the year and I put up no money.

Looks like a sweet deal for me.

But imagine now you take your loan from me in cash and pay it to someone else for a house and he deposits it back with me. I now have a deposit from him of a million and you owe me a million and I have not put any cash on the line.

Now imagine you fail to pay me back the loan at the end of the year as you agreed to. Well the other guy still has a million on deposit with me and when he wants it back I don’t have it ’cause you did not pay back your loan as agreed. (you deadbeat!)

I just lost $970,000 instead of making $30,000.

But gee, didn’t I print that money? no. In effect I loaned another guy’s money to you. I made a loan without my own cash. But now I have to give my depositor back his million and I don’t have it. I better go get it. Still want to be a bank?
not_harry

Le Petomane –

What is the French word for inheriting a disaster and sculpting it into an even bigger one?

And what is the French word for people who believe that politicians fix everything?
Kundalini

InvestorsFriend, nonsense, unless you want us to believe you loaned the million without collateral. If you’re doing unsecured loans, as your example implies, please let me know how I can borrow a million from you right away.

You have no business loaning out someone else’s money. That’s like the guy who owns a storage facility loaning out the stuff you stored there. But the banksters aren’t subject to warehousing laws, so they can leverage to the hilt. Banks go south because liberal laws allow them to play casino, to become speculative investment houses. And when the economy implodes, they go south.

Nice try at being an apologist for the banksters. But no cigar.

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