Why Economic Growth is Not a Sure Thing

What if everything you thought you knew about investing wasn’t so? Or, to put it another way…what if everything you learned about investing was learned in an unusual period in investment history? A period that won’t be repeated in our lifetimes?

You’re used to stocks going up, right? But they don’t always go up. They only go up — in general — when the economy grows.

But economies always grow, right?

Well, maybe not. How much did the economy grow in 2011 BC? Nobody knows, right? But we’ll take a guess. It didn’t grow at all.

And guess how the real economy in the US is growing this year? Probably about as much as it did 4,000 years ago.

No, we’re not kidding. The numbers are all over the place. But they’re all near zero. Even the feds say the economy is “barely” growing…or that the ‘recovery is very fragile.’

Guess how many jobs the economy added in 2011BC? We don’t know that either, but we’ll take another guess: zero.

Okay… You see where we’re going with this. This economy sucks, right?

But here’s the thing. You think the suckiness of this economy is a temporary thing. You think the economy USUALLY does okay. You think that there is something inherent in technology…that it is always finding new and better ways to do things…and that as a result we all get richer all the time, right?

Well, what if you’re wrong?

What’s the measure of wealth? Here’s one way to look at it. It’s how much output you can get from a unit of time. You take your bare hands…you try to dig a ditch. Your output is very limited. So, in a remarkable breakthrough, someone invents a spade! The first ones are made of wood. But they get better and better. Now, with a steel spade in his hands a man can dig much more hole in the same amount of time. He is richer. He can produce more. He can improve his standard of living just by using the tools he has available to him.

But then what? Then…maybe 5,000 years after the invention of the first hoe, a man invents a machine to do the digging…a backhoe. Now he’s really smoking. With a backhoe he can dig 10…20…times faster than a man with a regular hoe.

The first mechanical diggers are clumsy. Steam-powered. But gradually they get better. Now, they’re so smooth and responsive a good backhoe operator can use them to light a man’s cigarette for him. No kidding, it’s included in backhoe rodeo contests.

Mechanical diggers have been around for 100 years. They’ve gotten bigger and better. Presumably, each new generation of machines pays off. But not like they used to. The first backhoes produced huge new gains in productivity. The last produced only marginal gains.

Meanwhile, the energy needed to run the machines becomes more expensive. At 15 cents a gallon, the investment in fuel and machinery was almost sure to be worth it. Now, at $4 a gallon, a man has to think twice. If he has a small hole to dig, he might be better off digging it with a spade!

The energy revolution may have peaked. Growth may be a thing of the past.


Bill Bonner
for The Daily Reckoning