[JohnDenver]

People often say that our economic system requires growth to function, and will collapse without growth. The exact reasons why this is true aren't often discussed, so let's describe two of them:

1) Over the long-term, a non-growing real economy cannot service a positive real interest rate.

A growing economy is not necessary to pay exponentially growing compound interest if inflation is high enough. You can just pay off the interest by printing up more money. This is what would happen if you put $1000 into a savings account paying %10, while the rate of inflation was %10. You'd get your interest payment alright, but it wouldn't be worth anything due to the inflation.

The only time a non-growing economy has a problem is when it has to pay real interest (i.e. interest over and above the inflation rate). If the borrower pays compounding real interest, there will come a time when the interest payment cannot be made because the economy is not producing enough real stuff.

So, if growth goes negative, the real interest rate will have to follow it. This will cause flight out of the bond market, because bondholders are very inflation sensitive, and don't like the idea of negative real interest rates. The government can try to fight this by keeping the real interest rate on bonds positive. But it can't work. Saying you will pay a real interest rate is like making an agreement to pay your lender in barrels of oil. You can't keep it up because the interest is increasing, while the available barrels of oil are decreasing. Eventually, the government would have to: a) default, or b)acquiesce to inflation and start printing money instead of borrowing it with bonds.

2) If productivity is increasing, growth is necessary to prevent unemployment.

This situation can be described with the following equation:

G/P = E

Where:
G=GDP
P=Productivity (GDP/total man-years to produce GDP),
E=Number of employed persons (i.e. total number of man-years needed to produce GDP)


In simple terms, we can describe the situation like this. If productivity is increasing at your company, that means they need fewer employees to produce a unit of output. So they lay off those people. In order for those people to return to work, growth must occur. Either the old company must have sales growth to justify hiring the workers back, or a new business (which adds new sales to the GDP) must be started up.

Now, look at the equation again. If GDP is decreasing, and productivity is increasing, the total number of employed people must go down. Increasing population will amplify this negative effect on employment. So the other direct effect of decreasing GDP is increasing unemployment.

This problem could be massaged in different ways. If GDP is constant, a constant employment rate could be ensured by freezing the population, and stopping productivity improvements. The employment rate could be raised by reducing the population, and reversing productivity gains (i.e. doing farming by hand instead of with labor-saving machines).

This is much less of a threat to the fundamental integrity of the economic system than 1). There have been working examples of "modern" economic systems which functioned while completely eliminating unemployment (i.e. the planned economy of the Soviet Union).

The economic system can only be salvaged if we can retrofit it to:
a) Eliminate real interest, and
b) Incorporate some measures to solve the unemployment problem caused by increasing population and productivity.

[nero]

So as to be clear,
In part 1 you are talking specifically about the "risk free" nominal and real interest rates.(ie. short term government bonds)

[JoeGreene]

I love the way you think but what will it take to have you consider a bigger picture?

[JohnDenver]

$this->bbcode_second_pass_quote('nero', 'S')o as to be clear,
In part 1 you are talking specifically about the "risk free" nominal and real interest rates.(ie. short term government bonds)

[JohnDenver]

$this->bbcode_second_pass_quote('JoeGreene', 'w')hat will it take to have you consider a bigger picture?

[jeffvail]

It's acutally less complex:

The entire finance structure of capitalism is built upon the presumption of growth. If there is no assumption of growth, then there is no incentive to invest in anything (because assuming no growth also assumes that there will be no return on any investment beyond the initial money invested).

Without both A) the assumption of growth, and B) actual economic growth our entire economic system will fall apart:

- No home loans: housing prices collapse, followed by masive default
- No consumer & car loans or credit cards: consumer spending collapses, followed by the collapse of the domestic economy
- No deficit financing: dollar collapses, followed by the international economic system.

Given that this discussion is taking place on peakoil.com, most of us have recognized that the future will not see continued actual economic growth. The only question is how long will the assumption of continual economic growth be maintained?

[Aaron]

Because without growth there is no incentive to invest.

Why invest money with no hope of growth?

When investments (read loans) fall...

Well...

The rest should be obvious.

[nero]

$this->bbcode_second_pass_quote('JohnDenver', 'I') don't really understand it, but somehow the risk-freeness seems important. For example, if it became impossible in practice to provide risk-free returns, would that be enough to salvage the system? Could industrial companies still function in such a climate? If bonds weren't available, wouldn't long-term investment flow by default into equity?

[nero]

$this->bbcode_second_pass_quote('jeffvail', 'T')he entire finance structure of capitalism is built upon the presumption of growth. If there is no assumption of growth, then there is no incentive to invest in anything (because assuming no growth also assumes that there will be no return on any investment beyond the initial money invested).

Without both A) the assumption of growth, and B) actual economic growth our entire economic system will fall apart:

- No home loans: housing prices collapse, followed by masive default
- No consumer & car loans or credit cards: consumer spending collapses, followed by the collapse of the domestic economy
- No deficit financing: dollar collapses, followed by the international economic system.

[aahala]

I don't agree with statement 1. Interest without inflation, or its threat,
is simply rent for money. We rent many other things, and growth is not
something required.

I do agree with statement two, but it seems to assume two facts not
in evidence. Why must there be productivity gains--that just seems to
assume the conclusion of growth is necessary. Secondly, the statement
seems to assume that increases in unemployment are inherently
undesirable. There are a number of people who lose their jobs, who
have assets and find thereafter they prefer living off assets rather than
working.

[Tyler_JC]

Aahala, if everyone lived off their assests, we wouldn't produce anything. Shay's Law comes into effect here. We have to increase production in order to grow the economy. We must grow the economy to pay off the debt. We must create more debt to pay off the existing debt.

As long as the current money system survives, we must grow the economy or face collapse.

[jeffvail]

Nero: you make a good point... I stand corrected.

I think that in a shrinking economy, though, deflation will complicate this. I'm not too sure on this line of reasoning, so help me out:

- If the economy is shrinking, on average investments (either in bonds, home loans, business assets, etc.) will on the whole be worth less in the future than they are today.
- If investments will, on average, be worth less in the future--and critically, if the general assumption is that this will be the case--then there will be a tendency to remove capital from investments and place it in a hedge, such as real estate, gold, whatever? Except that real estate and other hedges will drop in value as well, right?, as the overall demand for all goods and services declines...
- This will dramatically decrease the supply of money to loan. The demand for loans may also decrease as the change in future expectations will reduce the borower's confidance in his ability to pay back the loan... so will interest rates go up or down??

I know that we have economic models for what happens in a depression, when the economy temporarily shrinks. But when the critical assumptions flips -- when people assume that the economy will get smaller in the long term -- we will have to figure out a whole new economic calculus... interesting.

[JohnDenver]

Elaborating on what nero said: There are lots of ways loans and interest could coexist with a non-growing economy. A farmer could borrow $100 for supplies at planting time, and pay $110 after the crop is sold, year after year, without any growth in his output. Investments to improve efficiency and productivity would also make sense. For example, a fisherman might get a loan to purchase a more fuel efficient boat, so he can fish more profitably without increasing his catch.

So it is not interest per se which is the problem. It is the indefinite compounding of interest which is ruled out by principle 1). Suppose for example that I have $100, and that GDP growth is stabilized (= 0%). I loan it to you, and one month later get $110 in return ($100 principal + $10 interest). I am providing a service (money rental) for which I am charging a fee (the $10 in interest). That $10 is part of GDP. It's the value of a service produced. If I simply loan you $100 and you pay back $110 every month, that situation can go on indefinitely without increasing GDP. The problem arises when I want to reinvest the interest and make it compound. If I loan out $110 the second time, then the interest is $11. If I can do that, the revenues of my money rental business have grown by 10%. But that can only happen if somebody else's money rental business drops by the equivalent amount. Total GDP can't grow, so it's a zero sum game. The only way I can grow is for somebody else to shrink. The only way I can make my money compound is to gradually encroach on the turf of other lenders and put them out of business.

So let's suppose there are two money lenders A and B. They both have $110 to reinvest due to a previous loan of $100 at 10%. Suppose that A steals 10% of B's business, and can now loan all of his $110 ($100 to his previous customer and $10 to B's customer). B now can only loan out $90 and will have $20 in idle money left over, which he can't lend out. (Of course, he might be able to steal C's business etc., but that chain of stealing has to come to end at some point, so let's just assume it ends at B.) On the other hand, if neither A nor B steals from each other, then they both have $110 to loan, even though the demand for loans is only $200 total. So $20 of idle money is left over again. It would seem that idle money which cannot earn interest must necessarily build up in a system where GDP is constant.

[nero]

Jeffvail,

I agree that in a deflationary cycle there might be a massive exit to cash as peoples expectations for growth disappear. However there is a solution to that: the printing press. In an inflationary environment even if you have negative real interest rates for high credit rating debtors there will still be a market for the debt because as long as the nominal interest rate is positive the return is better than holding cash.

One thing I'm curious about is how investors risk taking will change as the expectations for the economy change. Will they chase the real return by taking on riskier debt?

[MonteQuest]

$this->bbcode_second_pass_quote('Aaron', 'B')ecause without growth there is no incentive to invest.

Why invest money with no hope of growth?

When investments (read loans) fall...

Well...

The rest should be obvious.

[MonteQuest]

$this->bbcode_second_pass_quote('nero', 'I') agree that in a deflationary cycle there might be a massive exit to cash as peoples expectations for growth disappear. However there is a solution to that: the printing press.

[EnergySpin]

Hello everyone,
Actually both (1) and (2) will be completely irrelevant in an energy based current along the lines of the Technocratic Movement of the 30s.
A) Delegate all production to machines (and it makes sense to build them as efficiently and productive as possible)
B) Fix (either voluntarily i.e. people deciding to stop raping the global ecosystem or involuntarily i.e. due to energy infrastructure etc) the material basis of the financial system
C) Distribute personalised energy based money credit to the population that cannot be stored in a bank further than a 2-3 year time orizon
D) Let them spend it individually or in groups (aka TOKAMAK-ITER maniacs)
and forget about monetary gain and other distortions.
The production system could employ people if they really want to (or have to i.e. health industry) but do not tie employment to income. Control of the system should rest with the educated people (I find the original Technocratic system undemocratic) and birth control should be freely available. Such a financial system can only grow if
- population decreases
- productivity increases (with material flow of the economy constant)
- material flow increases
An interesting observation is that barter economies are inherently energy based since an assessment of the energy (i.e. due to physical processes/ person labor required to produce a particular object) is implicitly made by the two people engaging in an exchange within such a system. In addition, the notion of interest is virtually inexistent and even promises to deliver in the future goods that one does not possess today are likely to be accepted in a deal only if the future is not a distant one.
I find that the Technocratic proposal could vastly improve such a system ... the question is where to get the energy to build such a machine-based system. Maybe SUVs have to die ... to keep computers and networks around

[JohnDenver]

$this->bbcode_second_pass_quote('EnergySpin', 'H')ello everyone,
Actually both (1) and (2) will be completely irrelevant in an energy based current along the lines of the Technocratic Movement of the 30s.

[EnergySpin]

Yes I forgot to mention that Hubbert was a prominent member of the technocratic movement along with other promininent scientists and engineers (I believe that Deming the mathematician who revolutionized process control in the 40s was also a member).
In fact Hubbert 's speach in 1974 on the Energy Subcomittee about the nature of Growth can be found at their website

http://www.technocracy.org/?p=/document ... ert-growth

There are some problems with the technocratic movement i.e. they limited their scope to North America only (and have proclaimed that they do not care about the rest of the planet). Obviously that made sense in the 30s when NA was still a net exporter of goods and still had plenty of natural resources but would not work out well today (the problems we are facing are GLOBAL), and in fact there is no reason why an energy based accounting system cannot be expanded worldwide .
The bottom up organization of technates and energy based currencies offer other advantages as well:
1) preserve national or group identity
2) share goods and mitigitate dangers
3) relocalize production (obviously if energy is factored in the price of a given product, anything that has to travel around the globe will be horribly expensive
4) energy cannot flow across continents (unless it is of the liquid/gas variety) , hence an energy based currency will probably re-align the foreign trade situation along the Dale Environmental Economics lines which prohibit flow of capital and only allow goods to flow across countries
5) Provide an incentive to people to self control overpopulation
6) Allow the democratic process to apply to how goods are to be distributed and to what effect. For example adoption of these concepts in a global scale make things like the Uppsala protocol for oil depletion be a mere consequence of the underlying principles of societal organization
7) Render things like managers/auditors/paper pusher's a thing of the past (I work in the health sector, and I am constantly amazed by the % of health care cost that goes to useless things like that. It is amazing that out of the 2000-2500$ that an MRI scan is charged only 100-150$ go the people who do the MRI (technicians) and another 200$ to the people who read that ... everything else is gobbled by parasites)

However, the question is how to apply the same principles in situations of energy scarcity (like the one we are about to face) because
a)people tend to react like blood thirsty maniacs (I have friends that have said that they do not care what needs to be done, as long as gasoline is cheap)
b) technocracy was originally conceived in an era of abundace.
In any case
1) I am not affiliated by the technocratists and could not even participate in the movement in the current form(I live in NA but am a citizen of the EU member states)
2) The principles need to be extended to allow ecological concerns to be addressed (otherwise the whole planet could end up looking as wasteland)

[Rochester]

$this->bbcode_second_pass_quote('', 'A') growing economy is not necessary to pay exponentially growing compound interest if inflation is high enough. You can just pay off the interest by printing up more money. This is what would happen if you put $1000 into a savings account paying %10, while the rate of inflation was %10. You'd get your interest payment alright, but it wouldn't be worth anything due to the inflation.