Saturday, June 01, 2013
The End of Economic Growth?
Perpetual or infinite growth is the economic paradigm in most of the world. Nowhere is this more evident than on Wall St., where companies are expected to consistently grow their revenues and profits year after year, even quarter after quarter.
In fact, a company can show growth, but if that growth is deemed inadequate — meaning it misses estimates — the company will be punished by Wall St.
Perpetual growth isn't just expected, it is mandated. But while infinite growth has long been taken for granted, it seems that we are now living in a time where it will no longer be the norm.
As a nation's population grows, its economy also has to grow in order to support all of the new workers entering the workforce. The US economy, for example, needs to grow at least 2.5 percent annually just to keep up with its population growth. But that kind of growth is becoming harder to rely on. As I reported previously, the US economy has been slowing for many years.
This trend has gotten the attention of some respected economists who have some sobering warnings for us.
The IMF projects that global growth “will slip below 2% in 2013.” Yet, through much of history, that sort of growth would be cause for celebration.
In August of 2012, economist Richard Gordon published a disturbing research study, titled, “Is U.S. Economic Growth Over?” In it, he notes that for the five centuries leading to the 18th century, the per capita growth rate was only 0.2 percent annually.
Then, during the Industrial Revolution, the U.S. growth rate shot up to 2.5 percent through 1930. A string of innovations, such as the steam engine, railroads and electricity drove that growth. But “it’s been downhill since 1950,” says Grodon, with growth averaging 2.1 percent.
On this trajectory, Gordon warns, the American economy will be back where it started by 2100, at annual growth of just 0.2 percent.
Given that the current economic, political and social systems are predicated on infinite economic expansion, the mere suggestion of this is unacceptable to our national leaders. It doesn't fit within the framework of how we view ourselves as a great nation, and publicly accepting this certainly won't help any politician win an election. That's because many Americans will similarly refuse to accept this, even when it proves to be true.
Some truths are just too hard and too bitter.
Gordon found that prior to 1750 there was little or no economic growth (as measured by increases in gross domestic product per capita).
It took approximately five centuries (from 1300 to 1800) for the standard of living to double in terms of income per capita. Between 1800 and 1900, it doubled again. The 20th Century saw rapid improvements in living standards, which increased by between five or six times. Living standards doubled between 1929 and 1957 (28 years) and again between 1957 and 1988 (31 years).
Gordon argues that the rapid advancement of living standards achieved since 1750 was driven by three distinct phases of the Industrial Revolution: 1.) steam engines; 2.) electricity, internal combustion engines, modern communication, entertainment, petroleum and chemical and 3.) computing.
However, these means to growth have either reached, or will soon reach, their limits. And Gordon isn't the only one who recognizes this. The slowdown is not only underway, it may be picking up a head of steam that will soon make annual growth of even 1 percent hard to come by.
Historically, from 1948 through 2013, the United States annual GDP growth rate averaged 3.21 percent.
Yet, over the last two decades, as with many other developed nations, its growth rates have been decreasing. In the 1950’s and 60’s the average growth rate was above 4 percent. In the 70’s and 80’s it dropped to around 3 percent. And in the last ten years, the average rate has been below 2 percent.
Famed investment strategist Jeremy Grantham, founder and chief investment strategist for the $100 billion asset management firm GMO — one of the largest such firms in the world — provided a recent warning to his clients: America’s long-term 3.4 percent annual GDP growth is a thing of the past.
In a recent Quarterly Letter “On Road to Zero Growth,” Grantham issued the following stark forecast:
“Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%,” writes Grantham.
"Capitalism’s greatest weakness is its absolute inability to process the finiteness of resources and the mathematical impossibility of maintaining rapid growth in physical output,” Grantham states.
"Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal," says Grantham.
The “bottom line for U.S. real growth,” he says, “is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.”
The problem comes down to the rapid depletion of our natural resources. Once we dig up and utilize our resources, there's no getting them back. Most of our key resources are finite and non-renewable. Yet, they have been, and will continue to be, vital to our economic growth.
Many economists and political leaders have ignored this problem because their focus is solely on the short term. Most projections are done on an annual, or even quarterly, basis. That shortsightedness isn't helpful in identifying longer term problems or crises.
Unfortunately, the rising cost of resources is often read as a boost to GDP. For example, drilling a deeper, more complicated well that requires more steel, more energy and more manpower is reflected as a boost to GDP. However, utilizing more resources and manpower to extract resources isn't really adding to GDP. It's misleading.
The reality is that the rising cost of resources is hindering real economic growth all over the world.
"I’ve been obsessing about the shift in resource prices that started 10 years ago, which is reducing the growth rate of every [country]," says Grantham. "We calculated the percentage of global GDP that was going to resources, and it declined beautifully, forever, until 2002, when it hit some very low number like 9 percent. The price of pretty well everything has doubled and tripled since then. This has taken a bite of three points out of global GDP."
This is a major shift since typical commodity prices dropped by about 70 percent during the 20th Century, according to Grantham. It was easy to get rich and grow an economy in that environment. However, that is no longer the case. The entire 100-year decline in commodity prices was reversed from 2002 to 2008. That's right; in just six short years, a century of resource declines were completely reversed.
The era of cheap resources is over, and that is a game-changer. The world is bigger today and there are more people than ever before competing for the same limited resources. The developing economies of China and India, alone, are home to more than a third of the earth's population.
For example, oil was $25 per barrel in 2000. It is now trading at roughly $100 per barrel. This has raised the price of everything else in the US and global economies. The extraction of all other resources is wholly reliant on oil, which makes them more expensive as oil becomes more expensive. In fact, resource prices have been rising faster than the global growth rate.
Under the perpetual-growth paradigm, oil — the most critical of commodities — is a requisite. But given that oil is a finite resource, that is an inherent limitation to growth.
In 2012, the Worldwatch Institute published a report titled, “Planet’s Tug-of-War Between Carrying Capacity and Rising Demand: Can We Keep This Up?”
The short answer is no. The planet’s “shrinking resources” cannot satisfy the exploding population’s “growing demand for food and energy,” stated the report's authors.
Back during the Great Depression the world had 3 billion people. Twelve years ago it had doubled to 6 billion. Now it’s 7 billion, with the United Nations predicting 10 billion by 2050.
Yes, by 2050, another 3 billion people will be added to the planet. This means that the world’s farmers, ranchers, and fishers must find a way to produce more food in the next 37 years than they have in all of human history. That will prove daunting since farmland is decreasing instead of increasing.
In 1960 there were 1.1 acres of arable farmland per capita globally, according to data from the United Nations. By 2000 that had fallen to 0.6 acre. Yet, during that time, the global population doubled from 3 billion to more than 6 billion. In other words, productive farm land and the human population are moving in the wrong directions.
"Even if we could produce enough food globally to feed everyone satisfactorily, the continued steady rise in the cost of inputs will mean increasing numbers will not be able to afford the food we produce,” says Grantham.
The world is facing an impending shortage of phosphorous, which is primarily used to make fertilizer. Plants remove phosphorous from the soil, so using fertilizer replenishes what is lost.
The trouble is, some scientists now believe that "peak phosphorous" will occur in 30 years, leading to a global shortage. What's particularly troubling is that there is no synthetic alternative to phosphorous.
"At current rates, reserves will be depleted in the next 50 to 100 years," warned a 2008 article in the Sunday Times.
"It`s an element. You can`t make it," Grantham cautions. "You can`t substitute for it and no living thing -- humans, animals, vegetables, everything needs phosphorous to grow. You can`t grow anything without it and we are mining it in what we call big AG, big agriculture. It`s a finite resource. Now that should make you pretty scared."
In the absence of phosphorous, there is no means to feed the current global population of 7 billion, much less than 9-10 billion humans set to inhabit this planet by mid-century.
"You can`t substitute for very few things in this world. You can`t substitute for water, not really for soil, not potassium and not phosphorus," says Grantham.
Moreover, mining phosphorous requires enormous amounts of energy, which will only add to future costs.
All of this will act as a drag on future economic growth.
Many people take economic growth for granted and expect it to continue indefinitely. But, as Gordon and Grantham have noted, in historical terms, economic growth is a relatively recent phenomenon.
Governments cannot simply conjure economic growth at will. If that were the case, there would be no business cycle. The economy would never slowdown. It would just continually grow instead of being plagued by regular recessions.
Massive government deficits are not leading to rapid growth and neither is the relentless money-printing of central banks. The days of financially engineered growth are over.
The reality is that growth is driven by an ever-increasing amount of debt. By 2008, $4 to $5 of debt was required to create $1 of growth. Fiat currencies are being continually devalued and we have finally reached the limits of the debt super cycle.
As finance expert and author Satyajit Das puts it, "If government deficit spending, low interest rates and policies to supply unlimited amounts of cash to the financial system were universal economic cures, then Japan’s economic problems would have been solved many years ago."
As Europe is painfully learning, reducing debt simultaneously reduces demand and locks an economy into a negative spiral of ever lower growth.
"We have been living in an unsustainable world of Ponzi-like prosperity where the wealth was based on either borrowing from or pushing problems into the future," says Das.
Going forward, economic growth will be much lower than that which we, our parents and grandparents became accustomed to.
Grantham warns that from the late 1900s until the early 1980s “the trend for U.S. GDP growth was up 3.4% a year for a full hundred years,” powering the American Dream. But after 1980, under Reaganomics and the new conservative capitalism, “the trend began to slip,” warns Grantham.
In other words, trickle down economics never worked out as promised.
Quite remarkably, after a century of high-growth prosperity, our GDP growth dropped “by over 1.5% from its peak in the 1960s and nearly 1% from the average of the last 30 years.”
Looking ahead at long-term macro-trends, “The U.S. GDP growth rate that we have become accustomed to for over a hundred years” is “not going back to the glory days of the U.S. GDP growth.”
Despite all the optimistic projections from in-house economists at Wall Street banks that are breathlessly reported in the mainstream media, “It is gone forever.”
Living in denial will only make the ultimate reality more bitter and more challenging. We're wasting precious time acting as if the last 100 years were an indicator of the next 100 years, when it clearly was not.
Our alleged leadership is ignoring our accelerating GDP decline. Grantham puts it this way: “Most business people (and the Fed) assume that economic growth will recover to its old rates.”
"Clearly, Bernanke seems to believe [growth] will go back to 3 percent — the good old days," Grantham laments.
But looking ahead to 2050, Grantham warns, “GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”
The evidence is clear: the American economy is in a long-term decline. That's a bitter pill.
Unless we shift to a model of sustainability driven by less consumption, more conservation. efficiency and renewables, we will continue running headlong into an eventual collapse.
History is littered with collapsed civilizations that lived beyond their means and exhausted their natural resources.
We may be no different.