What's holding back the world economy?
theguardian.com
theguardian.com
Basically, many people and entities have financed growth by massive debt. The US is now comparatively better and has reduced QE and increased interest rates. This has caused commodities to plunge. (minus the fear-buying precious metals) A strong US dollar and faltering global markets have caused commodities to sink. Oil producers continue to produce in hopes that they can continue to finance their debt obligations.
In my opinion, the economic outlook will get worse-- especially in domestic and international markets where shale oil and tar sand oil is produced. These resources are much more expensive to extract and refine than traditional oil wells. Once these economies fall further (corporate and personal forclosures), the economic outlook will worsen.
The biggest problem is investing in expensive resources, financed by large debts. This is why companies are socking money away at astounding rates- debt is crippling the global economy.
There is no money without an equal amount of debt. All debt created can be repaid by the money created in the same process.
One person saving money is equal to another person struggling to pay back debt. One person taking on debt is equal to another person being able to save money.
Is debt crippling the global economy? No, debt is running the global economy. It's the saving of money which dries up the lake of debt repayment. The problem is that those who can take on debt have money and those who need money have maxxed out their credit and cannot take on more debt. In total, we have a lack of new debt (=fresh money).
What I can agree on is that there are different qualities of creditors - yet, the money they generate is traded equally.
Corporations have largely stopped taking on more debt. Usually lowered interest rates have helped here to stimulate growth by lowering the interest rate below the expected profits. But today corporations like Microsoft, Google and Apple, for example do not take on more debt. Instead, they hoard money.
Instead of stimulating growth by giving people more money e.g. through increasing the wages and forcing the companies to take on debt, we're doing it ass-backwards. The population goes into debt, student debt, credit card debt, consumption credit in addition to housing debt to prop up consumation. You are right. That method is not good and it stops working at some point.
You are wrong though, in that debt as such is what brought us into this situation. It is the wrong kind of debt growth which is being stimulated.
The government is already stepping in by taking on large sums of debt in order to keep the system running. How that will turn out is to be debated.
What I personally think is that the whole debt-money creation is just a broken, arbitrary system that the world outgrew (Just like we outgrew classical mechanics - it was sufficient and then turned out to be incomplete)
How it will turn out? Painfully, because the assumptions are out of touch with reality. (cough Alan Greenspan cough)
More worthless money will be pushed in, rates will remain stuck (or go down!), more "busywork" nth order financial derivatives, the can will be a little further down the road.
Up until there will be no way to pretend anymore (what one can't hide away at some point: http://www.infrastructurereportcard.org/)
The problem is utilized industrial capacity has been falling for decades. Companies are not employing the invested capital and machinery they already own at anywhere near full capacity. So why invest more?
Even with capital utilization rates falling for decades, there is still overproduction - or underconsumption, depending on the angle. Corporations are flush with cash reserves. Naval Ravikant turned down a $600 million blank check from Chinese investors. Meanwhile wages have been moribund for a long time. Inflation-adjusted hourly wages were higher in the U.S. 45 years ago. Real hourly wages aee lower, yet more capital equipment exists and productivity has risen. It is trying to sell more to people who have less.
The economic report of the president (US) has US industrial capacity utilization rates- over 87% from 1967 to 1969. By 2011 it was below 77%. (table b54 of the economic report of the president 2013).
https://research.stlouisfed.org/fred2/series/INDPRO
Inflation-adjusted hourly compensation has never been higher.
https://research.stlouisfed.org/fred2/series/COMPNFB
People are not underconsuming. Per-capita consumption is going up: https://research.stlouisfed.org/fred2/graph/?g=3oWn
Why are so many people making up random facts and posting them in this thread? I don't understand this.
that is what "more capital equipment exists" means. Its utilization of 87%+ in the late 1960s to below 77% in 2011 is the problem.
> inflation-adjusted hourly compensation has never been higher
The chart you refer to is very obviously NOT inflation adjusted. Adjusted for inflation it was higher in the early 1970s - it has fallen over 45 years.
> making up random facts
I am citing data correctly. You are pointing to charts showing hourly wages are 10 times what they were 50 years ago and saying they are not adjusted for inflation.
https://research.stlouisfed.org/fred2/series/COMPRNFB
My mistake, thanks for the correction. It's still going up.
The claims that wages have not risen are based entirely on cherry-picked data, carefully choosing endpoints, and ignoring non-wage compensation as well as the fact that CPI wildly overstates inflation in the long run [1].
Also, the graph I provided is industrial production, which is going up. You might be right that capacity grew faster than production (cite?), but production has also gone up.
[1] See, e.g. Boskin commission, the lack of hedonic adjustments in healthcare, and the variable basket of goods used in chained CPI which prevents it from actually being a long term inflation measure. (I.e., inflation from 1970->2015 should only include goods invented in 1970, but chained CPI adds new goods yearly in order to accurately measure 1983->1984 inflation.)
https://research.stlouisfed.org/fred2/series/COMPRNFB
(note the additional R before complaining it is the same link)
Of course it is not as dramatic as the rise in compensation.
One problem with debt is the long-term effects caused by the method in which much modern debt is created: I.e the bank creates capital out of 'thin air' and it costs them nothing other than some liability for the value of that debt, and conversely when money is paid back to the bank, that money (minus a small cut) is effectively destroyed. Usually you can only pay back that money by receiving money from someone else who has gone into debt in order to raise that capital.
At the macro level, this means that effectively all money is debt. It is very hard (some would say impossible) to make any sizable reduction in levels of debt without causing a recession.
The pessimist in me has some sympathy for the viewpoint that bailing out the banks in 2008-2009 only served to delay an inevitable and long overdue correction in the global economy.
"What happened" is the Great Depression in the interwar period. Some say various nations "cheated" on the gold standard - rigged conversion rates to hoard gold.
In principle all debt could be repaid - BUT only if nobody saves money. That money which is saved cannot be used to repay debt. It is this money which requires new debt to pay back old debt.
Some entity (the state) needs to ensure that nobody saves a lot of money in order for the system to work long term.
A weak state would rather take on new debt on its own instead of taking the money out of the hands of its citizens. This creates a temporary relief but in the long run it creates an increasing amount of money saved which in turn worsens the problems.
Monetary debt is one thing, but technical debt is what is actually killing us, in my view.
I think there's something else going on that hasn't really been considered or identified, and it's that cycles of adoption and innovation now overlap so tightly with ever increasing levels of technical prerequisites to adopt that we are now in a state that by the point a new technology or new means of efficiency is adopted, it is obsolete.
I've been thinking more about this over the last months as a result of watching governmental IT projects where they are adopting unsupported software, as when they started their projects a decade or more ago, it was new.
That doesn't seem so bad on the surface of things, but it leads to a few outcomes:
Incumbent organisations tend to be the ones funding R&D, producing innovation. Massive incumbent organisations can take advantage of their own innovations as they have sufficient mass to sustain a lengthy adoption cycle, and can afford the capital outlay. This builds vast multi-sector monopolies which self-sustain and block out competition through sheer inertia. As time progresses the incentives to innovate decrease for these guys, as they own the entire market, so need not compete on utility, nor even price.
Smaller incumbent organisations, however, end up saddled with technical debt, and the only way out for them is tabula rasa - i.e. to write off sunk costs, and start with new tech - or go bust.
New organisations start with a blank slate, and can thrive for a while - but unless they have a strong strategy for stemming technical debt, they end up as a "smaller incumbent organisation".
This boom-bust cycle of profitability followed by obsolescence accelerates as the evolution of new technology accelerates, and the overheads and complexity of adoption increase. Complexity increases as the sum total of moving parts in society and technology always grows, and overheads increase as more advanced technologies tend to require a larger capital outlay to implement.
Where this leads is ultimately to a deadlock type situation, where innovation ceases to be profitable as adoption is too slow to allow a new tech to flourish before it is superseded, and ultimately stagnation, and collapse.
So... if I had to point to one thing that could make a big difference to how the global economy functions, it would be a complete revamp of patent law around the globe. I'd love to also think that we could move away from the idea that Everyone Must Work, and actually start to realise the benefits of the vastly increased efficiencies of the last several centuries, but the ideology is so entrenched at this point that the only thing likely to allow a change will be outright collapse of our current system of the world.
Since the ordinary person can't afford jack shit and already exceeded all levels of debt he/she can take nobody buys anything besides bare necessities. This is what you get if productivity rises sky high over decades and at the same time wages stagnate.
"Management best practice is to 'cut fast and deep' at the start of a recession"
"We're really surprised how quickly demand has dropped"
I wasn't daft enough to point out to the CxO who passed this message along to us that if everyone is doing the first of these then surely the second shouldn't come as a surprise?
[NB this wasn't a criticism of the CEO implementing a 'cut deep and cut fast' policy - he was exceptionally good at his job, just surprise that given he was so obviously extremely bright that he didn't make the obvious inference.]
This is the reason why the state takes on more and more debt to cover the monetary failings (in the macro-sense) of the private industry.
You seem to be wildly misunderstanding Keynesian economics - the entire purpose of stimulating demand is to create inflation and lower real wages.
Further, all your premises are definitively false in the US. Debt levels are falling, and aggregate demand (i.e. NGDP) has been steadily rising.
https://research.stlouisfed.org/fred2/series/GDP
http://www.businessinsider.com/deutsche-bank-lavorgna-americ...
https://research.stlouisfed.org/fred2/series/HDTGPDUSQ163N
https://research.stlouisfed.org/fred2/series/TOTDTEUSQ163N
Globally GDP also is rising: https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&...
This is what you get if productivity rises sky high over decades and at the same time wages stagnate.
Employee compensation has been rising, it's just shifted from taxable wages to untaxed benefits.
https://research.stlouisfed.org/fred2/series/ECIALLCIV
Why don't you do even a tiny bit of research before posting? Literally every word of your post is false.
So what to do? Buy gold?
Hindsight even proved it.
Problem is, politicians don't have the courage. Bankers tell them if the change the system, there'll be an economic crisis.
Well, I'd say yes.
I'll look for the definition of moral obligation for politicians. Hoping that there is one.
1. Mainstream (maybe lobbied) view that growth is constant and without it we're all going to die. 2. Incurred debt trying to achieve #1
Although it's possible to obtain hemp fiber and oil now it's price is artifically high because hemp farming is restricted on most of the surface area of earth. This artifically high price pevents this plant from being used in building construction and consumer plastics which keeps us locked into a petrol economy.
In addition there is a vast amount of rough terrain in US and elsewhere which is suitable for hemp production but not for agricultural crops. This land currently sits unused which it could be absorbing co2 at a high rate while contributing to the global economy. Also a reduction in the price of hemp would cause it be used more as the world's primary source of cellulose which would help neturalize the wholesale destruction of biodiversity in both the rainforests and marine environments.
Trying to grow hemp (for hemp oil) on rough terrain won't work - far too expensive given the implications of manual labor.
2. Wheat is not an ideal primary food crop in terms of nutrition for an advanced civilization that has the technology to scale distributed food production of much more nutritious plants. Instead we could scale out verical farming, aquaponics technology, permaculture, etc. Still I don't believe industrial hemp would effect large scale wheat production. I think that's a misnomer based on calculations centered around the idea of what it would take to replace petrol completely.
You can certainly grow hemp on flat terrain that is not optimal for food crops, but how much can be realistically harvested on truly rough terrain is debateable. It helps to remember that since you don't need insect repellent or petro-fertilizers it's signficantly easier to grow. I estimate that it could at least double the amount of land that can be used for productive farming in the US, and another thing is that hemp actually helps add nitrogen back into the soil.. in other words it's an excellent "cover crop". In addition it only needs to be rotated once every 70 years.
There should also be a fix for the "1% of the population having more than 60% of total wealth" problem.
Not sure if Stiglitz is aware of these points because he doesn't address any of them. Or it's possible I'm misunderstanding something, Stiglitz' article is very complex and is clearly intended for economists, I'm not sure why it's appearing in the Guardian.
http://blogmaverick.com/2016/02/04/the-pre-cognitive-anti-tr...
This lack of opportunity is reflected in the very low interest rates available today combined with low growth. This technological stagnation is reflected in the massive funding of SV-area tech companies, which are shitty opportunities for a return on investment in a world full of even shittier opportunities.
Investors are desperate for a return anywhere. That it's so hard to find a good ROI is against indicative of technological development petering out. After 300 years, we've reached the end of super-Malthusian growth, and we're going to return, hopefully peacefully, to the normal steady-state conditions of human existence, albeit at a higher baseline technology level.
There are no major advances left. Physics can predict everything except the most extreme conditions at the largest and smallest scales, and there are no more bugs in the universe to exploit. Computing will see incremental improvements, but all the really hard problems have already been solved or proved impossible. Quantum computing will make some problems a square-root function easier, but won't change anything. Biotechnology may help us live longer, but research that might change the human condition --- germ-line genomic editing --- has _already_ been banned.
Sure, you might argue, we're still going through the technology revolution. But that's petering out. Cell phone sales growth slipped into the single digits last year. Tablets are dead. Desktop sales have been declining forever. The commercialization of technology we've already developed --- e.g., self-driving cars, automated personal assistants, and high-efficiency power generation --- will decrease costs by some constant factor, but also put a lot of people out of work.
It's remarkably, really, that the laws of the universe are such that humanity was able to elevate itself from ape to thinking ape, and then from thinking ape to calculating machine. It's remarkable that we can compute. Why should we expect the universe to be further more compliant?
I think the problem is elsewhere. There's noone doing the advancing. People like myself (smart, educated, ambitious, technically-oriented) are way better of doing the unproductive things (finance or ad-tech) than the productive (research). And by "way better" I mean it doesn't even compare! Academia is fucked-up as well (chasing it's proverbial tail by encouraging young researchers to publish, not to, you know, actually research).
Simply said, everyone is looking to invest capital in equity, but nobody actually wants to pay people to do the work. Give me a living wage (i.e. not 40k when the tiny apartment I live in costs 600k) and freedom to decide the direction I'll go in, and I'll gladly research "useful stuff". Otherwise, I'd rather chase my own interest by doing the "useless" (but highly-paid) stuff.
Everyone I know wants to do research. No one wants to do it in academia, and no one wants to live below poverty levels.
The Star Trek economy is here, and it's here now. Basic income, flat-tax and publicly funded research infrastructure (e.g. Bell Labs) is the way forward. Asset bubbles, financial crookery, and trickle up economics are the way of the past.
Time to choose now. Sadly, as a scientist, I know this decision has already been made. Human greed is insatiable, and the top 0.1% won't be satisfied till they're the top 0.01%, and then the 0.001%, and then...
I have to wonder how much of this phenomenon is due to genuine advances just being harder to come by. When others have already filled in the color between the lines in your field except for tiny bits in the corners here and there, what's left to do but fudge experimental results, salami-slice what genuinely novel results you do see, and take advantage of publication bias?
Maybe researchers wouldn't need to resort to these shenanigans if we weren't running out of things to discover.
Renewable energy Social housing Aerospace AI Quantum computing Transport infrastructure Novel Internet distribution/5G SETI Biotech Fusion power Next-generation operating systems
There's been an uptick in momentum in some of these over the last few years, but they're easily at least a decade behind where they could have been if money had been dropped on them from a helicopter instead of being wasted on (say) invading Afghanistan, and keeping banks fed and watered with QE.
The real problem is Wall St. So many PhDs moved there when they could have been doing useful, original research. And Wall St cannibalised academia in other ways, pressuring universities to offer stupendous ROI at the expense of genuine education and research, and warping what used to be a productive culture into yet another hyper-competitive sweat shop.
Financialisation has a social reverse Midas effect - it looks like it's producing gold in the short term, but over longer scales everything it touches turns to shrivelled crap.
and this sentence "The world economy is being held back by declining returns on investment in science and technology."
are not the same that "The primary cause of the slowdown is that there's just not much more to _do_."
There is a big different between "there are not easy profits in perspective" and "there is nothing more to do".
There are a lot of things to do. A lot of people is living in need and wherever you look you can see possible improvements in education, infrastructure, investigation, etc.
The fact that those things don't have a return of 15% shouldn't be a justification for, we, as a society, not doing them.
Isn't it, though? Doesn't ROI define what it means for something to be "worth doing"? If you think we should be doing X and X is not currently profitable, what's effective isn't expressing disappointment that X isn't being done. What's effective is changing the incentive structure so that X is profitable.
By the way, it's not a 15% return that's necessary. Right now, the current reserve on US federal bonds is 2.56% over 30 years. Investors are buying these things like crazy. It's really fucking sad that our society is so hard-pressed for things to do that 2.56% over 30 years looks like a great opportunity.
No, it doesn't. That was my point.
How do we know they are properly allocated? because in other case, the market would be allocating them in another way.
Don't you think there is a circular reasoning there somewhere?
Even when the economy is under-performing, and there are obviously underutilized resources, we have to accept it because there is not profit in perspective to make. This is the logic that, for instance, pursue austerity in Europe instead of counter-cyclic policies that would be the logic thing to do.
What about using markets as a tool for accomplish society goals instead of as the way to define the goals? What about defining goals using that other tool we have: democracy.
As a simple and relevant example, would you rather invest in a company that has a 10% chance at a 1000% return (but otherwise returns 0%), or take the 2.56% bond?
The EV of the first option is 100% return (with high risk), whereas the other is 231% compounded (guaranteed).
- converting the economy to carbon neutral ( one "gigfactory" is getting build, but we could do with about 100) - curing cancer and heart disease (not to mention all the other diseases) - curing old age - colonizing the moon/Mars - creating a general purpose artificial intelligence... etc.
Improved transport and communications for a start have had, and will continue to have, massive impacts on both labour and assets by facilitating a more distributed workforce and changing the value of real estate (currently 60% of global assets). Those changes will definitely decrease the ROI of real estate investment, but don't necessarily reflect a decrease in production.
Meanwhile, disruptive technologies challenge traditional protected market sectors as regulatory barriers fail to catch-up with new threats to existing businesses (e.g. Uber, Airbnb). Again, those changes will decrease ROI in traditional sectors, and due to efficiencies in the new model the overall money spent in these sectors may decrease.
In effect we could be revisiting the arguments around Marx's "tendency of the rate of profit to fall" (https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...).
The flip side to these impacts is that the rapid change to the economy hasn't yet been fully appreciated or addressed by current government policy.
For example, improvements in health technology have extended the age to which the Baby Boomer generation has been able to remain in the workforce, as well as overall life expectancy, placing far greater strain on social services and health planning than expected.
At the same time, "entry" jobs have far greater expectations than 30 years ago as automation has reduced the need for unskilled/entry labour, while increasing the demand for highly-skilled specialisations. This has delayed the entry of Gen Y into the workplace (with many workplaces unwilling to invest in training entry-level workers and at best offering unpaid internships) which has meant far reduced consumption and tax revenue than might otherwise be expected demographically. This has created a bit of a "chicken and egg" problem as reduced consumption doesn't justify increased hiring, but the lack of jobs prevents consumption (and experience required to add greater wealth).
Finally, effects on the value of labour have increased inequality (for better or worse as the pg essay controversy demonstrates). In effect, if there is less value for unskilled labour there is the potential for increased demand on social services (see the whole Basic Income debate). Meanwhile the scarcity of high-demand labour increases the wealth accumulated by the educated and talented. How this plays out over time is an interesting question.
This problem has been exacerbated in recent times by monetary policy that has seen far more money flow into the economy only to be captured by well-placed rent-seekers (see Occupy Wall Street etc.).
Add in the historical increases in global debt and recent geopolitical pressure on energy production and you have a perfect recipe for current economic troubles.