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« What is a Smart Species Like Us Doing in a Predicament Like This? | Main | The Day Job Calls »

February 13, 2012


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George, "health care" and war spending have made up all of the net incremental growth of nominal GDP since 9/11. Had the aforementioned sectors grown at the avg. trend GDP during the period instead of TWICE the rate, the US economy would be about 10% smaller (all else equal).

The avg. annualized trend rate of real GDP since '00-'01 has been halved from the long-term avg., reducing growth by 16% from what otherwise would have occurred had the long-term trend continued. At this post-'00 compounded trend rate, the US will have lost real GDP growth of 30% from the long-term trend by '20.

Looking at the private GDP (GDP less all gov't spending, including personal transfers) per capita after price effects, the avg. trend rate since '00-'01 is actually negative; that is, the US private sector per capita has not grown in more than a decade.

As for 8-12% return on assets, this is a function of the "money illusion" effects of compounding debt-money growth and monetizing and leveraging place value land rents, not real wealth creation.

Over the course of a secular bull and successive secular bear market for stock prices, historically all price appreciation gains to the S&P 500 are wiped out after inflation by the time the secular bear market resolves, leaving only the avg. compounding dividend for the so-called "investor" over the course of a secular bear market. But the avg. dividend today on the S&P 500 is barely 2%, which is negative after inflation, taxes, and fees.

Moreover, over the long run, profits track very closely the rate of GDP, which has been 3.6%/yr. since '00 vs. 6-7% long term. Corporate profits after tax as a share of GDP today are at a record level going back to '07 and 1929. The 10-yr. avg. P/E adjusted for avg. peak earnings for the S&P 500 is now at the third highest on record, below the levels of '00 and '07 and matching the level of 1929. With stock values this high, there has never been a positive real 3-, 5-, 10-, or 20-yr. in 141 years of data.

Thus, not only will returns to equities not be 8-12%, they will most likely be negative. Add a negative return from stocks and virtually a 0% or negative real total returns to fixed-income securities, and a portfolio of 50% stocks and 50% bonds will be the lowest on record in the years ahead.

Labor returns are now competitive with returns from financial assets; however, with wealth and income concentration at levels of the Gilded Age and the political system utterly captured by the rentier caste seeking returns of 6-10%+, there is no political mechanism for forcing idle captive wealth/savings/investment into recapitalizing labor at labor returns.

Total credit market debt is now $52 trillion or 3 1/2 times GDP and 10 times private wages of which the cumulative compounding interest to term is now larger than the US money supply and approaching the size of GDP. Debt can no longer grow and be serviced from labor and production and allow labor to subsist.

Finally, nearly 50% of US income is received by the top 10% of US households (avg. household income of $150,000/yr. and ~$1,000,000 in net wealth), whereas this group owns 85% of US financial wealth. The top 1% own more financial wealth than the bottom 90%. The top 1% and next 9% receive roughly the same share of US income and own about the same amount of US wealth; therefore, their interests are closely aligned to the financialized economy and the performance of the stock market, even though it is the top 0.1-0.4% who own disproportionately the majority of controlling shares (and collateralized tranches) in the largest 1,000 US corporations.

That the top 10% receive about half of all US income and the top 20% more than 60% of income, the US economy is not only increasingly dependent upon growth of consumer spending, it is the discretionary spending of the top 1-10%, which tends to include luxury imports and the services offered by the next 9%, including legal, tax, financial, medical, real estate, foreign travel, and high-end luxury services, expenditures that have low multiplier effects for the incomes and employment of the bottom 80-90% of US households.

I trust the inferences are obvious.

Phil Henshaw

Great you bring it up, but I'm not sure if you'll like my answer. I think there's an easy way to say how long it will take for the truth to dawn on economists. It'll be around the same time as for the rest of the sciences that represent the natural world as operating by our own flimsy little abstract models rather than complex natural processes.

I was floored a couple decades ago, when I discovered that the ecologists have the very same problem as economists have, representing ecologies with equations. It happened in the 1920's when all the living systems on earth were turned into equations by science, conceptually so at least.

Science has simply been studying its own models ever since, and not noticing the amazing pattern of holes in the information we use to create our models. They're in the places where the self-organizing parts of the systems we model are located.

Of course, it IS indeed also quite hard to see a “lack of information”, but not impossible. Some day more people may get interested in it. That'll be when it'll dawn on economists that economies are really a kind of living organism, competing for space on a physical planet, not really machines operating in “phase space”.

Anywhere But Here Is Better

Great points George, as always.
I think two literary works are useful guides to what is going on, underneath the hysteria of economic "reporting" and government "action". One is 'The Emperor's New Clothes', which puts it so succinctly, namely that no one inside the inner sanctum is brave enough to tell the truth about the abject failure of economic theory and policy.
The other work is Orwell's 'Nineteen Eighty Four'. This used to be a portent of doom for the exercise of government in our world. Whoever would have believed it would now be used as an instruction manual by Western "democratic" governments!
All the best, Oliver P

Aboc Zed

My undergraduate education was in “economic cybernetics” which was mostly about optimization with heavy emphasis on underlying mathematics and computer science. The “economic” in that name was nowhere near “economics”. When I went for my Masters degree in Economics from a US university I expected to experience some sort of revelation. You cannot believe the depth of my disappointment. I lost all respect for economics and economists. Back then I could not clearly explain why economics is not a science and why economists are simply high priests serving the needs of power elites. Now I can but I would not bother: they have been in la-la land of ideology for so long and even the most “radical” of them cannot let go their religion. It will take complete full stop of the economic machine, the widespread ever-increasing unemployment, the uprising of 99%, the violence and breakdown of government to yank economics profession from their make-belief world into reality. And even then physicists will learn economics faster than economists will learn physics.

Robin Datta

When the economists say "economy" they are referring to the process of conversion of (natural) resources into (usable) products, a process that is predicated (mostly unbeknownst to them) on energy flows. When they speak of economic "growth" (again, mostly unbeknownst to them) this translates into an acceleration of the process of conversion of resources into products.

And when they say “The economy that we had before the recession is gone,” what they are referring to with the term "economy" (yet again, mostly unbeknownst to them) translates into that acceleration

The economy is not gone - not by a long shot. Both the primary economy, the natural resources, and the secondary economy, the usable products still exist. However the cumulative effects of the depredations wrought upon the primary economy since the adoption of agriculture, and magnified untold orders of magnitude since the adoption of fossil fuels (which happens to be another natural resource!) are now having increasingly severe consequences.

It is also to be remembered that the process is linear from resource to product to wastes & trash. Biological ecosystems are sustained by cycles: the wastes at one point are the resources for the next point forming closed loops. With human activities, even renewable resources are depleted faster than their replenishment rates; even the so-called "renewable" energy sources require capture devices made from, and maintained with, non-renewable resources.

The depleting fossil fuels and the shrinking of the energy streams contingent upon them, exacerbated by the depletion of most other natural resources, mandates not just a loss of the acceleration of the conversion process of resource to product, but an inevitable deceleration of the same.

To economists, all this is represented by symbols: pieces of green paper bearing pictures of dead presidents, magnetized particles on hard drives, etc. This is the tertiary economy,  where those limits do not apply in the creation of more symbols.


"And they are not prone to tell audiences truth unless the audience really wants it."

I'm not so sure the MSM know what the truth is or where to find it they wanted to know.

George Mobus


Indeed they are. This bit:

Looking at the private GDP (GDP less all gov't spending, including personal transfers) per capita after price effects, the avg. trend rate since '00-'01 is actually negative; that is, the US private sector per capita has not grown in more than a decade.

seems to be in line with my model's inference that net energy per capita growth started to slow sometime in the 70's and peaked in the 90's. It is now in absolute decline globally, on average.

Thanks for the data points.


I'm still perplexed by your claim about scientists and singular reliance on models. You should attend some of Charlie Hall's lectures in Systems Ecology to hear what he has to say about the use of and reliance on models. And he is only one such scientist who understands the proper role of modeling in the process of moving toward understanding systems. I sometimes think you are not giving people enough credit for understanding this. And it seems, at times, you are constructing a straw man argument in order to suggest a dichotomy (false) that would bolster your side. While I can admit that from an historical perspective (in the early days of modeling) many ecologists may have relied too heavily on models. But I do think this has changed in that field anyway. What you say about economists is more likely true. They started with 'assumed' models that looked good mathematically and allowed tractable solutions to analytical questions. Only lately have some of these started to come into question as with the behavioral and biophysical economics communities poking holes in many of the premises of neoclassical econ.

But I wish you would lighten up on ecologists and people in the other natural sciences. The ones I know and read seem to grasp the incompleteness of their modeled versions of natural systems.



I'm intimately familiar with 1984! Good observation. Thanks for the other reference.



...physicists will learn economics faster than economists will learn physics.
That is already underway. Not just physicists but most of the natural scientific fields are turning their thoughts to problems in economics just because the classical economists seem to be doing such a poor job of it. And, as with any natural phenomenon, we ought to be able to understand economics as well. This is what attracted me to biophysical economics (I might have preferred the name "systems economics" but the subject matter is pretty much the same!)



In my mind, a "growing" economy based on consumption is necessary in order to continue to make "profits" that exceed mere need for maintenance in what built wealth we have already created. Ergo, the reason they have to buy into growth, etc. is to justify greed. The latter being a leftover from our animal origins unbridled by natural negative feedbacks. Could greater sapience down-modulate the tendency toward greedy acquisition? I suspect so. I hope so.



In today's world I would have to agree. The MSM has lost their capacity to independently investigate claims and seem to rely mostly on "officials" to tell them the story, or merely repeat what one of their colleagues has said/written. A recent example of the latter is the number of news stories circulating proposing to explain the run up in gas and oil prices. They look at short-term volatility and want to explain it all with simple answers like speculators or Iran troubles. It absolutely never occurs to them to ask why the base support of oil prices has reached such a high level by historical comparisons ($85-$90/bbl).

But they do what they do because that is what the advertisers want and entertainment is what the masses want.

I would hold politicians to a higher standard for understanding and communicating truth. In theory they are the ones we have elected to deal with the large-scale truths in our interest. But they find themselves in the exact same boat as the MSM. Lobbyists are the same as advertisers. And the people only want to hear a "truth" that gives comfort.


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