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Economics - June 16

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The Return of the Demographic Crisis

Dean Baker, Aljazeera
There is a renewed drumbeat in the media about the coming crisis in both the United States and elsewhere of an aging population. The story goes that we will have too few workers to support a growing population of retirees, scary stuff. While this is probably good grist for the Washington cocktail party circuit, it is not the kind of thing that normal people need take seriously.

The idea that we should be troubled by the prospect of a stagnant or declining population is almost laughable. This is like an overweight person being worried over the fact that they have lost 20 pounds. Under most circumstances this is good news.

At the most basic level, the demography gang is trying to tell us that we are running out of workers. Really? Is that the problem we see in the United States with our 8.2 percent unemployment, in France with 10.0 percent unemployment, or in Spain with an unemployment rate of more than 24.0 percent? Regardless of where we look, the problem is too many workers for too few jobs. If many of these workers suddenly chose to retire what exactly would be the problem?

In principle we should expect this downturn to end at some point, although most major forecasts show the United States and other wealthy countries experiencing excessive unemployment throughout the decade. As long as the economy is suffering from a problem of high unemployment it is difficult to see how the high ratio of retirees to workers is posing a problem.

Dean Baker is a US macroeconomist and co-founder of the Centre for Economic and Policy Research.
(13 June 2012)

Rentier Debt and the Collapse of Debt-Based Finance

Gail Tverberg, Our Finite World
At the Age of Limits conference near Artemis, Pennsylvania on May 25-28, I was asked to speak on rentier debt and the collapse of debt-based finance. This is a somewhat difficult subject, so I decided to talk about the subject more generally–how growing debt fits in with economic growth and growth of energy supplies, and how inability to keep increasing this debt makes any existing tendency toward collapse worse. In this post, I would like to share this presentation with readers.

Let’s start by talking first about a subject fairly far removed debt–the difference between the systems created by nature and systems created by humans. The reason why I bring this difference up is because if we were only dealing with natural systems, there would be no need for debt. It is only when we start dealing with man’s systems that debt becomes an issue.

... It appears to me (based on GDP statistics of Angus Maddison for the last 2000 years) that prior to the use of fossil fuels, most of the growth was simply population growth, as humans were able to increase their food supply. It was not until fossil fuels were added that there was a big increase in standard of living.

Economic growth of the type we have had since the growth in the use of fossil fuels provides many benefits. If the economy is growing fast enough, there is rising demand for homes, so home prices tend to rise. The prices of individual stocks rise, and there are more jobs available, some of which pay well. Governments find that the taxes that they collect rise, even without raising the tax rate. This helps governmental stability.

Slide 11. What is needed for a growth-based system?

How can humans’ system be made to grow? Clearly one thing that is needed is increasing amounts of materials from the natural world; another is a way of transforming these materials into goods and services that people want or need.

A less obvious thing that is needed is a way for people to be able to pay for the goods and services, in advance of the time that they earn the money to buy these things. This is where “rentiers” come into play. Rentiers provide the credit that allows people to buy goods and services that would normally require a large accumulation of wealth.

Debt was first used about 5,000 ago, back in the days of early agriculture, according to David Graeber’s Debt: The First 5,000 Years. At that time, large temples acted as purchasers and sellers of goods and services. People brought goods to the temple to sell, and also bought other goods. The temples kept running tabs. Those who bought more than they sold were in debt.
(8 June 2012)

Eating the Seed Corn? Consumption in the American Economy Since 1929

Steve Roth, Angry Bear
Following up on some work I did a while back (Kuznets Revisited: Investment in the American Economy Since 1929), I got curious about what consumption has looked like in America over the last 80 years.

I’ll give you the results first, as a proportion of output, or GDP, followed by explanation and discussion.

Thinking About Consumption

This all requires some explanation. First off, when I use the word “real” herein, it doesn’t mean “inflation-adjusted.” It means real-world, nonfinancial. In national-account-speak, all consumption and investment spending is about purchases of real goods and services — things that are produced and consumed. Financial “goods” or “assets” — which aren’t/can’t be consumed by humans — aren’t even part of the accounting. (We’re “inside” the NIPAs.)

Next: when you hear economists talk about “consumption,” they’re almost always talking about something somewhat different: consumption spending. Definition: purchases, within a period, of goods and services that are consumed within that same period. (If the period you’re looking at is long enough, everything is consumption. If it’s short enough, everything’s investment — breakfast is an investment in the afternoon’s work. I’ll just talk about one-year periods here to keep things simple.)

But in any period, we’re also consuming stuff that was produced in the past, and so is not included in measures of consumption spending. We’re depleting inventories (these fluctuate up and down over the years, sort of a buffer stock), but more importantly we’re consuming real, long-term productive assets by using them, and through the inevitable decay of time (and obsolescence — a tricky technical accounting issue that I won’t explore here). When you run a drill press you’re using it up. You’re consuming it. It’s even true of living in your house. Absent maintenance and remodels, it eventually becomes a worthless heap of rotting lumber; you’ve consumed its value by living in it.

... Coming back to the graph, we see:

• A denominator-driven spike in these measures during the depression (GDP plummeted).

• A rapid decline in the pre-war and war years driven by 1. rising GDP and 2. a massive temporary increase in government consumption spending. (Factoid: In just seven years 1940-1947, government’s share of national consumption spending went from 13% to 39% and back to 16%.)

• A steady period of relatively low consumption from the late 40s until the mid 70s or early 80s (depending which measure you look at).

• Consuming an increasingly large portion of our national output since the late 70s/early 80s — with Gross Consumption just shy of 100% ’08-’10.

... So the long-term trend change for the nation as a whole is simply toward more consumption spending and less investment spending. That may seem obvious to some, but it’s nice to know it for sure.

... The most obvious interpretation is suggested by the title of this post: we’re consuming more and more of our seed corn (and tractors), leaving less for future consumption and production (and growth).
(4 June 2012)
Recommended by Asher Miller of Post Carbon Institute writes, "Found this an interesting read..."

Former Hedge Funder Presents A Terrifying Vision Of THE END GAME

Raoul Pal, Business Insider
Everyday, we hear some pretty grim predictions about the markets and the economy. But this is one of the more comprehensive and most gloomy outlooks we've ever seen.

Raoul Pal expects a series of sovereign defaults, the "biggest banking crisis in world history", and asserts that we don't have many options to stop it.

Pal previously co-managed the GLG Global Macro Fund. He is also a Goldman Sachs alum. He currently writes for The Global Macro Investor, a research publication for large and institutional investors.

A note on the presentation; the last slide is not meant to suggest that we're going back to the economic activity of 3000 years ago. It refers to the 3000 year old trade links between the nations along the Indian Ocean, which Mr. Pal believes will be the center of world's opportunities. Just like the West 50 years ago, they have "...low debts, high savings and a young population".

Thanks to Raoul Pal for giving us permission to share his presentation.

- Max Nisen of Business Insider
(1 June 2012)
Slides at original.

Steve Keen & Chris Martenson: Why 2012 is shaping up to be a particularly ugly year

Ian McPherson, blog

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen. Banks began lending money at a faster rate than the global economy grew, and we’re now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to.

Once borrowers start eschewing rather than seeking debt, asset prices begin to fall – which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices. From Chris Martenson via YouTube. Visit Steve Keen’s page at the University of Western Sydney. Visit Chris Martenson’s website.

(10 June 2012)

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