The real cause of economic stagnation(Read article summary)
In today's changing economy, it's no longer true that you get out what you put in
We think weāre onto a big story. A BIG story.
This correction is aiming highā¦itās going to take down the entire capital structure of the worldās developed economies.
Stocksā¦bondsā¦real estate ā watch outā¦theyāre all going down.
The dollarā¦the poundā¦the euro ā look out below!
But thatās not all. No, if weāre right, this is bigger, much bigger than just a market correction.
Itās an economic correctionā¦a monetary correctionā¦and a political correction.
But weāll come back to that in a moment. First, letās look at what happened yesterday. The Dow lost 108 points. Not much information content thereā¦
ā¦but look at what happened to gold. It was down $35. Could gold be finally testing its admirers? Though still in a major bull market, could it be correctingā¦possibly falling back to the $1,000-$1,500 range?
Yes it could. Goldās time will come. But we donāt think it is here yet. Gold has risen in anticipation of trouble. But the trouble gold buyers foresaw hasnāt comeā¦not yet. Thereās been massive money-printing. Still, in terms of the goods and services it will buy, gold has held up pretty well.
Gold will take off ā when the anticipated trouble becomes real here-and-now trouble. And that probably wonāt happen for a while. And part of the reason it wonāt happen is this Big Story weāre following.
You see, our whole economyā¦and our societyā¦and our governmentā¦and much of what we thinkā¦all were built on truths that are no longer true.
In a word or two, our modern economy ā and our government ā depends on growth. And growth may be a thing of the past.
You want to make money, you invest in profit-making businesses, right? Not necessarily. On the whole, investments in stocks only go up if the economy grows. Otherwise, companies are just fighting for market share. One goes up, but another goes down. Taken all together, investors go nowhere.
Well, at least you can always put your money in bonds. You wonāt earn a lot of money, but over time youāll receive safe, sure gains. Right?
Wrong again. Practically all the worldās major debts ā private, corporate and government ā depend on growth. Without growth, the debtors canāt pay. And if they canāt pay the debt is worthless.
Do you hold Japanese Government Bonds, dear reader? Good luck with that!
But those points are obvious, arenāt they? How about this: if you want healthier people, you just grow your health-care institutions, right?
Wrong again. In terms of a percentage of GDP, Chile spends only a third as much on health care as the US ā much less in absolute dollars. Life expectancy in the US is 77.6 years. How long do you think they live in Chile? Well, weāll tell you ā 78.6 years.
Maybe thereās something in the water in Chile. But suppose you could take a group of Americans and give them all the free health care they want. Would they live longer?
Well, guess what, the Rand Corporation tried it. And guess what it found? Except for people who were extremely poor and had no access to health care previously, giving normal people more health care did not make them healthier. The group with free health care consumed a lot more resources from the health industry ā about 25-30% more. But it was no healthier.
And guess what else? When it comes to surgery, who do you think comes out ahead ā people on Medicaidā¦or people with no health insurance? The people with no health insurance, of course.
These facts and figures come from a delightfully moronic book called The Great Stagnation, by Tyler Cowen.
He points out that the results from educational spending are similar. In 1971, the US spent a little more than $5,000 per student per year. Now, it spends more than $12,000. So guess how much reading scores have increased? Have they more than doubled too? Nope. They havenāt budged.
This is especially interesting because of something known as the āFlynn Effect.ā Flynn noticed that kids were getting smarter every year. So, if IQs are going up, youād naturally expect test scores to go up to. But theyāre not. Which suggests that the quality of educational inputs is going downā¦so that the results end up in the same place.
In other words, the great Truth of the Modern Age ā that further inputs produced further outputs ā is no longer true.
Whatās the connection between education and government debt? Why are we trying to compare stock market gains with gains in health care?
Hereās where The Great Stagnation falls apart. Its author completely misses the point. He thinks the ālow hanging fruitā has already been picked. In a way, heās right. The big gains in output ā in education, health care, heavy industry, farming, banking, debt and many other areas ā have already been made. Now, itās hard to make any successful investment in any areaā¦
ā¦if you invest in more health careā¦it will probably be a waste of money.
ā¦if you spend more on education (not individually, but collectively), that too will probably be money down a ratholeā¦
ā¦if you increase the level of credit (as the government is trying to do)ā¦you might as well save your money.
ā¦no point in investing in the stock market either. The glory days are overā¦
ā¦and stay away from the bond market. The debtors wonāt be able to payā¦
Yes, weāve entered an era of āGreat Stagnation.ā And yes, it looks as though the low hanging fruit has been picked.
Tyler Cowen thinks this is a problem that we can fix. He thinks we just have to put our thinking caps on.
The silly goose. He doesnāt realize that the era of low-hanging fruit changed the way we look at things too. It made our arms shorter and our brains smaller. We are all dumb optimists now. Thatās what 300 years of finding low-hanging fruit does to a people. We think that every downturn ā even a Great Stagnation ā can be reversed by, among other things, raising āthe social status of scientists.ā
No kidding. Thatās what he recommends. As if the social status of people was determined by an act of intellectual will.
What a disappointment. We began reading The Great Stagnation thinking its author was a closet Dear Reader. Instead, he turns out to be a disciple of Thomas Friedman.
More on the real causes of the Great Stagnationā¦tomorrowā¦