Skewering Alan Greenspan's Myth Of Endless Economic Growth

Former Federal Reserve Chief Alan Greenspan believes he knows what's best for the U.S. and that is endless growth, as measured by ever rising GDP.  ('The Great American Growh Engine And How To Fix It', WSJ,   Oct. 13-14, , p. C1).    One of his main recommendations for improved growth is:

"Get entitlement spending under control. Putting the system on a more sustainable footing could be done by raising the retirement age by a couple of years, indexing it to life expectancy so that the problem doesn't keep coming up."

Note  this is despite the fact  that a third of seniors have Social Security as their only income. Also, more than 50 percent of Americans claim their Social Security by age 62.  Why are so many doing this? It isn't always a case of not wanting to work but rather, for too many,  not being able to last at demanding physical jobs, i.e. landscaping, roof repair, nursing home aide,  etc.  It is fairly easy to work past 70 when it's all consulting, paper pushing or brain work.   But not so much when one is involved in heavy day -to -day labor like a nursing home caretaker moving an elderly patient from bed to chair and back many time a day - not to mention other tasks, such as bathing, toilet use etc. Work that takes its toll on the back, as well as many other parts of the anatomy.

Never mind, Greenspan fantasizes this ongoing rampant growth because well, it's the "American way", i.e.  "Today the United States has the most powerful economy in the world. It still accounts for almost a quarter of global GDP."

Well, yeah, given that it also has barely 5 percent of the global population but consumes 25 percent of its resources annually.  Greenspan also goes on to blab:

"The key to America's success lies in its unique toleration for creative destruction, the destabilizng force described by the economist Joseph Schumpeter in 1942. Creative destruction reallocates society's resources from less productive pursuits to more productive ones, or from horse and buggies to motorcars."

 Creative destruction, irrespective of who conceived it, is one of the most tragic and wasteful aspects of American cowboy capitalism.  It entails perpetual waste of energy and investment that ravages precious resources. In Barbados, with few resources, each must be maximized. There isn't the quantity  available (on a 166 sq. mile island) to allow duplication or other squandering in wasteful competition. In the U.S., the exact opposite holds. Huge amounts of resources are yearly squandered in competitive games- that have only one or a few 'winners'.  There is Alan Greenspan's "reallocation" of resources for you.

By contrast, the endemic socialist, communitarian structure of Denmark- for example - promotes a healthy growth of the social commonweal and the belief that what is done for the benefit of one, or a few, redounds to the benefit of all. E.g.

Oprah got perfect response from Danish woman on their social welfare state  

Hence, the imperatives for government subsidized low cost housing, national health insurance for all, free education through college.  Enough to make Greenspan and his ilk apoplectic.

Matt Miller in his The Tyranny of Bad Ideas has pointed out that all the so-called European "welfare state" economies (e.g. Denmark, Norway, Sweden etc.) fared much better than the neo-liberal, market dominated U.S. during the financial crisis and Great Recession. They provided the resources for their citizens to be more resilient, and also their higher formal tax structures prevented the sort of macro-scale deficiencies we still see in the U.S. where infrastructure is crumbling, public pensions are under-funded.  Does Greenspan factor in the cost of repairing our infrastructure (est. $2 trillion) into his growth delusions? I doubt it.

It's also somewhat ironic the former Fed chief praises "creative destruction" as a major contributor to the growth engine, while invoking the transition from horse and buggy to motorcar. This is given what all those existing 1 billion motorcars around the planet have wrought - putting us on the cusp of runaway warming  e.g.

Climate report understates threat

Of course, it's also choice and ironic that it was none other than Alan Greenspan  who was actually complicit in creating the financial crisis, though he disingenuously blames a "combination of fear and herd  behavior".    Adding  that this combination "led people to overreact to bad news and to plunge economies into self-reinforcing cycles of decline."

 That takes a lot of chutzpah given Greenspan relentlessly pumped ARMs  (adjustable rate mortgages) to people who didn't know enough about them and how an initial 3% rate could balloon into an 8 %- 10% rate  and ultimately lead to foreclosures. Then there were Greenspan's and other bankers' moves to bundle the credit default swaps into mortgage loans (collateralized mortgage obligations, or CMOs) and peddling them to folks with little or no credit. That set up the immediate collapse of the credit-loan system, especially as the debased loans were awarded AAA or other high ratings by the likes of the credit agencies, such as AIG and Moody's.

 Fear on the part of the hoi polloi?   How about crass manipulation of an exploitative mortgage market and inadequate oversight of destructive financial devices? See e.g.

Brane Space: The Financial Black Hole

Another factor 'Greenie' overlooks is that the onset of the productivity growth slowdown nearly matches the point U.S. employers gained access to workers from low wage countries to whom they could pay much lower wages than to American front line workers. Especially as the former often had similar skills to the latter.

Even given the current 3 percent growth of 12 months through September, Greg Ip in his WSJ piece today (On the paradox of 3% growth, p. A2) argues it isn't sustainable. As Mr. Ip writes:

"To keep this up the unemployment rate would have to go negative in eight years, a mathematical impossibility."

Better clue Greenspan in on his fantasies there, Mr Ip.

A further hidden factor damping growth which I've discussed before is the decreasing energy return on energy invested (EROEI) of fuel sources. In other words, our energy-dependent civilization is becoming ever more impoverished as the efficiency of the energy to run it diminishes over time. So no, with conditions like this, and a projected EROEI of 7.7 to 1 by 2030 do not look for more growth.

With such a forecast, energy costs will absorb as much as 15% of GDP by then. So we will be lucky to sustain the growth rate of 0.7% per annum Greenspan bitches about as characterizing the economy the last few decades.  Nor is the oil shale -fracking option the way out. As  Robert Heinberg observes ('Snake Oil: How Fracking's False Promise Imperils Our Future'), while it may cost less to extract a cubic foot of natural gas or a gallon of oil shale today, it will cost much more in just five years and even more in ten - such that one would have to spend as much or more to get the energy as the benefit it delivers.

Heinberg summons a point that most of the snake oil salesman humping fracking won't tell you, that it costs energy to get energy. And if you are a nation that resorts to employing 15 to 1 EROEI energy to extract  5 to 1 EROEI  oil shale energy.....well, can we say 'stupid'?

As Heinberg puts it (p. 116):
"No evidence suggests that the technology of fracking has actually raised the EROEI for natural gas production. It temporarily lowered prices but only by glutting the market."

Greenspan and his growth humpers need to process that lowered EROEI translates to increased debt - nationwide as well as for (most) individuals, since it will cost more and more in the future  to obtain the same services, products one currently depends upon.  Raise the per barrel oil prices by even 15%  - say from $100 to $115, and watch the impact on food prices, not to mention gas, or electricity. Eventually, as   Tullet Prebon Strategy Insight   notes, the economics becomes "non-viable" and that means the only way people can access the food or services is to go into debt, i.e. using credit cards or other means.

Here's another "stinger" or a reality bite - which is the subject of a forthcoming book by London School of Economics sociologist Mike Savage: It is very likely that, given the Earth's limited resources, there is also a very limited capacity to handle traditional growth. This is  easily discerned from the graphic below on how many "Earths" are currently being consumed by humans per year,

At root, the issue is sustainability - especially for water which is needed for crops. NO water, no crops to feed a growing population. Simply put, there simply aren't the resources to support a growing human population which is conditioned to consumption. (Especially in the developed, industrial world - which now includes China and India).  The projections now are for at least 10 billion people by 2050, and an 80 percent probability of 12.3 billion on Earth by 2100. 

 By June, 2030,  TWO full Earths - that is,  the resources therein - will be needed to support the then population. Already we are at 1.7 Earths. Every year Global Footprint Network raises awareness about global ecological overshoot with its Earth Overshoot Day campaign.   I believe even a guy like Alan Greenspan ought to be able to grasp these figures and the graphic, and that his growth ideal is a mirage, a myth or fantasy, if you will.

As sociologist Savage explains (The Nation, October, p. 16):

"If we want to live in a better society, it's not 'How do we grow more?' It's how do we become more sustainable and consider what level of inequality most people might find acceptable  and not extreme." 

A "rising tide" then - contrary to capitalist myths- might not raise all boats but flood us all out of existence.  Of course there will always be economic Pollyannas spreading bollocks, like Tom Gionvanetti , e.g.

Why Not 'Trump Retirement Accounts'? - WSJ

who writes, evidently with a straight face (p. A15):

"The back door solution to the entitlement crisis is to make workers wealthy"

Right, even as employers are unwilling to pay their employees a fair wage, or enhance their job benefits - even after being flush with corporate tax cuts. As managing director of Aspen Advisors, Andrew Gadomski (from a January WSJ piece) fessed up, when companies lament they can't find workers to fill key openings, that is code for: "I can find talent, I just don't want to pay them as much as they cost."

One wonders what brand of "wealth"  Giovanette conceives of with this sort of payout?  Also what sort of MJ candy he's gulping to write such unadulterated codswallop?

Is there an alternative route?  The Index of Sustainable Economic Welfare which was first proposed by Eco-economist Herman Daly of the University of Maryland. is a prime alternative . Daly's point was that the GDP was too artificial and narrow an indicator of economic health. He argued that if one incorporates all the "externalities" usually dismissed or ignored by standard economic models, people would be more parsimonious in how they consume. This would then yield a more equitable economic landscape.

Ignoring these externalities leads us into a fool's paradise where we come to believe things are much better than the GDP numbers show. Similarly with energy, conveniently ignoring externalities of cost and demand leads too many to envisage a pie-eyed future of never-ending growth.    All this translates inexorably into lower growth and woe betide you if you dare intimate (as Prof. Daly has done) that a zero or negative growth index may be a lot better for humans, if they hope not to outstrip their resource support base

In the meantime, until we get to the Index of Sustainable Welfare, people may wish to consider redistribution of resources to bridge the gap. Why?  Well, because 0.1 percent of the world's population currently controls 50 percent of the planet's wealth and resources. 

Let those richies go on with their favorite playthings and pastimes  e.g.

Then don't come crying if the great 'unwashed' mass of the hoi polloi comes for them with torches and pitchforks in hand.  Faced with a choice between starvation or grabbing what they can from the richest, it shouldn't take a Mensa level IQ to figure out what will unfold.

See also:

Robert Reich

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Donald Trump | Economic Policy

The Truth About Trump’s Economy

Making Short of the Short Sellers

Within mere days of the Security and Exchange Commission's announcement of a tough new rule designed to limit "short selling" (now believed responsible for driving share prices of financial stocks into the tank) you can see and hear the howls of protest erupting from every quarter (e.g. 'SEC Short-Sale Rule Gets Negative Reviews', The Wall Street Journal, July 19, p. B1).

What is short selling, also called "shorting"? This occurs when financial (especially) share sellers aim to profit from share declines by selling borrowed shares then buying them back in the market at a lower price. In a more egregious variation, called a "naked short sell", the shares are sold without any arrangement to have borrowed them first. The end result? These shorting operators make a killing with little or no risk, and certainly none of the upfront exposure that normal purchasers of shares have. (So, in many respects they are like the oil commodity speculators who only have to produce 5% of the total purchase to speculate a much higher price). Prior to the SEC rule, by one report, it was estimate short sellers had creamed $11 billion of profits from their short sales.

What is amazing to me, especially in view of the much reported market timing ploys of a few years ago, is how many average Joes and Janes still entrust their hard earned money to Maul Street. This, despite all the recent markers that disclose it is a bad bet.

The cold, brutal and hard fact of the matter is that most Americans (unless they have at least $2-3 million in disposable wealth) had best stay out of the Maul Street casino. It is purely a game for the 'whales' (as huge bettors are called in Vegas). Even mutuals offer little or no assurance of getting anything more than chump change - unless you are remarkably lucky in your redemptions.

A Stanford University study- based on the median return of 62 mutual funds- showed that $1 invested in 1962 would have grown to $21.89 by 1992, on a pre-tax basis. The study disclosed that the $1 would have grown to only $9.87 on an after-tax basis. And the investor would have had to come up with $12.02 to pay the taxes. By contrast the study showed that a “conservative” investor who put assets into a U.S. Savings Bond in 1962, had every $1 become $10.93 by 1992.

It is easy to work out from these numbers which investor actually fared better over the thirty-year interval according to the study. Hint- hint: it wasn't the sucker in stocks. Unless mutuals investors do the math and watch the numbers they cannot be aware of how little they're actually taking home. (A point also made emphatically in The Wall Street Journal, Nov. 27, 2003, page D1, 'A Harsh Truth: Most of Your Investments Won't Make Money- Even in the Long Term', after assessing stocks, bonds and mutuals).

Recent articles appearing in MONEY magazine, and The Wall Street Journal bear this out, noting that in the past ten years the S&P 500 has barely eked out 1.6% a year, not even matching the gains of CDs or Treasuries. Plus, one has to contend with onerous expenses, fees )e.g. 12b-1) clobbering from every angle.

It is also well for small investors to understand that, to a large degree, they are in a game with a 'stacked deck'. Not only that, but under current laws their investments are almost entirely blind. Like buying a pig in a poke. This point was emphasized in a London Financial Times article (‘A Metaphorical Proposal’, Mar. 13, 2003, p. 11A) by Michael Skapinker. He cited remarks by Joseph Berardino – chief exec of Arthur Andersen- who noted how the current reporting system “fails to communicate essential information about the real risks facing companies” to the small investor.

The basic Wall Street pyramid game is elementary to grasp. Pundits, wags and paid flacks on cable business channels hype the various stocks, funds or instigate a "buzz" about them - to get suckers to buy in. The increasing buy-in inflates the price-to -earnings ratio (P-E ratio) and produces a bubble of high profits. The "Big boys" (mostly large, institutional investors, but also big money single investors) get tipped 1-2 days in advance and cash out, leaving the little guys to sink. If they're lucky they may earn a few bucks. Not much.

For example in the Financial Section of the Balt. Sun of 1/27/97, p.1C there was this little headline: INVESTORS COMPLAIN OF UNEVEN EXPOSURE :

Quote:
General Motors Corp. gave a welcome warning last month to a few close friends. One by one, the automaker called analysts at top brokerage firms on Dec. 18 to say that fourth quarter costs would be higher than expected. Word was quickly passed to those (brokerage) firms' big clients, whose sales of GM stock sent the shares tumbling $1.375 on a day when the Dow Jones Industrial Average rose 38 points. Other investors had to wait until the next day - when nine analysts cut fourth quarter earnings estimates - to find out what GM said in private.

The thievery works eventually because most manjacks are conditioned to "buy and hold" rather than fold when the share price dives below a certain threshold. (Which ought to be the tip off). Thus, there are always ample marks left at the end game to be properly fleeced. Amazingly, they're always ready to play the game again, and pile their newly saved up money in.

I wised up in 1997 after the DOW was "juiced" and reading a lot of books and article on how the game was played, especially the psychological enticements to become "an investor". (I.e. you were "missing out" if you didn't plunk that cash into the Street). I cashed out of all the high risk equity and other funds before the 2000 bubble burst. I've stayed strictly with money market accounts, funds, and laddered CDs since. I did lose more than I'd like to have in a few bond funds, but also pulled out of all those in early 2000. (That was after I learned of the collateralized mortgage obligations or "toxic waste" piled into many of them)

Slow and steady is the way to go, albeit not "sexy" - and anyone who tells you any differently is trying to pick you off. I may not have millions at the end of the day, but won't have to go back to work prematurely because an IRA tanked by 40% or 50% - as many too trusting people are learning now.

The only real diversification in the end, is not to keep all the eggs in Maul Street's casino coffers. As Joe Dominguez and Vicki Robin note in Your Money or Your Life, about 20% on the Street is perhaps the maximum, the rest in cash (money market) accounts, laddered CDs and Treasuries. That way - when the market tanks by 40-50% as it surely will when the next bubble bursts, you don't have to commence from square (X- 100) again. Particularly as all losses are compounded in a downmarket environment - since as I noted- Maul street will still exact its Shylock cut (in expenses, fees, commissions etc) even as you're reaping market losses! Add a 15% loss to a 5% load, and more than 3.5% in fees-expenses and the results are not very pretty.

However, the hype and media fomenting of the PR of the market mythology keeps most prospective retirees thinking that they must be in the market or they won't be able to retire. Even now, the media drumbeat has begun for people – with portfolios and 401ks still in tatters- to get back into the market game. “Buying opportunity” is the mantra issued to rope in millions more suckers. Meaanwhile, oldsters who've taken a beating in the current Bear market may be looking at another ten to twelve years of work to make up their losses - assuming they can find work!

The stock market's sole purpose, As E. Brockway observes in his The End of Economic Man, 1990, is to steal capital from the poor or middle class (that can least afford losses) and give it to the rich. The means to achieve this are not obvious, but all one needs to do really is pay attention to the financial news and especially how market manipulation rears its ugly head again and again.

One day, perhaps, people will learn how to protect their assets themselves, without being drumbeaten into being hostage to stock sharks, con artists, shorters, speculators and other denizens!