Beside the two kinds of economic growth that have been analyzed before, there is one more kind of economic growth, and it is the worst it its kind. It is an expansion of economic capacity but this expansion represents malinvestment. Such a kind of economic growth usually comes about due to monetary impulses that lift aggregate demand beyond the former capacity. Due to demand impulses or “stimuli”, buisness will be induced to enlarge capacities. However, this kind of economic growth, while usually praised by the press and hailed by incumbent politicians, contains the seeds of its own destruction in itself. This kind of economic growth, which produces malinvestment, usually comes along with the big swings of the business cycle. Large business cycles go hand in hand with financial cycles which in turn ar brought about by expansive monetary policy. It is not rare that these big business cycles will take place in an environment of a favorable investment climate (the emergence of new technologies, for example) which is one of reasons that credit becomes easy and monetary policy makers are unconcerned about credit growth. This kind of economic growth — economic expansion in the form of malinvestment — produces extremely destructive economic illusions. Its destructiveness typically remains hidden to conventional economic analysis. It is mainly only the Austrian school of economics that provides a theory of explain unsustainable economic growth. The Austrian school of economics explains the phenomon of malinvestment as the result of a credit-driven expansion that lacks the foundation of genuine savings. The artificial creation of money with the availability of easy credit produces the illusion of wealth that does not exist in reality. The deception about the true availability of resources induces business and consumers to pursue projects that go beyond current means. Sooner or later the over-dimensioned projects have to be stopped. In other words: the house that Jack built turns out to me too large for his means in order to be maintained. The project needs to be abandoned. Capital is lost, and instead of producing prosperity, society is now poorer than before. Jack has not only not obtained the big house he thought he could afford, but he is left now with no house at all.
In his desperation, Jack may curse capitalism and bankers, yet he should know that the true perpetrators of his misery sit in Washington, D.C., in a building called the Federal Reserve. The very same persons that produced the disaster are still charge. And while the central bankers and politicans and their vasalls trumpeted the hymn of eternal prosperity still a couple of years ago, they now pretend to act as the savior to Jack. It is time for Jack to learn that he is only a pawn in a game that is played by those who sit at the source where money is being made. While the true stuff of prosperity is made at other places, the easy money comes to those who know how to grab it first.
Most analysts and policymakers usually fail to distinguish between economic growth, which augments the prouctive capacity of an economy and that kind of economic growth, which reflects an increase in the use of existing capacity. The first kind of economic growth represents economic growth proper, or authentic economic growth and reflects improvement of the factors of production. The second kind of economic growth is a derivative kind of economic growth, which reflects demand conditions. Effective demand expansion typically is the result of higher expenditures and as such it is principally a monetary phenomenon.
An economic recovery may begin with demand expansion but this won’t carry the economy very far when it is not followed-up by an expansion of productive capacity. When monetary expansion goes beyond the normal level of capacity utilization, price inflation will set in, and this, in turn, may have the detrimental effect that instead that businessmen will icrease capacity, i.e. invest more, stagnation or even shrinking will occur because investors turn skeptical about the outlook of the economy and may, for example, expect higher interest rates.
As a mere monetary phenomon, economic growth in terms of expansion of effective demand, may go on indefinetely, because there are no limits of scarcity imposed upon the creation of money. It is different with the real economy. Here, scarcity is a permanent problem and it takes investment and ingenuity to make the economy grow.
Economic history is full of of examples of triumphed songs being sung by the believers in growth as expansion of expenditures who shortly thereaftere had to learn that they have praised a chimera.
As long as capacity utilization is way below the normal level, demand expansion fueled by monetary impulses, makes some sense. Yet this kind of policy has serious limitations. Firstly, as much as the economy moves closer to normal capacity utilization, the monetary impulses on the real goods production get weaker and the part which affects prices becomes more dominant up to the point when the monetary impulses mainly and finally only have price effects and its effect on real production gets smaller and finally becomes nil.
If policy makers do not recognize the limits of their actions and continue to promote expansion of expenditures by stimuli, the result will finally be the opposite of what is expected. In the face of bottlenecks, increasing price increases and the regime uncertainty that comes with unfettered monetary expansion, both business and households will scale back effective demand. The result then will be a collapse of both: economic growth in terms of demand will break down in tandem with the collapse of productive capacity.
Among the many problematic legacies of Keynesianism is the failure to distinguish between these two kinds of economic growth. Many harm has been produced by policy makers who have promoted expansionist macroeconomic policies without recognizing that while doing so they actually have contributed to weaken the productive capacity of the economy and in the end have not only failed to create more prosperity but in fact have made people poorer.
The statements and actions of president Obama and his economic team reveal a high degree of ignorance concering the quality of economic growth. By failing to distinguish between the two kinds of economic growth, the economic policy of the current US administration must be characterized as foolish and primitive.
Demand management puts economic logic on its head. It negates the praxeological truth that production must come before consumption. Keynesianism negates the existence of sequences in economic life and that these must be respected like the laws of nature. An individual may run ahead of its own production and consume more than he produces as long as he has access to loans or is lucky enough to get gifts. When a country absorbs more than it produces, it will run a trade deficit, which, in turn, also requires either loans or gifts from abroad. In each case there need be someone somewhere who produces more than he consumes in order that someone else can spend more than he has earned.
Basic economic laws such as that production comes before consumption are as strict as the laws of nature and one may even argue that they are even stricter. Nevertheless, it is common not only for individuals to pursue actions that try to violate economic laws, but particularly that governments systematically disrespect the basic laws of economics.
Under a fiat money regime there is no limit to government spending. Yet an increase of spending, based on pure monetary expansion, does not imply that production could expand at the same pace. While monetary spending is limitless and there is no scarcity in adding more zeros to the price tag, production is limited by the law of scarcity. The problem with Keynesianism is that it negates the natural sequence of production and consumption and such, implicity, negates the existence of scarcity. Keynesianism suggests that more consumption and government spending can create wealth. Yet while it is impossible that consumption could precede production, demand, based on the expansion of money, can. By this logic Keynesianism will always lead to higher inflation and instead of creating wealth this policy will make society poorer once the short-lived boom is over.
posted by Antony Mueller
The “improvement” of economic performance which gets ascribed to the stimulus package will be a major soure of deception for policy makers and investors because it does not represent genuine economic growth and while indeed the measured growth rates my be rising, the productive capacity of the economy, that which we call genuine economic growth, may be declining. Thus, after a short period of increases of the gross domestic product, the lack of genuine growth will lead to a decline of output thereafter.
Conventional economics does not distinguish between genuine economic growth that represents an expansion of the productive capacity and an increase of output merely due to demand.
The stimulus package will augment demand yet its effect on the productive capacity can in fact be the opposite and lead to a reduction of genuine growth. Keynesian economics is only concerned with demand-dependent economic expansion and has nothing to say about how to increase genuine growth, which is the foundation of sustainable prosperity.
Fake growth can be easily produced by wasteful consumption or by non-productive government spending, such as war expenditures. Genuine growth, however, requires an increase or the improvement of the factors of production.
Fake economic growth takes place when the gross domestic product expands because of demand in the form of malinvestment — be it by private companies or by government. A third kind of fake economic growth occurs when consumers expand their expenditures to unsustainable levels mainly based on credit. Among these three groups: business, government and the consumer — it is the government which can most prolong its expansion of wasteful demand. It is only in times of extreme loose monetary policies when consumers and business can extend malinvestment and wasteful consumption. Without ever-increasing access to loans, such a process will stop sooner or later. However, in phases of extreme credit expansion a lot of harm can already be done until the buck stops. Things of course get relly worse when the credit crunch will induce government to continue its demand expansion in an even more extreme way.
Those people have lost their minds who still believe that the stimulus pact would work when in fact the notorious Keynesian multiplier has gone into reverse.
What will be left when the circus is gone is not a revived economy but a government burdened with an unmanageable amount of debt.
There will be counter rallys, for stocks and for the US collar, but the trend will continue to go downwards — at least as long as the US government doesn’t change course, and under President Obama the chances for CHANGE are almost nil.
Nine Reasons the Economy is Not Getting Better By Mortimer B. Zuckerman On Wednesday July 15, 2009, 12:09 pm EDT Buzz up! 227 Print.We are now looking at unemployment numbers that undermine any confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. A better image is to look at the true total of jobless people as a prudent navigator looks at an iceberg. What we see on the surface is disconcerting enough. The estimate from the Bureau of Labor Statistics of job losses for June is 467,000. That increases by 7.2 million the number of unemployed since the start of the recession. The cumulative job losses over the past six months have been greater than for any other half-year period since World War II, including demobilization. What’s more, the job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all employment growth from the previous business cycle. That’s bad enough. But here are nine reasons we are in even more trouble than the 9.5 percent unemployment rate indicates. Read more
June 29 (Bloomberg) — Investors displaying “a bout of impatience” for a worldwide economic recovery may soon find relief, according to Tim Bond, head of global asset allocation at Barclays Capital…–