by John Mattingly
Four blind men describe an elephant: one at the trunk, one at a leg, another at a side, and the fourth holding the tail, resulting in radically different accounts of the pachyderm’s anatomy. So it is with those of us offering descriptions of The Economy. In this four part series on Economic Growth, Debt, Accounting, and the Stock Market, I confess to being one of the four blind men.
My bias as a farmer is naturally toward the production sector. For years, I saw The Economy from the point of view of people making a living directly from the Earth. The Mining Hall of Fame in Leadville says something like, “Nothing happens until someone digs something out of the ground.” And farming, though we don’t usually think of it that way, is slow-motion mining.
I tended to think of it as a simple model of producers organizing Earth and sun into new wealth which the service sector then manipulated in various ways. “See how much the service sector can do if I don’t produce anything,” I found myself saying, especially back in the 1960s and ‘70s when I’d obviously read too much Ayn Rand and championed the likes of Howard Roarke and John Galt.
It wasn’t until I hit 40 that I actually heard the service sector reply, “Fine, big man, see how much you can produce without us servicing your needs and products. Try growing a crop without our seed or try selling it without our elevators.” As I aged, I began to see the economy as a web of deeply dependent relationships rather than a stratified hierarchy.
That level of tolerance acknowledged, the one thing that continues to mystify me is our robust dedication to, and incredible misjudgment of, economic growth.
In the early 1970s, shortly after I started farming, the Club of Rome predicted that by the year 2000 humans would be out of oil, and Earth’s residents would be facing mass starvation. The book, The Limits to Growth, obtained in large part from an update of the Malthusian, straight-line depreciation of resources plotted an axis of human population growth.
Many of the old farmers I grew up with told me I would soon have the world by the tail with a downhill pull because, consistent with the concepts of The Limits to Growth, “They weren’t making any more land and people have to eat.” I felt strategically placed and fundamentally proud to be a farmer. (I hadn’t yet learned that there is a decent chorus of folks out there who always have, and always will, think the world was coming to an end.)
Indeed, by the year 2000, the world was far from its end for most of us. Oil was so plentiful that gas dipped below a $1 a gallon for a while, and we had mountains of surplus grains and beans piled up around the United States. India and China were not on the brink of starvation, they were exporting corn and wheat into world markets. The dire prediction of the Club of Rome hadn’t considered the powers of substitution and innovation, the Green Revolution, nor had it anticipated the explosion of debt vehicles that kept the Growth Party supplied with freshly printed money.
Then there was the famous wager in 1980 between Paul Ehrlich, a radical environmentalist, and Julian Simon, a cornucopiaist. Ehrlich bet that by 2000, basic resources would have become progressively scarce and thus increase in price. He emphasized that this would lead to mass starvation and global chaos. Simon took the other side of that bet, claiming basic resources would become more plentiful and thus cheaper, and concerns about global disruptions were vastly overblown. As proxies for “basic resources” Ehrlich and Simon used the prices of copper, tin, nickel, tungsten, and chromium, which may not have been the best selection. Simon won the wager by a substantial margin, as twenty years after the two men shook on the wager, the prices of these materials had steeply declined.
While it’s probably true that Simon won the wager due to the influence of the same fundamentals that fooled the Club of Rome – resource substitution, innovation, and expansion of the capital markets – it is also true that the five metals chosen as proxies for “basic resources” failed to account for soil erosion, deforestation, ocean health, global climate change, and other macro factors related to basic resources. When this famous wager is mentioned by cornucopiaists as a justification for relentless growth, it’s fair to counter that the proxies weren’t entirely representative. (Today, a good bet might be to predict Rare Earth Elements – REEs – will be in short supply and be worth a fortune in five years.)
Shortly after Ehrlich paid off on the bet in the year 2000, we had a true, down-on-the-ground, Main Street to Wall Street proof of the limits to growth. But it didn’t manifest as mass starvation or resource shortage. It manifested initially as a dot.com collapse. Then, as if in full denial of what this collapse demonstrated to our economy, a majority of American homeowners, mortgage lenders, bankers, and Wall Street investors made an Ehrlich-like bet that the American Home would remain so scarce in the marketplace that its price would increase, well, basically forever. They left out the dire predictions of a typical Ehrlich bet, but the bet was clearly based on an expectation of increasing scarcity leading to unabated price increases.
The interesting thing about the Eternal Housing Bet is that it also contained the Simon-like ingredient that the American Homeowner would never reach the end of a cornucopia of credit, or more specifically, the ability to make ever-increasing mortgage payments. Ehrlich and Simon both won this bet, but one of the nonhilarious ironies of growth prediction is that winning can mean losing.
The Great Financial Crisis of 2008 ensued. The Crisis has been hyper-analyzed ad nauseum, so I won’t add to the muddle except to say that, in my view, the Crisis offered convincing proof that there are limits to growth. Even the American Home cannot grow unrestrained, nor can a homeowner be expected to make mortgage payments that grow unrestrained. One would think this painful, point blank example would have caused a few light bulbs to go off in the heads of state, and perhaps it did, though dimly. I still hear endless chatter in the economic press lately about, “When will growth resume as usual?” or “Did XYZ Company meet revenue growth expectations?” The word “sustainable” is still lurking on the fringes.
After all we learned from the 2008 Crisis, we still seem to be deeply dedicated to the necessity of growth, still driven by the expectation that growth is the real measure of economic health. If a company fails to grow, it disappoints, forcing it to either restructure or become a takeover target. If a national economy is not growing, it is in recession or headed for depression and must be stimulated. The value of a company, or nation, is measured by its projected growth as a function of its share price, or GDP. I’m not arguing that growth is necessarily problematic or bad, only that failing to acknowledge its limits has proven perils.
My suspicion is that the limits to growth are currently occluded by the fact that the 2008 Crisis did not get down and dirty with the real problem – the limits of debt. The international de-leveraging that occurred during the Crisis was quickly replaced by new debt, and the new debt was moved around and spread around from private to public sectors, bundled and scrambled as smoke was blown up our pantlegs (much of the TARP money is still “unaccounted”), but at the end of the day, the net worldwide debt grew. Actually, “grew” is too diminutive to describe the extent to which worldwide debt expanded.
Because we are so conditioned to see growth as good, and because we have learned to substitute debt for productivity, it’s almost as if we have been fooled by some Mobius logic that even the growth of debt can be a good thing. Note that U.S. markets “recovered” after the infusion of several trillion dollars of new public and private debt, and more recently, the availability of a nearly a trillion dollars of new debt in the Eurozone is seen as necessary for a European “recovery.”
Next month I will profile some of the nitty gritty of the history and growth of debt in the U.S., and drill into the specific ways in which we have changed from a nation that owned its assets, to a nation that, in good part, now ow’ns (owes on) its assets.
John Mattingly cultivates prose, among other things, and was most recently seen near Creede.
