Can You Teach a Chicken to Dance? Part Two

Routine becomes habit forming.

The longer the routine, the more ingrained the habit becomes.

If you’ve only ever lived in a war-torn region, your daily habits are vastly different to those living in the tranquillity of Noosa Heads.

We become conditioned by the influences in our lives.

In Australia, anyone under the age of 50 has only ever experienced an expanding economy. Our record breaking recession-free run has conditioned us to believe this is normal, and we act accordingly. Debt levels expand on the belief that tomorrow will be as good as, if not better, than today.

Whereas, any adult living in Athens over the past decade has learned to adjust to life in a contracting economy.

As a society, our conditioned beliefs have been centuries in the making.

The changes happened slowly at first. With each advancement, our expectations expanded.

A little over 100 years ago, no one expected (make that, demanded) universal access to first-world health care, or for the State to pay them for not working, or to buy things they didn’t need with money they didn’t have, or reliable and instant connectivity.

These expectations, entitlements and demands have all evolved from the progress made by our forefathers.

Knowing how we have arrived at this point in our economic development – population growth, productivity improvements, the sophistication of debt instruments and financial markets – can assist us in determining whether the routines we’ve become accustomed to (and based our life decisions on) are going to continue or be (severely) disrupted.

In this series of ‘Back-to-the-Future’ articles, today we start with….

The Industrial Revolutions

The first Industrial Revolution is recorded from 1750 to 1830.

The invention of the steam engine and cotton gin were instrumental in improving efficiencies and output.

Machines replacing manual labour. Generating more with less effort.

Factory-based manufacturing was making the cottage industry redundant.

Industrial cities sprang up. People migrated to these cities in search of employment in the new industrial economy.

Unfortunately, the sanitation facilities in these new cities had not yet been revolutionised. The lack of hygiene was major contributor in keeping life expectancy levels low in the early phase of the Industrial Revolution.

Economic growth rates rose modestly during this first phase due to mechanisation increasing in productivity levels and not so much from more people entering the workforce.

The second Industrial Revolution — 1850 to 1900 — was the major game changer for our standards of living.

Electric light. Refrigeration. Internal combustion engines. Running water to homes. The telephone.

Then came the railroads. The motor car. The airplane. Farm machinery. Sewer systems. Advancements in medical science. Electrical appliances reducing time spent on household chores.

One of the major changes, according to Professor Gordon, (author of the research paper Is U.S. Economic Growth over? Faltering Innovation Confronts the Six Headwinds was:

There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.

The economy prospered from the efficiencies and employment provided by these new industries. Productivity per person increased significantly.

At the same time, improved hygiene standards and medical science reduced the infant mortality rate and lengthened life spans.

The combination of increases in both population and productivity sent the economic growth rate soaring.

The big game changers

The major influences in economic terms from this era of innovation were:

  • Mechanisation: machinery replaced manual labour
  • Sanitation, improved hygiene and medical science: the higher birth rates and longer life expectancy increased population levels significantly. Since 1930 the world’s population has increased by 5.8 billion (from 2 billion to 7.8 billion)
  • Women (free from domestic chores) entering the labour force

These influences combined to create the greatest tailwind for economic advancement in history.

Machinery could produce far more than man alone. Women entering the workforce boosted employment numbers. The doubling of life expectancy from 40 to 80 boosted population levels and subsequently, the lifetime spend of a consumer.

When you put all these factors together — increased productivity, increased workforce and increased number of consumers — the 20th century was the sweetest of economic sweet spots.

The problem for policy makers looking to recreate the ‘glory days’, is these were all one-off economic lifters.

Yes, we can improve current levels of productivity. But the increases will be marginal. Not the quantum leap it was when it went from man to machine.

Life expectancies can be increased further, but by how much? Double?

Possibly, but that then has major ramifications for the traditional pyramid structure of society.

And finally, women, en masse, can only enter the workforce once.

To emphasis the one-off impact of this last point, this is from the US Department of Bureau and Labor Statistics (BLS) report Labor force projections to 2022 (emphasis is mine):

During the 1970s and 1980s, the labor force grew vigorously as women’s labor force participation rates surged and the baby-boom generation entered the labor market. However, the dynamic demographic, economic, and social forces that once spurred the level, growth, and composition of the labor force have changed and are now damping labor force growth. The labor force participation rate of women, which peaked in 1999, has been on a declining trend. In addition, instead of entering the labor force, baby boomers are retiring in large numbers and exiting the workforce. Once again, the baby-boom generation has become a generator of change, this time in its retirement.

These big game changers propelled the Western world economies forward far more than the developing world.

They created higher living standards, higher income levels and higher expectations.

The longer this trend of increased affluence (real and imagined) continued, the more we became conditioned to this ‘new normal’.

On the strength of the ‘new normal’ and in the belief of ‘what has been, will continue to be so’, the private and public sectors indulged in debt. Slowly at first. Then with each passing decade of growing confidence and complacency the pace of debt accumulation increased.

Delayed gratification and prudence were replaced with ‘I want it now’ and greater risk taking.

Total Credit-market debt owed 22-02-19

Source: Positive Money

[Click to open in a new window]

In the early years of the ‘new normal’, debt was a positive influence on the global economy. One dollar of debt (blue line) produced one dollar of economic output (broken purple line).

The relationship between debt and output began to turn toxic in the 1990s.

It now takes more than three dollars of debt to generate one dollar of economic output.

The ‘big game changers’ set in motion the financialisaton of the global economy.

In order to meet the high expectations we believe we’re entitled to, all manner of debt instruments have been introduced to the market place.

While the wealth creators of yesteryear — the factories — are downsizing or closing, the ‘wealth creators’ of today are labelled as ‘too big to fail’.

Is this dependency on the production of debt, at the expense of genuine productivity, sustainable or healthy?

Where to from here?

Population has been a major driver of our economic growth over the past century.

The global population is expected to reach 8 billion around 2022. That is quadruple what it was in 1930.

Can this growth rate be replicated?

Highly unlikely.  We are running out of resources.

According to Live Science, the Earth has a maximum capacity for 9–10 billion people.

Many scientists think Earth has a maximum carrying capacity of 9 billion to 10 billion people.

One such scientist, the eminent Harvard University sociobiologist Edward O. Wilson, bases his estimate on calculations of the Earth’s available resources. As Wilson pointed out in his book “The Future of Life” (Knopf, 2002), “The constraints of the biosphere are fixed.”

Perhaps science and technology may find a way to increase the supply of fresh water and an alternative way to grow grains and farm livestock.

If they can, then it’s possible the global population could exceed 10 billion. But realistically, we cannot replicate the extraordinary population growth rate of the 20th century.

The BLS report ‘Labor force projections to 2022’, has already factored in the slowdown in population growth (emphasis is mine) in its projections:

Because of the decreasing labor force participation rate of youths and the prime age group, the overall labor force participation rate is expected to decline. The participation rates of older workers are projected to increase, but remain significantly lower than those of the prime age group. A combination of a slower growth of the civilian noninstitutional population and falling participation rates will lower labor force growth to a projected 0.5 percent annually.

Once again, please remember, genuine economic growth can only come from two sources — increase the workforce and/or increase productivity.

That’s it.

The economic growth in recent decades has been largely artificial, masked by the tremendous amounts of debt being injected into the system.

However, history tells us — in NEON lights — that this is not a sustainable economic model. That’s why we have books dedicated to ‘debt crises’.

No civilisation has ever been able to permanently borrow its way to prosperity.

All empires become overstretched and under-resourced.

Will it end differently for us?

Stay tuned for part three in Monday’s edition of Markets & Money.

Matt Hibbard,
Editor, Options Trader


While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.


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