When Economic Growth is a Thing of the Past

We think we’re onto a big story. A BIG story.

This correction is aiming high…it’s going to take down the entire capital structure of the world’s developed economies.

Stocks…bonds…real estate — watch out…they’re all going down.

The dollar…the pound…the euro — look out below!

But that’s not all. No, if we’re right, this is bigger, much bigger than just a market correction.

It’s an economic correction…a monetary correction…and a political correction.

But we’ll come back to that in a moment. First, let’s look at what happened yesterday. The Dow lost 108 points. Not much information content there…

..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 correcting…possibly falling back to the $1,000-$1,500 range?

Yes it could. Gold’s time will come. But we don’t think it is here yet. Gold has risen in anticipation of trouble. But the trouble gold buyers foresaw hasn’t come…not yet. There’s 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 — when the anticipated trouble becomes real here- and-now trouble. And that probably won’t happen for a while. And part of the reason it won’t happen is this Big Story we’re following.

You see, our whole economy…and our society…and our government…and much of what we think…all were built on truths that are no longer true.

In a word or two, our modern economy — and our government — 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 won’t earn a lot of money, but over time you’ll receive safe, sure gains. Right?

Wrong again. Practically all the world’s major debts — private, corporate and government — depend on growth. Without growth, the debtors can’t pay. And if they can’t pay the debt is worthless.

Do you hold Japanese Government Bonds, dear reader? Good luck with that!

But those points are obvious, aren’t 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 — much less in absolute dollars. Life expectancy in the US is 77.6 years. How long do you think they live in Chile? Well, we’ll tell you — 78.6 years.

Maybe there’s 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 — 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 — people on Medicaid…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 haven’t budged.

This is especially interesting because of something known as the “Flynn Effect.” Flynn noticed that kids were getting smarter every year. So, if IQs are going up, you’d naturally expect test scores to go up to. But they’re not. Which suggests that the quality of educational inputs is going down…so that the results end up in the same place.

In other words, the great Truth of the Modern Age — that further inputs produced further outputs — is no longer true.

And more thoughts…

What’s the connection between education and government debt? Why are we trying to compare stock market gains with gains in health care?

Here’s where The Great Stagnation falls apart. Its author completely misses the point. He thinks the “low hanging fruit” has already been picked. In a way, he’s right. The big gains in output — in education, health care, heavy industry, farming, banking, debt and many other areas — have already been made. Now, it’s hard to make any successful investment in any area…

..if you invest in more health care…it will probably be a waste of money.

..if you spend more on education (not individually, but collectively), that too will probably be money down a rathole…

..if you increase the level of credit (as the government is trying to do)…you might as well save your money.

..no point in investing in the stock market either. The glory days are over…

..and stay away from the bond market. The debtors won’t be able to pay…

Yes, we’ve entered an era of ‘Great Stagnation.’ 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 doesn’t 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. That’s what 300 years of finding low-hanging fruit does to a people. We think that every downturn — even a Great Stagnation — can be reversed by, among other things, raising “the social status of scientists.”

No kidding. That’s 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 Stagnation…tomorrow…


Bill Bonner,
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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If this is going to eventuate, the only thing will console me is if that those who engineered it go down too. Would not be OK if they had plenty of safety nets from their shenanigans.


Our fearless leaders always talk about “SUSTAINABLE GROWTH”, which has never made any sense to me, knowing that planet earth itself is not growing in size. If we cover all the land in concrete, then what next. You might be right, maybe “GROWTH” will become a thing of the past, and we will have to learn to live with sustainable economies, policies, trade etc. It would certainly be a different way of life if “GREED” not longer existed.

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