Tuesday, August 9, 2011

Squeezing the Margins and the Emerging Growth-Crunch

So London is burning, Arctic ice set a new low for July, Italy looks like defaulting, Stock markets are crashing, mints can’t keep up with the demand for gold and silver, our Super funds are toast, sales of guns and survival food are setting records in the US, world food production is down, Syrian troops are killing their citizens so fast that they needed to order more ammo, and the news agencies are way too busy to even mention the growing casualties from starvation in Africa, oh…. And the wrong person got eliminated in Master Chef.

How are we enjoying the world resource shortage growth-crunch so far?
I have written previously about the problem of declining resource quality - it leads to squeezed margins, and our lifestyle is fed from those margins. As we bump up against the squeezed margins it stunts economic growth, because real growth needs real resources. If resources are limited real growth stops. The limit is, of course signalled by price. As the price of oil (and just about every other commodity) rises we feel it as a squeeze on discretionary spending.... and then we feel it as an economic downturn.
The part of my brain labeled "Physics" has no problem thinking about limits to growth and diminishing returns. However the "Economics" section of my brain struggles with these thoughts. An economy that stops growing enters into recession or depression - it must be stimulated to re-start growth. The "Economics" section of my brain has no tools to describe non-growth. Our economic paradigm does not allow a long-term hiatus from growth. A non-growing economy collapses. I suspect I am not alone in not dealing well with this topic.

The reason that the markets have crashed is said to be because of the downgrade in US debt. So investors responded to the US debt downgrade by dumping shares and buying US debt.

WHAT!!??!! That doesn’t make sense. I submit that the US debt downgrade was not a cause, it was a trigger. The CAUSE is that people sense that something is wrong and that the “something” is not confined to the US, it is systemic. The US debt downgrade was a symptom, as are the problems in Europe, the Middle East and Africa. Investors see symptoms all around them and they don’t feel in control. They are seeking relative safety – even the relative safety of downgraded US debt.

Although people sense that there is something really wrong, they don’t know exactly what it is – so they lose confidence. Since financial markets are based on confidence, the first casualty is the financial markets.

A US downgrade will not be the root cause of GFC II – the US downgrade is a symptom of a deeper issue. GFC II will be a consequence of the sense of uncertainty triggered by an emerging awareness that there is a systemic problem that is not confined to the US.

Population and the associated resource shortage is the elephant in the room. Nobody dares say it, so the cause of all of these growth-related problems stays a mystery.

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