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Defaulting into a world without growth

Economic growth is the central assumption underlying our political and economic systems. It is the mechanism relied upon for improving living standards, reducing poverty to now solving the problems of over indebted individuals, businesses and nations. All brands of politics and economics assume sustainable, strong economic growth, combined with the belief that governments and central bankers control the economy to bring this about. Like F. Scott Fitzgerald’s Gatsby:

“[they believe in] the orgiastic future that year by year recedes before us. It eluded us then, but that’s no matter – tomorrow we will run faster, stretch out our arms farther.”

Growth fuelled by debt

But strong growth is not normal, being a relatively recent phenomenon in human history. Moreover, recent economic activity and the wealth created relied on borrowed money and speculation. It was based upon the profligate use of mis-priced natural resources such as oil, water and soil. It relied on allowing unsustainable degradation of the environment. In 1954 German economist E.F. Schumacher identified the trajectory:

“Mankind has existed for many thousands of years and has always lived off income. Only in the last hundred years has man forcibly broken into nature’s larder and is now emptying it out at breathtaking speed which increases from year to year.”

Central to the problem is the level of indebtedness. Debt accelerates consumption, as borrowed funds are used to purchase something today against the promise of paying back the money in the future. Spending that would have taken place normally over a period of years is squeezed into a relatively short period because of the availability of cheap borrowing. Business over invests misreading demand, assuming that the exaggerated growth will continue indefinitely, increasing real asset prices and building significant over-capacity. Around 85% of the debt incurred over the last 30-35 years funded the purchase of existing assets or consumption rather than being used for creating new businesses or productive purposes which build wealth.

The problem of debt remains unaddressed. As a recent analysis by McKinsey Global Institute shows (see Table below), deleveraging has not even commenced.

SD Table1 301015

SD Table1 301015

Source: Richard Dobbs, Susan Lund, Jonathan Woetzel and Mina Mutafchieva (2015) Debt and (not much) deleveraging, McKinsey Global Institute.

Elegant financial engineering and ‘hopium’ economics cannot mask the problem of excessive leverage forever. The debt will have to be repaid out of future income or proceeds of asset sales, diminishing growth or savaging investment values. If as is likely this debt cannot be repaid, then it will be written off, resulting in an unprecedented loss of wealth for savers.

Pushing problems to the future

Compounding the problems of debt, resources and environment are challenges of slowing rates of meaningful innovation, lower improvements in productivity, demographics, inequality and exclusion.

The trade-offs are complex. Lower growth reduces environmental damage and conserves resources. But it lowers living standards and increases debt repayment problems. Faster growth lifts living standards. If the expansion is mainly debt driven, it adds to already high borrowing levels and increases environmental and resource pressures.

Lower commodity prices help boost consumption and growth. But it encourages greater use of non-renewable resources and accelerates environmental damage. Inflation reduces debt levels but penalises savers and adversely affects the vulnerable in poorer nations. Reducing free movement of goods and capital or currency devaluation assists an individual country, but the resulting economic wars between nations impoverishes everyone.

The approach to dealing with the challenges is flawed. In a Faustian bargain, policy makers sold the future originally for present prosperity and are now re-selling it for a precarious and short lived stability. There is a striking similarity between the problems of the financial system, irreversible climate change and shortages of vital resources like oil, food and water. In each area, society borrowed from and pushed problems into the future. Short-term profits were pursued at the expense of risks which were not evident immediately and that would emerge later.

Kicking the can down the road only shifts the responsibility onto others, especially future generations. By postponing the inevitable, the adjustment becomes larger and more painful. A slow, controlled correction of the financial, economic, resource and environmental excesses now may be serious but manageable. If changes are not made, then the forced correction will be dramatic and violent, with unknown consequences.

Less room to move

The world is remarkably sanguine about a new major crisis. During the last half-century each successive crisis has increased in severity, requiring progressively larger measures to ameliorate its effects. Over time, the policies have distorted the economy. The effectiveness of instruments has diminished. With public finances weakened and interest rates at historic lows, there is now little room for manoeuvre. Resource constraints and environmental problems are increasingly pressing. A new crisis will be like a virulent infection attacking a body whose immune system is already compromised.

Economic problems feed social and political discontent, opening the way for extremism. In the Great Depression the fear and disaffection of ordinary people who had lost their jobs and savings gave rise to fascism. Writing of the period, historian A.J.P. Taylor noted:

“[the] middle class, everywhere the pillar of stability and respectability . . . was now utterly destroyed . . . they became resentful . . . violent and irresponsible . . . ready to follow the first demagogic saviour . . .

In 130 AD, Claudius Ptolemaeus, known as Ptolemy, a mathematician, astronomer, geographer and astrologer, developed an astronomical system. The system fitted the accepted view of philosophers and the church that the earth was at the centre of the universe and all stellar bodies moved with perfect uniform circular motion. When Galileo observed the actual movements of heavenly objects and tested Ptolemy’s theories against the evidence, the system collapsed. Economic and political processes increasingly resemble the Ptolemaic system where the possibility of lower growth, reduced wealth, reduced living standards, and constrained economic sovereignty do not feature in the policy debate.

The world generally and financial investors are remarkably unprepared for the events that are unfolding. Humanity faces this, its greatest crisis, with, in the words of Biologist E.O. Wilson, “Palaeolithic emotions”, “medieval institutions” and delusions about its “god-like technology”. Like Fitzgerald’s tragic hero Gatsby, the battle cry is: “Can’t repeat the past? Why of course you can!


Satyajit Das is a former banker and now a world-renowned author and consultant. His latest book is A Banquet of Consequences. © 2015 Satyajit Das, All Rights reserved.


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Warren Bird

November 04, 2015

I have enormous respect for Das and his knowledge of corporate treasury operations, derivative instruments and the workings of financial markets. He rightly warned of risks in the global banking system ahead of the GFC. And he may well be right that the world still faces on-going issues from high levels of indebtedness.

But the appropriate way to respond to Das's argument in this paper is to critique it, not to be simplistically drawn in by its emotive tone. For example, growth has been driven by a lot more things than just debt so the central piece of the argument is at best inadequate and possibly flawed. Productivity improvement is one thing that comes to mind as a growth driver, with the technological changes of the last 150 years far surpassing anything seen in history before that and making it possible for economies to carry more debt than before as it will be able to be paid off by the strong growth generated.

The emotive opening, which calls the legitimate desire of all men and women on the planet for an improvement in living standards 'belief in an orgiastic future', is just that - emotive. Is it factual, is it legitimate - not in my eyes. There are definitely sub-sections of global society who are as greedy and rapacious as Gatsby's peers, but that's not the heart of the global economy and the ordinary people who just want a better life for their families. Lumping us all with unnecessary guilt in this way is not helpful to the discussion of the issues the global economy undoubtedly faces.

David M

November 01, 2015

Just to ask the obvious, after reading Das's article in this weeks issue, what should we all be doing about such an obviously dire problem - or do we just sit a boil like frogs until we expire - or the Global System does? Thanks and thanks for the article - indeed for whole of Cuffelinks.

Philip Carman

October 31, 2015

What to do, John Volf...??? Own your own home and your next home if you can identify it and your business premises (if applicable) - that's all the property exposure anyone should have; expect weaker Australian industrials (especially the banks) over next 6-12 months but some resources/materials stocks will start recovering now as they've been oversold. Weaker Aussie dollar means investing offshore will work, but stay cashed up with only 30-40% "at risk" - the rest in cash until end of 2016. Liquidity will be important and buying low during periods of low confidence in markets is always better than following the herd...
Das is right but a little short on details...maybe that's wise when making predictions.

Doug C

October 30, 2015

Economies should aim for development rather than growth.
Growth means development only if either :
- current standards of living are maintained through innovations that reduce consumption of resources (materials, energy, labour, time) or
- standards of living are improved through innovations without increased consumption of resources (materials, energy, labour, time).
(In both of those conditions, materials should be recycled, and energy should be from renewable sources)
Otherwise, growth becomes acquisitive materialism and inefficiency; and an inevitable depleting of resources which eventually results in increased costs, pushing development (at any level) out of reach of anyone but the wealthy.

Graham Wright

October 29, 2015

We have kicked the can down the road for so long and so many times to avert the full correction, that we now believe we can continue to kick and avoid the reckoning. We have reinforced our belief that the future reckoning can be deferred or even, that future time will provide a painless remedy. It has not hurt yet, so why let it interrupt our greed. I hate to think how the reckoning will manifest itself. If we cannot believe it will happen, we will not be able to predict it or avoid it.

John Volf

October 29, 2015

I tend to agree with the comments of Satyajit Das. However, Im curious to know, that given there will be an impending day of reckoning where debts will either be defaulted on or repaid, and hence will have an impact on liquidity, what does one do in the meantime wrt investment vehicle choice, what are the signs of the beginnings of this period of reckoning, and what does one do to protect their capital??

Gary M

October 29, 2015

If resources, land been used in unsustainable ways over the past 100 years how come all minerals, energy and food are more plentiful and cheaper than ever before in human history, even though the population has quadrupled? The current level of poverty reduction is unprecedented in human history eg 1 billion people lifted out of poverty in the past decade. And debt levels have only risen because an unprecedented number of willing lenders/savers all over the world have been happy to lend huge amounts to borrowers for very little reward. These lenders/savers are not borrowing/spending. So it’s a zero sum game – debt is offset by lending (by definition)


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