Wednesday, January 1, 2014

False Demand Fuels The Wrong Kind Of Growth

We should understand that demand drives investment, confidence is not the real driver. Lack of real growth is about lack of real demand. Much of the demand we see today is driven by artificially low interest rates and a mirage in the markets they distort. By this I mean the distortion and illusion that the economy is healthy tends to cause people to make poor economic choices. Still CEO's are unenthusiastic about investing and banks have little incentive to loan money on half backed ideas for which there is little demand. It is becoming apparent to many the financial system has become dysfunctional.  People are forced to loan their savings to governments and banks with negative interest after adjusting for inflation. Today for other than student and auto loans there is scant demand even at low interest rates.

We must differentiate the kinds of economic growth and understand that all growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category. We need the right kind of economic growth to propel us forward. It must be sustainable, with a purpose, well directed, and have long lasting benefits. It should be in harmony with the environment and at the same time make economic sense. An example of failure is that over the years our government has spent a fortune upgrading hospitals and colleges. This has driven up the cost of using both to where many Americans can no longer afford to visit or attend  either.

During times like these when we are experiencing slow economic growth we should take the opportunity to focus on how to develop and direct growth going forward. Projects that repair, upgrade, improve or reduce energy consumption, and extend the life of current assets both private and public are great targets for our efforts. This does not mean we should start a tear-down and replace program or to overbuild at great cost. It means adopting a sensible program to focus on things that have slipped through the cracks, fixing the worse 20% of our problems that generate 80% of our grief. This will make America more competitive long term and is important in that it will generate a real return on savings and investments, remember the old saying "a penny saved is a penny earned".

It makes little sense to invest in constructing new buildings when many currently are sitting empty or buying new machinery when little real demand exist. The idea of economic growth based on low interest rates tends to generate very bad decisions. We build and buy things that we don't really need. The lowering of rates creates a onetime transfer of wealth that is harmful long-term. Those who accept economic risk should be rewarded, and loaning out your savings is a risk. This means government should instead address the structural issues holding back investment and the Federal Reserve should abandon the policy of using artificially low interest rates to drive the economy forward, these have a negative effect on those who have done the right thing and saved.

With each economic pullback or recession following the great depression jobs have returned more slowly then the one before. This seems to be a trend as the world economy continues to change, mature, and become more government centered. This time the job creation is far less as small business the creator of jobs appears under assault from the lobbyist that represent banks, big business and special interest. Over the years these groups have shaped, guided, and crafted regulations that have shifted commerce strongly in their favor. As the stocks of large companies rise many Americans are often oblivious to the names of family and local businesses that cease to exist.

Small business once the backbone of this country is under attack from the unintended consequences of many new laws passed in recent years. Inspections, a plethora of permits, licenses, taxes, insurance requirements, and regulations make it almost impossible for a small business to open and operate legally. With larger businesses having a number of advantages going forward they are eating the lunch of their smaller competition. We must do all we can to level the playing field if we want to save the job creating backbone of America. Remember the small brick and mortar store and local businesses on Main Street pays taxes, trains workers, and supports your community.

Today many people that have saved for years and had planned to retire on the interest from their savings are being forced to receive meager and historically low interest returns on their savings while inflation lowers their buying power. When it comes to the supply and demand dynamics of the economy many people would be surprised as to the flexibility of demand. Americans are so wasteful that often they can reduce consumption with little impact on the quality of life. Sometimes by cutting back people discover that "less is more", and that life is less cluttered. Until we shift to a better model of quality growth true demand will remain elusive and the economy will find it hard to move forward.

FOOTNOTE; As always comments are encouraged. Please take time to scan the archives for other articles that might interest you. This dovetails with two other post concerning the dismal job market and why businesses are not hiring; 

1 comment:

  1. When you see more recent articles explaining how a bank can borrow money and invest in overseas assets to make 10x their investment does it sink in why no growth in America? EVER? Now reverse the said explanation and watch that credit rush home and get its physical on in Corp. Bond market?