Why does the economy have to continue expanding?

[citydweller]

I’m sorry if this is a stupid question, but I dropped out of Econ 101 and don’t quite understand the intricacies of economic policy.

It seems to me that if our economy is based on the theory of continual expansion, isn’t it kind of like a gigantic Ponzi scheme that will eventually have to collapse?

I was reading an article this morning about how the Fed had to pour money into the market yesterday, in order to keep the economy expanding.

Can someone explain this theory in simple laymens terms, and does anyone else agree that propping up the economy only postpones the eventual collapse?

[Fearful]

I am replying because I asked the exact same question in my macroeconomics class in business school. If the economy expands faster than population growth, that implies economic output per person is increasing, which means higher productivity, which means personal incomes are increasing.

The article you cite is a little misleading in that the Fed’s actions were not directly aimed at increasing economic output but rather to help ensure the financial system continues running by providing cash so obligations can be met.

However, this is a short term fix, as when the Fed does this, it increases the money supply; if this increase in the money supply is not reversed it results in inflation. More money correlated to the same economic output as before = inflation. Some argue that loose money got us into this mess in the first place.

The Fed cannot directly control the economy – that is, people still go to work and do the same jobs, whatever the Fed’s actions – but its influence on the money supply can affect the economy. Cynics would say, apparently only negatively.

Macroeconomics is fascinating stuff indeed.

[Fearful]

I am replying because I asked the exact same question in my macroeconomics class in business school. If the economy expands faster than population growth, that implies economic output per person is increasing, which means higher productivity, which means personal incomes are increasing.

The article you cite is a little misleading in that the Fed’s actions were not directly aimed at increasing economic output but rather to help ensure the financial system continues running by providing cash so obligations can be met.

However, this is a short term fix, as when the Fed does this, it increases the money supply; if this increase in the money supply is not reversed it results in inflation. More money correlated to the same economic output as before = inflation. Some argue that loose money got us into this mess in the first place.

The Fed cannot directly control the economy – that is, people still go to work and do the same jobs, whatever the Fed’s actions – but its influence on the money supply can affect the economy. Cynics would say, apparently only negatively.

Macroeconomics is fascinating stuff indeed.

[Fearful]

I am replying because I asked the exact same question in my macroeconomics class in business school. If the economy expands faster than population growth, that implies economic output per person is increasing, which means higher productivity, which means personal incomes are increasing.

The article you cite is a little misleading in that the Fed’s actions were not directly aimed at increasing economic output but rather to help ensure the financial system continues running by providing cash so obligations can be met.

However, this is a short term fix, as when the Fed does this, it increases the money supply; if this increase in the money supply is not reversed it results in inflation. More money correlated to the same economic output as before = inflation. Some argue that loose money got us into this mess in the first place.

The Fed cannot directly control the economy – that is, people still go to work and do the same jobs, whatever the Fed’s actions – but its influence on the money supply can affect the economy. Cynics would say, apparently only negatively.

Macroeconomics is fascinating stuff indeed.

[bsrsharma]

1. If you assume the population increases (either naturally due to increase in births over deaths or through immigration exceeding emigration), economy has to expand to provide same standard of living. It is like if you have an extra child in the family, you need to earn more to keep up your standard of living.

2. There is a general expectation that as time progresses, everyone should live a little better. This is supposed to be “progress”. Some of this expectation is based on improvements in science & technology. But the notion that next generation should live better than us is an ancient human desire. This requires that economy expand to provide more resources for same number of people, even if population remains constant.

Now if you multiply 1 and 2, you can see how an expanding economy is perpetually needed if you don’t want to feel like you are running in place (or even falling behind).

[bsrsharma]

1. If you assume the population increases (either naturally due to increase in births over deaths or through immigration exceeding emigration), economy has to expand to provide same standard of living. It is like if you have an extra child in the family, you need to earn more to keep up your standard of living.

2. There is a general expectation that as time progresses, everyone should live a little better. This is supposed to be “progress”. Some of this expectation is based on improvements in science & technology. But the notion that next generation should live better than us is an ancient human desire. This requires that economy expand to provide more resources for same number of people, even if population remains constant.

Now if you multiply 1 and 2, you can see how an expanding economy is perpetually needed if you don’t want to feel like you are running in place (or even falling behind).

[bsrsharma]

1. If you assume the population increases (either naturally due to increase in births over deaths or through immigration exceeding emigration), economy has to expand to provide same standard of living. It is like if you have an extra child in the family, you need to earn more to keep up your standard of living.

2. There is a general expectation that as time progresses, everyone should live a little better. This is supposed to be “progress”. Some of this expectation is based on improvements in science & technology. But the notion that next generation should live better than us is an ancient human desire. This requires that economy expand to provide more resources for same number of people, even if population remains constant.

Now if you multiply 1 and 2, you can see how an expanding economy is perpetually needed if you don’t want to feel like you are running in place (or even falling behind).

[FormerOwner]

The reasons go much deeper. The economy has to keep expanding because our entire economy is based on debt. Have you ever asked yourself “what is money” or “why is it worth anything” or what determines how much of something a dollar will buy? The answers to these questions will lead you to the answer to why our economy must keep expanding to avoid deflation (recession or depression). Once you understand it, you will be shocked and even more worried about our future than you are now.

I highly recommend reading “The Creature from Jekyll Island – A Second Look at the Federal Reserve”. In a nutshell, one of the major foundations of our entire economy is the fractional reserve banking system. The need for banks to keep on deposit only 10% of customers deposits results in a multiplication effect every time someone borrows money from a bank. This literally creates dollars out of nothing and is the cause of inflation. In order for people to make the loan payments on that debt more and more loans need to be made to keep putting money into circulation. If all of the loans are paid back, money goes out of circulation unless there are new borrowers to borrow it. Bottom line is, that people need to keep borrowing money from banks or the whole system collapses in a depresssion (severe deflation). If we ever get to a point where banks won’t loan or borrowers won’t borrow, the economy is toast – second great depression begins. The powers that be will do anthing (and have) to avoid this.

This is a very over-simplified explanation but it’s a start.

[FormerOwner]

The reasons go much deeper. The economy has to keep expanding because our entire economy is based on debt. Have you ever asked yourself “what is money” or “why is it worth anything” or what determines how much of something a dollar will buy? The answers to these questions will lead you to the answer to why our economy must keep expanding to avoid deflation (recession or depression). Once you understand it, you will be shocked and even more worried about our future than you are now.

I highly recommend reading “The Creature from Jekyll Island – A Second Look at the Federal Reserve”. In a nutshell, one of the major foundations of our entire economy is the fractional reserve banking system. The need for banks to keep on deposit only 10% of customers deposits results in a multiplication effect every time someone borrows money from a bank. This literally creates dollars out of nothing and is the cause of inflation. In order for people to make the loan payments on that debt more and more loans need to be made to keep putting money into circulation. If all of the loans are paid back, money goes out of circulation unless there are new borrowers to borrow it. Bottom line is, that people need to keep borrowing money from banks or the whole system collapses in a depresssion (severe deflation). If we ever get to a point where banks won’t loan or borrowers won’t borrow, the economy is toast – second great depression begins. The powers that be will do anthing (and have) to avoid this.

This is a very over-simplified explanation but it’s a start.

[FormerOwner]

The reasons go much deeper. The economy has to keep expanding because our entire economy is based on debt. Have you ever asked yourself “what is money” or “why is it worth anything” or what determines how much of something a dollar will buy? The answers to these questions will lead you to the answer to why our economy must keep expanding to avoid deflation (recession or depression). Once you understand it, you will be shocked and even more worried about our future than you are now.

I highly recommend reading “The Creature from Jekyll Island – A Second Look at the Federal Reserve”. In a nutshell, one of the major foundations of our entire economy is the fractional reserve banking system. The need for banks to keep on deposit only 10% of customers deposits results in a multiplication effect every time someone borrows money from a bank. This literally creates dollars out of nothing and is the cause of inflation. In order for people to make the loan payments on that debt more and more loans need to be made to keep putting money into circulation. If all of the loans are paid back, money goes out of circulation unless there are new borrowers to borrow it. Bottom line is, that people need to keep borrowing money from banks or the whole system collapses in a depresssion (severe deflation). If we ever get to a point where banks won’t loan or borrowers won’t borrow, the economy is toast – second great depression begins. The powers that be will do anthing (and have) to avoid this.

This is a very over-simplified explanation but it’s a start.

[bsrsharma]

FormerOwner,

My explanation is why a healthy economy should expand to provide increased standard of living for a generally increasing population. Your explanation describes, sadly, what has been happening in the last 30+ years in US. However, if you look at US economy, say, from 1800 to 1900, there were none of the pathologies you have described. There was no fiat money (money was mostly specie (Gold) based), debt was limited and handled with much fear and care, almost like dynamite but still the economy expanded probably a few dozen times in that period. Both due to population increase and a rise in standard of living. Same thing between 1900 to about 1970. The economic ills of modern times started around 1973/74 due to a combination of Vietnam war costs and energy crisis. Then we decided to borrow our way out of problems in the ’80s. ’90s was a bubble expansion due to tech and dot-com. This decade has been primarily a housing bubble. So , it was not always like what you describe. Even now, many of our creditor economies in Asia and Europe have a much healthier debt situation.

[bsrsharma]

FormerOwner,

My explanation is why a healthy economy should expand to provide increased standard of living for a generally increasing population. Your explanation describes, sadly, what has been happening in the last 30+ years in US. However, if you look at US economy, say, from 1800 to 1900, there were none of the pathologies you have described. There was no fiat money (money was mostly specie (Gold) based), debt was limited and handled with much fear and care, almost like dynamite but still the economy expanded probably a few dozen times in that period. Both due to population increase and a rise in standard of living. Same thing between 1900 to about 1970. The economic ills of modern times started around 1973/74 due to a combination of Vietnam war costs and energy crisis. Then we decided to borrow our way out of problems in the ’80s. ’90s was a bubble expansion due to tech and dot-com. This decade has been primarily a housing bubble. So , it was not always like what you describe. Even now, many of our creditor economies in Asia and Europe have a much healthier debt situation.

[bsrsharma]

FormerOwner,

My explanation is why a healthy economy should expand to provide increased standard of living for a generally increasing population. Your explanation describes, sadly, what has been happening in the last 30+ years in US. However, if you look at US economy, say, from 1800 to 1900, there were none of the pathologies you have described. There was no fiat money (money was mostly specie (Gold) based), debt was limited and handled with much fear and care, almost like dynamite but still the economy expanded probably a few dozen times in that period. Both due to population increase and a rise in standard of living. Same thing between 1900 to about 1970. The economic ills of modern times started around 1973/74 due to a combination of Vietnam war costs and energy crisis. Then we decided to borrow our way out of problems in the ’80s. ’90s was a bubble expansion due to tech and dot-com. This decade has been primarily a housing bubble. So , it was not always like what you describe. Even now, many of our creditor economies in Asia and Europe have a much healthier debt situation.

[FormerOwner]

bsrsharma,

I agree with what you stated in your last post. My explanation really only applies since the early 70’s. I totally agree that the Vietnam War was a turning point for our country and we’ve been headed for a cliff ever since. I just don’t know exactly how far away the edge is and what will push us over.

Another thing I didn’t mention is that our expanding economy at it’s core is extremely natural resource dependent and this is even more scary than the fractional reserve banking system as operated by the Federal Reserve. If the world can’t keep producing/shipping mass quantities of stuff, no one would have a reason to borrow, and we would again be faced with a depression. As you said, the US is in a much more precarious position than many other developed countries due to the fact that we consume more than we produce.

[FormerOwner]

bsrsharma,

I agree with what you stated in your last post. My explanation really only applies since the early 70’s. I totally agree that the Vietnam War was a turning point for our country and we’ve been headed for a cliff ever since. I just don’t know exactly how far away the edge is and what will push us over.

Another thing I didn’t mention is that our expanding economy at it’s core is extremely natural resource dependent and this is even more scary than the fractional reserve banking system as operated by the Federal Reserve. If the world can’t keep producing/shipping mass quantities of stuff, no one would have a reason to borrow, and we would again be faced with a depression. As you said, the US is in a much more precarious position than many other developed countries due to the fact that we consume more than we produce.

[Author]

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