Why does the economy have to continue expanding?

[FormerOwner]

Stagflation does seem (to me) like the most likely outcome this time around but some people make some arguments for deflation or even a severe depression as well. I guess that’s why it’s smart to hedge your bets and try and diversify into things that will work in either scenario (to the extent that’s possible!).

[garysears]

This is an interesting thread. My financial education is also limited. The key question that has always bothered me seems similar:

What is inflation?

I understand the value of dollars declines over time and can read a graph, but why must this happen? Isn’t purchasing power important? Inflation seems generally referred to as if it is a fundamental natural force or law like entropy. “The total amount of dollars in any closed financial system must always increase.” Is this really inevitable and if so why is it considered good and simple “economic grease”?

This seems related to the original question of the necessity for continued economic expansion. It also seems fundamentally related to the current housing fiasco as well. Shouldn’t housing basically be a zero sum game, taken as a whole? How can housing really ever outpace wage increases or inflation? How can GDP increase ever really outpace wage increase/actual production? Likewise, how can housing ever be a real source of “wealth building”? What other perceived market values are going to evaporate with the housing/credit bubble?

As far as our economy goes, what happens if wages do not keep pace with inflation? If they have not in the past, do not currently, or will not in the future what does that directly imply?

The whole issue of nearly unrestrained addition of money supply to a relatively static economic capacity seems fundamental. Also seemingly fundamental is the fact that debt presumes on the future. Isn’t debt interest a sort of tax on future productivity? Where is the expectation for future payoff of our current national debt load (personal, corporate, and private)? Won’t the introduction of such a concept require a total shift in values as a nation? What happens if we don’t shift our values in time?

Nationally speaking, what is the current national tax “budget”? What percent of all taxes is currently being spent on debt interest? How fast is that growing? When will our national debt servicing obligations exceed our ability to pay? What will happen then? Isn’t the fundamental faith in the whole system really a fundamental expectation of actual future debt repayment? I think the current housing market shows what happens when that expectation is forgotten. Isn’t our national debt similar to a toxic mortgage? Maybe negative amortization perhaps?

Can anyone explain to me how housing became so fundamental to our economy? I understand the consumer part of GDP. But how can our economy be considered healthy and strong if it is so dependent on spending and not production? Doesn’t money ultimately represent intrinsic value and production? Shouldn’t we be more concerned about actual production measurement and intrinsic value, rather than the total number of dollars being created and spent, when judging economic health?…especially given the nearly unlimited ability to create new dollars. Doesn’t this fact make GDP a poor indicator?

How do a slow down in housing starts, a deceleration in house price appreciation, and a rise in foreclosures pose such a serious threat to an otherwise healthy economy and world financial markets? Why should it pose a systemic banking crisis? How are we going to afford even the interest on the future debt the government will create to try to buy out the current problem?

The more I ask these sorts of questions, the more convinced I become that the future is darker than most bears have imagined. Maybe we shouldn’t assume that ours can will be the first successful fiat monetary system in history. I guess it’s only successful until it fails…

Should I be buying guns and gold? Warming up my bartering skills? My common man theory of finance kept me from buying a house in San Diego in 2004. It is telling me now that our whole monetary system itself looks like a giant pyramid scheme. What am I missing?

[garysears]

This is an interesting thread. My financial education is also limited. The key question that has always bothered me seems similar:

What is inflation?

I understand the value of dollars declines over time and can read a graph, but why must this happen? Isn’t purchasing power important? Inflation seems generally referred to as if it is a fundamental natural force or law like entropy. “The total amount of dollars in any closed financial system must always increase.” Is this really inevitable and if so why is it considered good and simple “economic grease”?

This seems related to the original question of the necessity for continued economic expansion. It also seems fundamentally related to the current housing fiasco as well. Shouldn’t housing basically be a zero sum game, taken as a whole? How can housing really ever outpace wage increases or inflation? How can GDP increase ever really outpace wage increase/actual production? Likewise, how can housing ever be a real source of “wealth building”? What other perceived market values are going to evaporate with the housing/credit bubble?

As far as our economy goes, what happens if wages do not keep pace with inflation? If they have not in the past, do not currently, or will not in the future what does that directly imply?

The whole issue of nearly unrestrained addition of money supply to a relatively static economic capacity seems fundamental. Also seemingly fundamental is the fact that debt presumes on the future. Isn’t debt interest a sort of tax on future productivity? Where is the expectation for future payoff of our current national debt load (personal, corporate, and private)? Won’t the introduction of such a concept require a total shift in values as a nation? What happens if we don’t shift our values in time?

Nationally speaking, what is the current national tax “budget”? What percent of all taxes is currently being spent on debt interest? How fast is that growing? When will our national debt servicing obligations exceed our ability to pay? What will happen then? Isn’t the fundamental faith in the whole system really a fundamental expectation of actual future debt repayment? I think the current housing market shows what happens when that expectation is forgotten. Isn’t our national debt similar to a toxic mortgage? Maybe negative amortization perhaps?

Can anyone explain to me how housing became so fundamental to our economy? I understand the consumer part of GDP. But how can our economy be considered healthy and strong if it is so dependent on spending and not production? Doesn’t money ultimately represent intrinsic value and production? Shouldn’t we be more concerned about actual production measurement and intrinsic value, rather than the total number of dollars being created and spent, when judging economic health?…especially given the nearly unlimited ability to create new dollars. Doesn’t this fact make GDP a poor indicator?

How do a slow down in housing starts, a deceleration in house price appreciation, and a rise in foreclosures pose such a serious threat to an otherwise healthy economy and world financial markets? Why should it pose a systemic banking crisis? How are we going to afford even the interest on the future debt the government will create to try to buy out the current problem?

The more I ask these sorts of questions, the more convinced I become that the future is darker than most bears have imagined. Maybe we shouldn’t assume that ours can will be the first successful fiat monetary system in history. I guess it’s only successful until it fails…

Should I be buying guns and gold? Warming up my bartering skills? My common man theory of finance kept me from buying a house in San Diego in 2004. It is telling me now that our whole monetary system itself looks like a giant pyramid scheme. What am I missing?

[garysears]

This is an interesting thread. My financial education is also limited. The key question that has always bothered me seems similar:

What is inflation?

I understand the value of dollars declines over time and can read a graph, but why must this happen? Isn’t purchasing power important? Inflation seems generally referred to as if it is a fundamental natural force or law like entropy. “The total amount of dollars in any closed financial system must always increase.” Is this really inevitable and if so why is it considered good and simple “economic grease”?

This seems related to the original question of the necessity for continued economic expansion. It also seems fundamentally related to the current housing fiasco as well. Shouldn’t housing basically be a zero sum game, taken as a whole? How can housing really ever outpace wage increases or inflation? How can GDP increase ever really outpace wage increase/actual production? Likewise, how can housing ever be a real source of “wealth building”? What other perceived market values are going to evaporate with the housing/credit bubble?

As far as our economy goes, what happens if wages do not keep pace with inflation? If they have not in the past, do not currently, or will not in the future what does that directly imply?

The whole issue of nearly unrestrained addition of money supply to a relatively static economic capacity seems fundamental. Also seemingly fundamental is the fact that debt presumes on the future. Isn’t debt interest a sort of tax on future productivity? Where is the expectation for future payoff of our current national debt load (personal, corporate, and private)? Won’t the introduction of such a concept require a total shift in values as a nation? What happens if we don’t shift our values in time?

Nationally speaking, what is the current national tax “budget”? What percent of all taxes is currently being spent on debt interest? How fast is that growing? When will our national debt servicing obligations exceed our ability to pay? What will happen then? Isn’t the fundamental faith in the whole system really a fundamental expectation of actual future debt repayment? I think the current housing market shows what happens when that expectation is forgotten. Isn’t our national debt similar to a toxic mortgage? Maybe negative amortization perhaps?

Can anyone explain to me how housing became so fundamental to our economy? I understand the consumer part of GDP. But how can our economy be considered healthy and strong if it is so dependent on spending and not production? Doesn’t money ultimately represent intrinsic value and production? Shouldn’t we be more concerned about actual production measurement and intrinsic value, rather than the total number of dollars being created and spent, when judging economic health?…especially given the nearly unlimited ability to create new dollars. Doesn’t this fact make GDP a poor indicator?

How do a slow down in housing starts, a deceleration in house price appreciation, and a rise in foreclosures pose such a serious threat to an otherwise healthy economy and world financial markets? Why should it pose a systemic banking crisis? How are we going to afford even the interest on the future debt the government will create to try to buy out the current problem?

The more I ask these sorts of questions, the more convinced I become that the future is darker than most bears have imagined. Maybe we shouldn’t assume that ours can will be the first successful fiat monetary system in history. I guess it’s only successful until it fails…

Should I be buying guns and gold? Warming up my bartering skills? My common man theory of finance kept me from buying a house in San Diego in 2004. It is telling me now that our whole monetary system itself looks like a giant pyramid scheme. What am I missing?

[patientrenter]

Gary, you asked a lot of questions, and I am not qualified to answer them all. Given the sharpness of your “common sense” I suspect you already know what I do. But I will share two of my thoughts related to your questions:

1. People who want more money tend to look for it where it’s already piled up. In the split between borrowers and savers, that means there’s always political pressure from borrowers to reduce their debts to savers. Inflation is a very handy way to accomplish this transfer. It’s a silent borrowers’ tax on savers. Since there are many more voting borrowers than savers, net inflation is more common than deflation. Even when people do save, it tends to be in things like pension funds where they can’t see clearly how they lose from inflation. Their debts are very clear to them – home loans and credit card debt and car loans.

2. Deflation increases the value of cash. So you’d be inclined to hold onto it if deflation were significant. If a lot of people do that, spending could plummet lower than even extremely conservative people (like me) want. So sensible managers of our economy tend to err on the side of inflation just to avoid deflation.

I am not ready to say that a depression is coming. The world’s economy is still expanding briskly, and a recession in the US is likely to be pulled up eventually by growth in other countries. Even when the world wasn’t doing as well as it’s doing now, most past recessions did end before they became depressions.

Patient renter in OC

[patientrenter]

Gary, you asked a lot of questions, and I am not qualified to answer them all. Given the sharpness of your “common sense” I suspect you already know what I do. But I will share two of my thoughts related to your questions:

1. People who want more money tend to look for it where it’s already piled up. In the split between borrowers and savers, that means there’s always political pressure from borrowers to reduce their debts to savers. Inflation is a very handy way to accomplish this transfer. It’s a silent borrowers’ tax on savers. Since there are many more voting borrowers than savers, net inflation is more common than deflation. Even when people do save, it tends to be in things like pension funds where they can’t see clearly how they lose from inflation. Their debts are very clear to them – home loans and credit card debt and car loans.

2. Deflation increases the value of cash. So you’d be inclined to hold onto it if deflation were significant. If a lot of people do that, spending could plummet lower than even extremely conservative people (like me) want. So sensible managers of our economy tend to err on the side of inflation just to avoid deflation.

I am not ready to say that a depression is coming. The world’s economy is still expanding briskly, and a recession in the US is likely to be pulled up eventually by growth in other countries. Even when the world wasn’t doing as well as it’s doing now, most past recessions did end before they became depressions.

Patient renter in OC

[patientrenter]

Gary, you asked a lot of questions, and I am not qualified to answer them all. Given the sharpness of your “common sense” I suspect you already know what I do. But I will share two of my thoughts related to your questions:

1. People who want more money tend to look for it where it’s already piled up. In the split between borrowers and savers, that means there’s always political pressure from borrowers to reduce their debts to savers. Inflation is a very handy way to accomplish this transfer. It’s a silent borrowers’ tax on savers. Since there are many more voting borrowers than savers, net inflation is more common than deflation. Even when people do save, it tends to be in things like pension funds where they can’t see clearly how they lose from inflation. Their debts are very clear to them – home loans and credit card debt and car loans.

2. Deflation increases the value of cash. So you’d be inclined to hold onto it if deflation were significant. If a lot of people do that, spending could plummet lower than even extremely conservative people (like me) want. So sensible managers of our economy tend to err on the side of inflation just to avoid deflation.

I am not ready to say that a depression is coming. The world’s economy is still expanding briskly, and a recession in the US is likely to be pulled up eventually by growth in other countries. Even when the world wasn’t doing as well as it’s doing now, most past recessions did end before they became depressions.

Patient renter in OC

[picpoule]

bsrsharma. I think we’re in the midst of stagflation in the housing market. High inflation in prices for homes vs. low wage growth.

[picpoule]

bsrsharma. I think we’re in the midst of stagflation in the housing market. High inflation in prices for homes vs. low wage growth.

[picpoule]

bsrsharma. I think we’re in the midst of stagflation in the housing market. High inflation in prices for homes vs. low wage growth.

[garysears]

Thanks patientrenter for your reply. I particularly liked points 1 and 2 that you made. You make it sound like inflation is intentional coercion to force participation in the stock market mania by either investing or spending on companies (which then fuels the market). I still don’t know why saving cash is considered such an evil. I can’t get over the notion that money should be ultimately linked to intrinsic value and production. Is it only evil if consumers save the money but good when it ultimately piles up in some rich guy’s account where he can convert it to real assets?

So inflation is intentionally made in order to force participation in the stock market scheme. “Buy now or you’ll never be able to retire.” or “If you aren’t willing to participate then you will lose all your savings’ purchasing power.” Sure seems strange that the stock market can increase in value consistently much faster than real economic growth. My common man theory of finance thinks a major adjustment is inevitable.

I wonder how long we can keep putting off worrying about the national debt though. That is a little more than an 800 pound gorilla in our economy I suspect. It also seems like that eventual “crisis” will doom the consumer if nothing else will. That probably sounds quaint because doomsayers have been worried about this for a few decades now but the system still hasn’t imploded. Seems like there is a lot more reason to worry now than ever.

The only way for government to pay debt is through raising taxes or to inflate it away. I have heard estimates that taxes would have to at least double to start meeting our obligations. That would sure take the wind out of my consumer confidence. Either solution seems like dark times are ahead. Inflating debt away can’t ever be the ultimate solution. That would be like getting away with your toxic house mortgage because appreciation will bail you out. It doesn’t make sense to never have to worry about the size of your mortgage/HELOC debt because your house can rapidly increase forever in value. It also doesn’t make sense to never worry how many trillions we owe as a nation because inflation will always bail us out. There has to be a practical limit to inflation. Eventually everyone will see our money as the worthless paper it is.

What happens when the government decides to just “mail the keys in”?

[garysears]

Thanks patientrenter for your reply. I particularly liked points 1 and 2 that you made. You make it sound like inflation is intentional coercion to force participation in the stock market mania by either investing or spending on companies (which then fuels the market). I still don’t know why saving cash is considered such an evil. I can’t get over the notion that money should be ultimately linked to intrinsic value and production. Is it only evil if consumers save the money but good when it ultimately piles up in some rich guy’s account where he can convert it to real assets?

So inflation is intentionally made in order to force participation in the stock market scheme. “Buy now or you’ll never be able to retire.” or “If you aren’t willing to participate then you will lose all your savings’ purchasing power.” Sure seems strange that the stock market can increase in value consistently much faster than real economic growth. My common man theory of finance thinks a major adjustment is inevitable.

I wonder how long we can keep putting off worrying about the national debt though. That is a little more than an 800 pound gorilla in our economy I suspect. It also seems like that eventual “crisis” will doom the consumer if nothing else will. That probably sounds quaint because doomsayers have been worried about this for a few decades now but the system still hasn’t imploded. Seems like there is a lot more reason to worry now than ever.

The only way for government to pay debt is through raising taxes or to inflate it away. I have heard estimates that taxes would have to at least double to start meeting our obligations. That would sure take the wind out of my consumer confidence. Either solution seems like dark times are ahead. Inflating debt away can’t ever be the ultimate solution. That would be like getting away with your toxic house mortgage because appreciation will bail you out. It doesn’t make sense to never have to worry about the size of your mortgage/HELOC debt because your house can rapidly increase forever in value. It also doesn’t make sense to never worry how many trillions we owe as a nation because inflation will always bail us out. There has to be a practical limit to inflation. Eventually everyone will see our money as the worthless paper it is.

What happens when the government decides to just “mail the keys in”?

[garysears]

Thanks patientrenter for your reply. I particularly liked points 1 and 2 that you made. You make it sound like inflation is intentional coercion to force participation in the stock market mania by either investing or spending on companies (which then fuels the market). I still don’t know why saving cash is considered such an evil. I can’t get over the notion that money should be ultimately linked to intrinsic value and production. Is it only evil if consumers save the money but good when it ultimately piles up in some rich guy’s account where he can convert it to real assets?

So inflation is intentionally made in order to force participation in the stock market scheme. “Buy now or you’ll never be able to retire.” or “If you aren’t willing to participate then you will lose all your savings’ purchasing power.” Sure seems strange that the stock market can increase in value consistently much faster than real economic growth. My common man theory of finance thinks a major adjustment is inevitable.

I wonder how long we can keep putting off worrying about the national debt though. That is a little more than an 800 pound gorilla in our economy I suspect. It also seems like that eventual “crisis” will doom the consumer if nothing else will. That probably sounds quaint because doomsayers have been worried about this for a few decades now but the system still hasn’t imploded. Seems like there is a lot more reason to worry now than ever.

The only way for government to pay debt is through raising taxes or to inflate it away. I have heard estimates that taxes would have to at least double to start meeting our obligations. That would sure take the wind out of my consumer confidence. Either solution seems like dark times are ahead. Inflating debt away can’t ever be the ultimate solution. That would be like getting away with your toxic house mortgage because appreciation will bail you out. It doesn’t make sense to never have to worry about the size of your mortgage/HELOC debt because your house can rapidly increase forever in value. It also doesn’t make sense to never worry how many trillions we owe as a nation because inflation will always bail us out. There has to be a practical limit to inflation. Eventually everyone will see our money as the worthless paper it is.

What happens when the government decides to just “mail the keys in”?

[Anonymous]

For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop. Now if everyone values leisure hours just as much reduced work hours does not have to translate into increasing involutanry unemployment. The reality in the US points the other way though.
By the way, the FRB’s charter is to maintain price stability AND full employment. Whether they can be achieved at the same time is another question.

[Anonymous]

For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop. Now if everyone values leisure hours just as much reduced work hours does not have to translate into increasing involutanry unemployment. The reality in the US points the other way though.
By the way, the FRB’s charter is to maintain price stability AND full employment. Whether they can be achieved at the same time is another question.

[Author]

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