The Dire Need for Increased Productivity

 

Bill Grossis an American financial manager and author. He co-founded Pacific Investment Management(PIMCO) and also ran PIMCO's $270 billion Total Return Fund (PTTRX). Gross left Pimco in A.D. 2014 to join JanusCapital Group as a portfolio manager.

"The next big monetary and fiscal policy move should include an airdrop of 'money from helicopters' to stimulate the U.S. economy and avoid an extended recession.

"The Federal Reserve and U.S. Treasury should engage in another round of quantitative easing (QE), printing trillions of dollars to buy government bonds and thereby boost the economy.  

 

Mr. Gross recommends more QE as a means to "stimulate" the economy or at least sustain stock prices.

Buying government bonds may increase the money supply available to government, corporations and/or consumers and thereby "stimulate" the economy.  However, I doubt that buying government bonds will cause a significant increase in productivity.  Thanks to the Fed buying more government bonds, the government, corporations and public might purchase more "stuff" (perhaps from China?), but America won't necessarily produce more "stuff".

In fact, I suspect that buying government bonds does no more to increase productivity than corporations buying back their own stock.  The purchases of governments bonds and corporations' stocks might look good on the books, and might even help "stimulate" the economy but, as I'll explain, I doubt that either really helps increase productivity.

Mr. Gross warns,

 

"There is a rude end to dropping money from flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, rather than die."

 

Mr. Gross is telling us that he and government know that QE will end badly.  However, government will nevertheless do almost anything to avoid the "austerity" (and loss of political offices) that are certain to occur in any economic depression.  Politicians will seek to avoid that depression as long as possible by "kicking the can down" the road with artificial "stimulation" based on borrowing against future generations rather than against increased productivity.

In other words,  government can't prevent another economic depression-they can only postpone it.   Government's only current "solution" for the coming economic decline is to "buy time" and beguile the public with "happy talk". 

 

*  "Gross noted that the Federal Reserve, the European Central Bank, Bank of Japan, and the Bank of England have effectivelybought bonds from their governments for six years and allowed their governments to borrow and spend moneyto support their sagging economies."

 

Yes, those governments have "spent money" to stimulate their economies, but much of that spending went to helping consumers buy more "stuff" made in China rather than help American producers to produce more products. 

Net result?

Little or no real economic growth from QE.

QE's failure to significantly stimulate the economies of the US, EU, Japan and England may be evidence of a fundamental fallacy in a "consumer-based" economy.  Government seems to believe that all they need to do to "stimulate" the economy is make it easier for consumers to borrow and spend more currency to purchase more "stuff".   The borrowing creates the illusion of prosperity in the same sense that a stolen credit card can produce an illusion of prosperity for the thief.

However, in a healthy economy, people don't borrow more (against the future) and spend-they produce more in the present, save more, and ultimately spend more without going deeper into debt.

A healthy economy requires a balance between productivity (producers) and spending.  (consumers).  If you can produce more, you can spend more.  If you produce less, you spend less.   The minute that you start going into debt (borrowing against future earnings that may be hoped for but are not yet, and may never be, real), you guarantee that you'll experience a time of future austerity (when the debt must be paid without additional productivity).

 

*  For example, suppose I earn $100,000 per year.  Suppose I borrow $50,000 to buy a new car, new boat or renovate the kitchen.  I spend the borrowed currency now to give me some degree of utility or pleasure.  But, inevitably, the day will come when I have to repay the $50,000 and that payment will have to come out of my $100,000 annual salary.  That will cause me to tighten my belt for a while, spend less, suffer some measure of austerity and experience some financial pain.

Debt is like drugs.  It makes you feel good today, but will make you feel bad tomorrow.  

The only way I can borrow $50,000 today and not experience some future austerity when I repay the debt is to increase my income from $100,000/year to, say, $120,000/year.  If the extra $20,000 will cover my annual debt repayments, I can have a new car today and not suffer some painful future period of austerity.

How do I increase my income?  By becoming more productive.  So long as my productivity increases faster than my debt, I can afford to borrow now, pay later, and avoid serious episodes of future austerity (personal bankruptcy, economic depression). 

But, once the increases in my debt begin to exceed the increases in my productivity, I'm headed for a day of reckoning wherein I'll suffer significant austerity as my debt payments begin to diminish what would otherwise be my disposable income.

 

*  The U.S. economy has been going deeper and deeper into debt for decades.  At the same time, we've shipped industries and jobs to third-world countries, we've allowed foreign competitors to freely sell their products in U.S. markets, our real unemployment rate (according to John Williams at Shadowstats.com) is now about 23% and our government has embraced an economic system called "consumerism". 

Result?  American productivity has been falling. 

We could endure a decline in our productivity if we tightened our belts and accepted a proportional reduction in our spending and standards of living.  I.e., if my annual income fell from $100,000/year to $80,000, I wouldn't die.  I could get by on $80,000-unless, I was also deeply indebted and that debt was based on the presumption that my income would at least hold steady at $100,000 (or might even increase to $120,000) while I repaid my $50,000 debt.

My $50,000 debt could be tolerable so long as I earned $100,000/year.  It might be cause for merriment so long as I earned $120,000.  But if my annual income fell to $80,000, that $50,000 debt might be enough to push me into bankruptcy and personal ruin.

 

*  Debt is always risky because, while the debt is certain, your future earnings can't be guaranteed.  You or your spouse could get sick.  The house might catch fire.  Your employer could go bankrupt.  The nation might slip into an economic depression.   There are scores of reasons why your future income might be reduced and make you far less able to repay your existing debts.

Result? 

Bankruptcy (financial ruin) or austerity (your earnings are substantially consumed by your debt payments leaving you with little or nothing to spend on yourself).

There's no reason to suppose that the same phenomenon (although in a longer timeline) does not apply to the United States economy. 

 

*  In order to establish and strengthen the New World Order, our government has (among other things) shipped many of our jobs and industries to third-world countries leaving us less productive.  We should've seen the loss of productivity in an immediate, correlative decline in our standard of living.  However, that decline in our standard of living was concealed by two policies: 

 

1)  Government advocated the joy of "consumerism".  I.e., Americans don't really need to produce anything.  All we need to do is keep borrowing and going deeper into debt in order to provide an artificial demand for all the products being produced in foreign countries.  Thanks to "consumerism," we could, and should, "shop 'til we drop".  And that's just what's going to happen:  we going to "drop"-big time.  And,

2)  Government made it easier for us to go into debt and borrow against our imagined future earnings or even against future generations.  So long as we could freely borrow, we could maintain the illusion of prosperity.  Borrowing is often a substitute for being productive.  Borrowing creates the illusion (the lie) of prosperity without the underlying need for productivity.  That illusion of borrowing concealed the fact of our diminishing productivity and inevitable decline in our standard of living.

 

By diminishing our productivity at the same time it increased our indebtedness, government has guaranteed that Americans will experience one or both of the following consequences:  1)  austerity; and/or 2) bankruptcy.

 

*  As a nation that values "consumers" more highly than "producers," we're heading for ruin.

If there was any chance of avoiding the coming economic depression, it could only be achieved by a sudden and dramatic shift in policy from "consumerism" to "producer-ism".  If we could regain our status as a nation that was predominately composed of "producers" (people who produce more than they consume), we might be able to avoid the coming depression. 

However, I doubt that's possible. 

Instead, we're coming to a moment when we'll all be forced to become producers, whether we like it or not.  We'll be forced into a deep austerity wherein we might earn/produce $20/hour but only receive $4/hour to spend and support ourselves.  Where'd the other $16/hour go?  To repay the debts. 

If we can't be "producers" by means of producing more than we consume, then we will be forced to become "producers" by consuming less than we produce. 

My point is that, one way or another, we're about to learn to value and revere anyone who is a "producer".  If you're not a producer, or if you're not associated with a producer who's willing to support you, you're heading for an episode of austerity that will make your ears bleed.

I'm not saying that the world must shift to worship "producers".   I'm saying there has to be (and will be) a "balance" between productivity and consumption.  Insofar as we focus on consumption rather than production, we're heading for a calamity whenever it becomes clear that the debt can't be paid.  If we focus on productivity (as we did with the "Robber Barons" of the Great Depression) rather than consumption, we'll see enormous income inequality that leaves the majority of the people/workers in abject poverty and prone to violence and political revolution.

If we have more production than consumption, we become a prosperous nation which exports more than it imports.

If our imports and exports are equal, that's probably evidence that we have a reasonably fair balance between internal production and consumption.

If we have more imports than exports, that's evidence that we've become less productive and are heading for poverty.

 

*  Mr. Gross:

 

"The central banks buy the government's bonds by printing money,expanding their balance sheets in the process.  They then remit any net interest from their trillions of dollars or yen bond purchases right back to their Treasuries.   The money is in essence free of expense and free of repayment as long as the process continues uninterrupted." 

 

The central banks don't print "money".  They only print "currency".  There's a difference.  Gross should know that.

"Remit any net interest from their bond purchases right back to their Treasuries"?  Oh, pulleese!  How much "net interest" can there be if the central banks mandate near-zero or even negative interest rates?

The QE "money is in essence free of expense and free of repayment?"  Is Gross crazy or a pitch man for the "system"?  Where do you find "money" that is free of expense and repayment?  

Money, by definition, has value.  That means people want it.  Because people want "money," they won't normally give it away and they don't lend it for no real interest.  "Free money," by definition, has no value.  There may be illusions of "free money," but there's no such thing in reality.

When Gross declared that economic "stimulation" can only last "as long as the process continues uninterrupted," he implicitly admitted that us that our illusion of QE and "free money" can persist only so long as our QE "stimulation" process continues.   As in Zimbabwe, the economic system can continue to function for several years, during greater and greater money-printing and hyperinflation.  But, ultimately, the QE process must end when it becomes apparent that we can't produce enough to repay the debt, can't borrow enough to service the debt and can't continue printing enough fiat currency to "roll over" the existing debt.  When that moment arrives, we'll all see that the "free"/helicopter monetary system is nothing but a Ponzi scheme that can't "continue uninterrupted" forever and must therefore, someday, implode. 

The government is going deeper and deeper into debt without significantly increasing our nation's productivity and capacity to repay the National Debt.   Eventually, creditors-even  central banks-will lose the will or capacity to continue lending more currency to the non-productive government.  When Americans can't produce more and government can't borrow more-and therefore the debt can't be paid, serviced or increased-the U.S. economy will implode.

 

*  "Gross believes central banks will print more helicopter money via QE 'perhaps even in the U.S. in a year or so and reluctantly accept their increasingly dependent role in fiscal policy.'"

"Such a move [more QE] would allow governments to focus on infrastructure, health care, and introduce a 'universal basic income'for displaced workers amongst other increasing needs."

 

Under the guise of some "universal basic income," productivity will stagnate.  Why?  Because, as we spend more currency to provide "entitlements" for the non-productive, we have less currency available to invest in increasing our productivity. 

This isn't conjecture.  It's happening right now.

According to Mish Shedlock ("Greenspan:  Worried About Inflation, Says 'Entitlements Crowding out Investment, Productivity is Dead'"), Alan Greenspan agrees:

"Former Fed Chairman Alan Greenspan spoke with Tom Keene and Mike McKee for Bloomberg TV & Radio. He discussed the ramifications of negative interest rates, entitlement spending and declining productivity.

"On the state of the U.S. and global economy, he said: 'We're in trouble basically because productivity is dead in the water.'

"On whether he is optimistic going forward, Greenspan said: 'No. I haven't been for quite a while. And I won't be until we can resolve the entitlement programs. Nobody wants to touch it.  And that is gradually crowding out capital investment, and that's crowding out productivity, and it's crowding out the standards of living."

 

 As government gives more borrowed, fiat currency to the unemployed and unemployable, inflation devalues the currency and productivity declines.  That's stagflation-the worst or all possible economic worlds.   Prices rise at the same time employment and productivity fall.  Debts become increasingly burdensome.  Bankruptcies rise.  Standard of living falls.  

 

*  Government can't increase the national standard of living by subsidizing the unemployed/non-productive.  The only way our average standard of living can rise is if our average productivity rises.  

The fundamental idea behind QE is that government will borrow from future generations to provide cheap loans to today's consumers; the consumers will buy more goods and services' the producers will make more profits, and the nation's GDP and standard of living will rise.

It's a nice theory, except for one thing.  It won't work in a world of Global Free Trade.  

Why not?

Lemme illustrate.  Suppose I'm a poor guy, living in poverty and not spending very much.  Suppose government gives me some "free" currency as an "entitlement".

What do you suppose I'll do?  Rush out and buy a new, American-made Cadillac? 

Or, will I-knowing myself to be a poor guy and having habitually purchased cheap products made in China for the past decade-try to stretch my windfall by purchasing more cheap products made in China or some other third-world country? 

As long as the Chinese products are cheaper than American-made products, you can bet that I'll be going to Walmart to buy Chinese.  To the extent that's true, QE did not stimulate American consumers to purchase American products-it stimulated American consumers to purchase cheap products and thereby enriched Chinese producers rather than American producers.

Which means that the QE that was supposedly intended to ultimately enrich American producers, actually went into the pockets of Chinese producers. 

Can I prove that hypothesis?

No.  But I can point to an interesting coincidence. 

Q:  When did our last episode of QE taper off and finally end? 

A:  October, A.D. 2014.

Q:  What's happened to China's economy since U.S. QE ended?

A:  China's economy has been in significant decline.

That coincidence doesn't prove anything, but it does support the hypothesis that (thanks to low tariffs and global free trade) much of the rise in productivity that followed QE flowed to China's producers rather than America's.  It's at least arguable that the end of American QE may have helped push Chinese producers and China's economy into recession.

*  If QE stimulated American consumers to purchase more foreign-made products, it thereby increased the imbalance between American consumers and American producers by further favoring consumers.

Result?  QE did not boost American productivity.  American productivity might even have fallen insofar as Chinese producers (subsidized by U.S. QE) were able to drive some American producers into bankruptcy or into relocating their factories to China. 

Result?  QE may have actually not only increased the National Debt, but also reduced American productivity.

Result?  More debt and less productive capacity to repay that debt.

Result?  America is heading for that day of reckoning when we must admit that we:  1) can't pay the national debt; 2) can't borrow any more; and therefore, 3) must reduce our standard of living to reflect our true capacity to produce; or 4) must repudiate most of the National Debt.  

In A.D. 2014, Forbes magazine ("We've Crossed the Tipping Point; Mos Americans Now Receive Government Benefits") reported that 49.2% of Americans receive government support.  By now, the percentage is probably over 50%.  And, bear in mind that this support is based primarily on government borrowing rather than American productivity.

If 70% of all government spending was directed to entitlements, that wouldn't necessarily be bad so long as the government's spending was derived from tax revenues based on our productivity.  I wouldn't like it, but I might not object if 99% of Americans lived on generous entitlements-so long as the remaining 1% of producers were sufficiently productive to afford that tax burden.

But, when 70% of all government spending is directed to the non-productive consumers, and those funds are substantially borrowed, I must object because I think I can see how this will end.  Badly.  Catastrophically.    

What do you think will happen to the 50% of Americans who depend on government support, if creditors refuse to lend more currency to government to provide that support?  The support they depend on will be significantly reduced.  What then?

There'll be poverty.  Trouble.  Chaos.  Violence.

And it won't end until Americans, as a people, regain their respect for producers and their capacity to produce more than we consume.

 

*  In sum, Mr. Gross's recommended strategy is to simply "kick the can" a little further down the road to postpone the depression that everyone knows we're going to have.  He implies that we should do what we can to "buy time" and postpone the coming collapse, but he has no remedy to prevent that inevitable collapse.