Tag Archives: economic growth

Is the economic imperative sustainable?

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Is the economic imperative sustainable?

This post was written before the COVID-19 conundrum changed a few things… and yet it still applies.

The Australian economy is in a funk. We are told that annual growth in retail trade of 2.4% in trend terms is the lowest since December 2017.

Throughout 2019 households have not increased their volume of retail purchases at all.

In short, we are all strapped for cash and are not buying stuff.

Woh, hold on. Not quite.

Of course, we are consuming, we do it each and every week.

The problem for the economy is that we are not doing more of it than we did last year. Consumption is going on all the time, it is just not growing in percentage terms.

So it’s not consumption that economist’s are worried about, it is growth in consumption. Growth is considered essential for without it everything collapses in a heap. At least that is what we are told.

Let’s just look at that 2.4% again.

In 2019, retail trade — selling merchandise in the state that it is purchased, generally to a customer base of private individuals — will be double what it was in the year 2000.

When ABBA were in the charts in 1974 consumer spending by Australians was four times less than it is today. There are more people on Australia now than in the mullet and square shoulder days, but to quadruple spending in 40 odd years.

Come on, think about it.

Growth is not sustainable. It cannot go on forever. Not least because there will be nothing left for me to consume. I’d be consumed out.

Unless prices skyrocket there is a physical limit to the stuff that one person can consume even if I am littering, throw away, who gives a shit kind of consumer.

Sooner or later everyone has all the things they can think of and wish to possess. Does it mean that they just keep going round and round upgrading every time? Are we really that shallow — maybe!

Endless growth is just an extraordinary premise when you really examine it.

It is obvious why it is there.

Companies have to keep selling or they go out of business. Unless there are new people around to buy your widgets you will need your current customers to buy widget 2.0 or you diversify into insurance and the airline business.

A business can get away with it if prices rise. Their unit costs might go up but so does the retail prices and so growth is maintained. Indeed inflation is part of the growth deal, too little being as bad as too much.

So we teeter on the delicate balance of perpetual growth being imperative to our survival

Teetering a lot

Recently there was a step-change in the Australian continent.

An extended drought in the east created hot, dry conditions in spring when frontal systems create strong westerly winds. Dry air, hot temperatures, tinder-dry forests and strong winds produced devastating bushfire.

At the time of writing more than 11 million ha of bushland has burnt in NSW alone, an order of magnitude more than the whole of the previous fire season. Across Australia, an area the size of the Netherlands and Belgium has burnt in just a few hot, scary and brutal months.

Many of the forests that went up in flames, sometimes 70m tall, were supposed to be wet, they are even called rainforest and rarely burn, some of them not for hundreds of years.

This year they did. Several of the fires are 500,000 ha each.

It will take a while to assess the consequences but I suspect that these events have nullified decades worth of conservation effort and billions of dollars worth of natural resource management actions.

It should also be a wake up to the economists who are going OMG “annual growth in retail trade of 2.4% in trend terms is the lowest since December 2017″.

If the countryside burns like it has this summer the economy will struggle to achieve any growth at all for a long time.

And now the virus

So here we are in mid-March 2020 and COVID-19 is about to be declared a pandemic.

Australians have cleared the supermarket shelves of toilet rolls because they are absolutely bonkers — the toilet roll supply for the country comes from Adelaide, not Wuhan — and are about to freak out good and proper.

Already global markets have freaked out too and taken a massive plunge. This is actually a necessary correction from an over-inflated bull run that has gone on from the GFC, partly a response to the cash injections from jurisdictions. But ni matter, we can blame nature.

This new virus will not cease economic growth. The flu virus does something similar every year, this one is just more acute. People’s reactions to this unknown make a recession is a given. 

Postscript

Even though there are confirmed cases of COVID-19 in the US, most people are more likely to catch and spread influenza.

In the 2019 flu season, there were nearly 30 million cases of flu and 17,000 deaths.

It would be great if you liked this post enough to share it on your social network.

Post revisited – washing machines

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Post revisited – washing machines

What does 2 billion look like?

2,000,000,000

A two followed by many zeros. It’s big.

This number of standard sized washing machines would fill over 8 million 40 ft shipping containers, roughly equivalent to the total capacity of the global fleet of container ships.

And before the next generation of youngsters get over their binge drinking obsession, there will be 2 billion dishwashers on earth saving teenagers from Cincinnati to Conakry the indignity of doing the washing up.

Quite the improvement considering that running water only entered the majority of homes after the industrial revolution.

Here is what Alloporus said about washing machines in June 2011…

Washing machines

The number of people with the economic ability to purchase a dishwasher will double to more than 2 billion in the next 30-40 years.

Far more will rise above what Swedish statistician Professor Hans Rosling calls the ‘washing line’; an income of US$40 per day, the threshold necessary to own and run a washing machine.

On the one hand this is a worry.

Energy is needed to manufacture and power all these devices as is a water supply to allow them to function. Policy efforts on climate change notwithstanding, the cheapest power still comes from fossil fuels. It is why China is building coal-fired power stations even as they diversify into alternative fuels because they will need the energy to run all the new white goods.

On the other hand, sales of consumer goods will drive economic growth.

This is good news for those who require GDP growth, the enshrined dogma of political success. Nothing will prevent families from buying a washing machine if they can afford it, nor indeed, airplane tickets, dishwashers and cars as their wealth allows.

Couple this inevitable growth in buying power with ever more people and the growth paradigm has never looked better.

Hans Rosling has a very clever way of explaining the population and economic growth combination using Ikea boxes

It is the economic transition that is integral to the population one.

Without economic growth it is harder to see population growth slowing and eventually contracting. Children must consistently outlive their parents for this to happen and that means needs must be met and standards of living must rise.

It seems that we have not fully embraced this reality.

No amount of environmental concern, moral imperative to preserve resources or even fear of environmental collapse is likely to trump the imperative to improve things for our families.

For this is an expression of self-preservation that is hard wired?

There is a reason that Rosling’s Ikea box video has appeared several times on this blog.

It is the best and most accessible explanation of what will happen to the human population of this planet under business as usual. It is also the most likely outcome baring collapse.

But that number, 2,000,000,000 remains hard to fathom.

When the number refers to washing machines an armada like no other is needed to move them to a point of sale. There is such a global fleet and it is ploughing the waves right now heavily laden.

Shareholder value

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Sydney cityscapeAre you a shareholder? It is hard not to be. If you have superannuation or a term deposit then at least some of your money is invested into business ventures on your behalf. In fact about the only way you can be totally share free is to keep all your money under the bed.

So now that you know you are a shareholder, do you know if you are getting shareholder value?

You can expect it because in most jurisdictions company directors have a legal obligation to maximise shareholder value. Indeed they can be prosecuted for failure to provide duty of care and diligence in this regard. Standard excuses such as denial, honest ignorance, paralysis from uncertainty, business as usual, and ‘we did what they did’ no longer pass muster in the courts [so I am told].

This is reassuring. The decision makers who get hold of our money are supposed to try everything they can to increase its value.

Only the truly trusting would leave it at that. Care and attention does not a dividend make.

Luckily you also have access to evidence to make your own assessment of investment value. When shares are purchased on a stock market, the buyer has information about the company she is buying into.

There is the share price, both the current and historical, that can be compared with other similar businesses.

There is the company website, press releases and, most importantly, there are the company reports. These are annual statements of how the company is governed and how it performed financially during the reporting period.

Sometimes companies will also release other reports on sustainability that say something about performance beyond the bottom line. These help claim values other than fiscal, the social and environmental performance of the firm.

Smart perusal of this information will tell you if the price you paid for the share, its current price plus any dividend, represents value now or if you might need to hold on a bit linger for the value to accrue. All good so long as the information the company releases is reliable and relevant.

Naturally there are rules that bind company directors to declare what they know and penalties applied if they don’t. This should make the evidence appraisal approach a sound way to assess value.

Many a wannabe Warren Buffet has made a mint on this evidence. Warren himself has made billions from an uncanny knack of investing in under valued stock. So with a bit of effort on your part, your shareholding can be valued and used to make a personal decision on value. Make the right buying and selling decisions and you appreciate shareholder value to yourself.

Now let’s complicate the puzzle a little.

Your superannuation is a long play. You don’t want to speculate with your retirement income so those annualised returns and the puts and short tactics of traders are not what you want. You need long-term value.

How can you determine this?

Well under the current disclosure rules this is very hard. The system is designed for short-term gain with returns to shareholders as immediate as possible. Hence value is what you get now, not what might come later.

This immediacy creates many problems. What if you want to know future value should you choose to hang on to your shares?

Historically share value goes up. At least that is what happens to the indices because, in general, as economies generate wealth over time indices of stock tend to rise. This is reassuring especially if you put your nest egg investments into many baskets.

But an index is an approximation from aggregating many stocks. Indices are poor predictors of what a given stock value especially over time.

Run out far enough and most things come and go. Remember when everyone had a Nokia? You would not have picked the trend toward smartphones from Nokia’s annual reports.

Shareholder value in the long run is guesswork, educated at best. You will never really know what that value will be.

And in the end what you value is the money you made.

Betterment

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yatchs in monaco harbourMost of us gain more satisfaction than we realize from progress.

We are programmed to solve riddles and explore new things that give us the feeling of moving forward. In modern suburbia it may be that crime shows on TV are enough to satisfy our problem solving need and the confines of a cruise ship once a year does enough for our sense of adventure. Yet there is some expression of the betterment gene in us all. We really like progress.

Our need for progress has morphed over the generations. Not so long ago it was a struggle for equality. We fought against oppression, prejudice and the denial of opportunity, and, for the most part, have made things better.

These issues still linger of course, but all around the world societies mostly do not burn witches at the stake, deny education, a fair wage or the vote. Each generation has seen improvement in these fundamentals compared to times past. So much so that we seem to have lost collective interest in them.

Instead of core benefits, progress of late has been taken over by commerce. We measure ourselves by our access to an almost endless choice of goods and services that we seek to acquire. From the luxury yachts that spend 99% of their time tied up at a mooring, to a kitchen renovation, or even the necessity of five varieties of breakfast cereal in the pantry. Betterment is now all about stuff.

And it is what it is — inevitable really. For when there is no need for struggle people still find a way to do it. Intuitively we know that betterment requires work and sacrifice.

When all our basic needs arrive on a plate instead of channeling our struggle energy into achieving higher things we have settled on ways to get more stuff. This is a pity and perhaps the start of our undoing.

Betterment should really be about our higher selves — our efforts channeled toward awareness, balance and a sense of peace. Stuff would be part of this but not the all consuming driver and measure of how well we are doing.

Greek debt again

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I came across this interesting visual presentation on the size of the Greek national debt… maybe staggering is a better adjective.

Recall that the talented presenter was dwarfed by half a trillion dollars. Now let’s go across the pond to the US.

The US national debt is roughly $15,717,900,000,000

That is $15.7 trillion if my conversion is correct – a tad more than Greece and a huge $50,000 for every US citizen.

In principle the US has a better capacity to repay creditors given the debt is 107% of GDP compared to 143% for Greece, but I just can’t get my head around the absolute number. And even though I lay no claim to an understanding of economics I am sure that owing more than you earn is not a good place to be.

You can see why climate change action is neither here nor there when the world has chosen to walk along this kind of fiscal knife edge.

Stranded assets

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My analogue television is a stranded asset. It has perfect picture and sound, plus it has worked this way for years without a flicker. Only now there is no signal for it because we have moved into the digital age.

I could complain. My investment in that analogue TV still had time to run – I expected to get entertainment returns from reruns of the Simpsons for years to come.

Instead I was forced to purchase another asset, either a set-top box to convert the signal or a new digital TV. I chose the second option in plasma. By doing so I wrote off any returns from my stranded asset and made another investment.

And the world did not end.

In fact I did what the economists, politicians and business owners want; I made another purchase.

It would be interesting to see what would happen to the performance of super funds that have invested in fossil fuel power plants if those assets were also stranded. No doubt returns would take a hit, but again, I doubt that the world would end.

We are always told that superfunds, the investment vehicles that take a proportion of our before tax income that in Australia is a compulsory 9% of salary paid by all employers on behalf of their staff, are risk adverse investors. Surely then, they should have balanced portfolios.

Presumably someone has done the sums, but I would guess that the inherent and irrational volatility of the markets is a far bigger hit that the loss of some power stations. And like the banks that chose to lend to the Greek government, they might not be as sure of their returns as they think and they may not get a bailout.

So the noise and bustle over the loss of these assets to accommodate the necessary change to alternative fuels is really vested interest. It comes across as a rail against a redistribution of returns but in really, it is the fear that they might actually have got the investment wrong. That in following what they claimed was conservative investment management they, in actually, were taking a huge punt.

This reality comes for adherence to growth economics 101.

To keep economic growth happening, funds must be mobilized to generate new assets, goods and services. How else are the GDP numbers expected to grow?

In fact we do it all the time. It’s just that we are so under the thumb of the current set of asset holders we forget that as part of normal economic activity some assets will do well while others fail. It is a normal pattern of economic activity. Consequently there will always be stranded assets; and the world will not end.

More importantly we will have to spend to create new assets to allow us to complete the transition from fossil fuels without seeing the end of the economic world.

 

A future economy

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Over the past 120 years ago the have been an average of 114 million sheep grazing on Australia paddocks producing wool and meat for export. In 1970 the numbers peaked at 180 million. Today there are still 72 million sheep but there are also mines making Australia the 2nd biggest global producer of iron ore and 4th biggest producer of coal. Australia the country has done very nicely out of the natural resources of the world’s largest island.

In time the Australian economy will need to make money from something other than natural resources. This is a significant reality for a society that was created on the back of the sheep and now rides high on coal trucks and ships laden with iron ore.

“No worries, mate,” some say. There is plenty of time. There will be generations of demand for those salable mineral resources from the 4 billion people who still don’t have a washing machine but would dearly like one.

Plus we could always go back to sheep. For soon there will be 10 billion humans to be fed and we have all that wet and wonderful land in the north to turn into a food basket.

I joke not. The latter idea is under serious consideration by the right leaning Federal opposition party. Equally there are those who would see remaining forests in the east paved to provide the living space for 100 million.

And maybe that is enough. There could be another 100 years of wealth in natural resources grown on and dug up from the land and immigration to provide local customers who will buy houses, white goods and visit air-conditioned shopping malls.

But I would think we need something else; at least a couple of alternative sources of external income. Not least because there will be a need to find something for everyone to do. Else the nation becomes a handful of miners and hi-tech farmers supported by millions of shopkeepers (or, more likely, couriers for online stores) and civil servants. And not everyone can be those; and already 3 out of 4 Australians in the workforce are paid for delivering a service of one sort or another.

So what would the else be?

Presumably something that the people are good at, have an aptitude for, and makes sense economically. Sport perhaps.

Commentators in the US have asked the same question of their nation. One of their answers is for the US to drive the technology revolution needed to shift our energy supply away from fossil fuels. They have capital, smarts, institutions, and the all-important entrepreneurial spirit. That they are being left behind in this by China and Germany also supplies plenty of motivation.

Australia lacks the scale of entrepreneurial spirit and risk capital to make innovation become a serious earner. Sole trading we can do, but a desire to build empires from small beginnings is rare. Consequently, the risk capital that runs at close to 10% of commercial investment in the US barely makes it to 0.1% in Australia. This lack of support requires that most innovators with a big vision must find what they need overseas.

So what does Australia have? What it has always had; abundant natural resources.

It makes sense to use the vast landmass, the myriad animals and plants, the minerals in the earth and become a regional, even global, breadbasket. Not least because Australia does have smarts, capital, infrastructure and the experience to overcome the significant practicalities that such a mission presents.

Only water, nutrients and labour are in short supply. Land must be managed carefully to avoid soil degradation and salinity. There has to be a careful eye on the changing weather and an ability to drought proof agricultural production.

Australia has a well-developed system of regional natural resource management, generations of farming experience, research and innovation capacity, a world-class tertiary education system and an emerging culture of prudent agriculture epitomized by the Landcare movement. It has what it takes.

This is not a proposal for turning the tropical savannas into laser leveled rice paddies, at least not everywhere, or to continue with meandering livestock left to their own devices and rounded up once in a while for market. This is a call for a radical change to agriculture that will make it into a smart, sustainable production system that accounts all production costs and harmonises output to the capacity of the landscape. In short, to create a totally new way that requires the engagement of everyone.

Why not do it? Create a robust economy on sustainable use of natural resources.

Washing machines

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The number of people with the economic ability to purchase a dishwasher will double to more than 2 billion in the next 30-40 years.

Far more will rise above what Swedish statistician Professor Hans Rosling calls the ‘washing line’; an income of US$40 per day, the threshold necessary to own and run a washing machine.

On the one hand this is a worry.

Energy is needed to manufacture and power all these devices as is a water supply to allow them to function. Policy efforts on climate change notwithstanding, the cheapest power still comes from fossil fuels. It is why China is building coal-fired power stations even as they diversify into alternative fuels because they will need the energy to run all the new white goods.

On the other hand, sales of consumer goods will drive economic growth.

This is good news for those who require GDP growth, the enshrined dogma of political success. Nothing will prevent families from buying a washing machine they can afford it, nor indeed, airplane tickets, dishwashers and cars as their wealth allows.

Couple this inevitable growth in buying power with ever more people and the growth paradigm has never looked better.

Hans Rosling has a very clever way of explaining the population and economic growth combination  using Ikea boxes

 

 

What Rosling explains so simply is that it is the economic transition that is integral to the population one.

Without economic growth it is harder to see population growth slowing and eventually contracting.

Children must consistently outlive their parents for this to happen and that means needs must be met and standards of living must rise.

It seems that we have not fully embraced this reality.

No amount of environmental concern, moral imperative to preserve resources or even fear of environmental collapse is likely to trump the imperative to improve things for our families.

For this is an expression of self-preservation that is hard wired.

Rosling calls himself a ‘possibilist’ because even though the transition will happen, it can be done with a workable number at its conclusion and damage limitation along the way.