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Satyajit Das: The End of Growth, Part 1

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Government intervention can cushion some of the costs of the crisis but cannot solve the fundamental problems.

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Debt also became a mechanism for hiding disparities in the distribution of wealth in many societies. The democratization of credit allowed lower income groups to borrow and spend, encouraging housing booms, in order to deal with the problem of stagnant real incomes.

The ability to maintain high rates of economic growth through additional debt is now questionable. The need for governments as well as the private sector to reduce debt simultaneously reduces demand and locks the world into a negative spiral of ever lower growth.

Growth was also based on policies that led to the unsustainable degradation of the environment. It was based upon the uneconomic, profligate use of mispriced non-renewable natural resources, such as oil and water.

There are striking similarities between the problems of the financial system, irreversible environmental damage and shortages of vital resources like oil, food, and water. In each area, society borrowed from and pushed problems into the future. Short-term profits were pursued at the expense of risks which were not evident immediately and that would emerge later.

Another common theme in the parallel crises in finance, environment and management of scarce resources is mis-pricing. In the period leading up to the global financial crisis, risk, especially the ability of individuals and firms to repay borrowings, was underpriced. The true cost of polluting the environment or consuming certain resources has also been underpriced.

In all cases, there was significant privatization of gains whilst losses were socialized. Financiers entered into increasingly destructive transactions, extracting large fees leaving taxpayers to cover the cost of economic damage.

In the early 20th century, German economist E.F. Schumacher observed that human beings had begun living off capital: "Mankind has existed for many thousands of years and has always lived off income. Only in the last hundred years has man forcibly broken into nature's larder and is now emptying it out at breathtaking speed which increase from year to year." That observation is now just as true about the economic and financial system as it is about the environment.

Policy makers may not have the necessary tools to address deep-rooted problems in current models. Revitalized Keynesian economics may not be able to arrest long-term declines in growth as governments find themselves unable to finance themselves to maintain demand. It is not clear how, if at all, printing money or financial games can create real ongoing growth and wealth. Former German finance minister Peer Steinbrink questioned this approach: "When I ask about the origins of the crisis, economists I respect tell me it is the credit financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again?"

Government intervention can cushion some of the costs of the crisis but cannot solve the fundamental problems. It is not self-evident that growth can be conjured up by policy makers. If government deficit spending, low interest rates, and policies to supply unlimited amounts of cash to the financial system were universal economic cures, then Japan's economic problems would have been solved many years ago.

The simultaneous end of financially engineered growth, environmental issues, and the scarcity of essential resources threatens the end of an unprecedented period of growth and expansion. But it was an unsustainable world of Ponzi prosperity where the wealth was based on either borrowing from or pushing problems further into the future.

Editor's note: "The End of Growth, Part 2" will be published on Minyanville.com tomorrow (April 17, 2013).
No positions in stocks mentioned.

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