Wednesday, May 12, 2010

Three Ways Out

In a great article entitled “The Case for Economic Doom and Gloom”, John B. Judis argues that the reason for the present malaise in the world economic order is due to, as he puts it, the “global overcapacity in tradable goods production”. In making his argument Mr. Judis focuses on the production side of the equation: as more countries develop, they put on the market additional production capacity that must compete with existing capacity. Driving down prices, lowering profits and hence investments. Capital in search of good returns then flows to real estate or government bonds and feed an unsustainable Keynesian cycle.

Though I’m in overall agreement with this model and its underlying dynamics, I think he is a ignoring the second part of the equation: Demographics. As Western populations age, their consumption patterns slows, further aggravating the overcapacity problem.

There are only three ways outs (in decreasing rosiness) that I can see:

  1. Technological breakthrough: As the microprocessor drove the Reagan recovery and the Internet Clinton’s, a new technological breakthrough will drive productivity and consumption and restore growth.
  2. Rise of Asian Consumerism: Aging Western consumers are replaced by younger Asian and African ones driving up the demand curve and restoring growth
  3. World War III: a major world war manages to destroy significant production capacity all around the world. (This is not an unlikely scenario: as the Great Depression gave rise to Fascism and Communism, a prolonged economic downturn coupled with Islamic Jihadist can yield the same result)

None of these scenarios bode well for environmentalist: it is clear that, as a race, we need to expand or wither. We Simply cannot stand still.

For the sake of everyone, I'm rooting for #1.

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