Debt Got Us Here; More Debt Will Keep Us Here

ITEMS FOR YOUR CONSIDERATION

The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially.

Binyamin Appelbaum, Fed Ties New Aid to Jobs Recovery in Forceful Move, New York Times, September 13, 2012.

 COMMENTS

The likely outcome of the Federal Reserve’s new round of bond buying is another round of investment bubbles, another financial crisis, and another round of concentrating the world’s wealth in the hands of fewer and fewer people.

The underlying problems are 1) income growth for the majority of the world’s people and 2) downward pressure on global GDP growth from limits to the earth’s carrying capacity.

The tradeoff between job growth (which is dependent on rapid GDP growth) and high rates of inflation is a problem tied directly to the finite carrying capacity of the earth.  We started hitting those limits in the 20^th century.

Debt growth in the 1970s, 1980s and 1990s worked fairly well as a way to sidestep stagnant income growth for the majority of the world’s middle class people, but it no longer works because of the carrying capacity problem.  As the world economy is currently structured, a jump in global demand from debt growth or from a radical redistribution of wealth sufficient to push job growth to acceptable levels would push prices toward the stratosphere.

The solution to the world’s employment problems is not more debt and it is not classical redistribution of wealth, its a global economic transformation that ends the tradeoff between employment and inflation.