Our Economy is Not a Machine

We have a very different view of what actually drives our economy, as people who follow our books and newsletter know. We believe new generations, doing predictable things as they age, are the key.

When they’re young, they drive innovation and inflation because it’s expensive to raise them and incorporate them into the workforce and they are rebellious by nature.

As they age and raise their families and drive massive increases in productivity, income, and spending… that’s when the big booms come that last for decades.

Then, as their kids leave home and retirement looms, they save and downsize… oops, that’s good for them, but not for the economy.

In short: Government policies don’t drive the economic train, as is the popular misconception. They’re more like conductors on the coaches. They’re reactive…

Governments raise interest rates when the economy or inflation overheats. They lower rates and run deficits to offset a slowing economy, which is what they’ve been doing for the last several years at unprecedented levels. Why? We’ve seen the greatest global crisis since the Great Depression.

Today, in financial crises or emergencies, they go one step further, printing money and injecting it into the financial system to create liquidity for banks, and they lower interest rates for long-term loans to boost the private sector.

These Keynesian policies, which have become the norm since the 1970s recessions, have given governments and central banks the illusion that they can run and regulate the economy like a machine.

And this may just be the single greatest mistake and misperception in economic history!

An Organic Economy

You see, organic entities, like our bodies or the economy, are not regulate-able like a machine or motor (or some other inorganic object).

You can run a motor continuously at a certain speed or output. You can change that speed or power by manipulating inputs and controls. That’s how they’re designed. But complex, interactive, organic processes follow their own course, depending on their needs.

For example, our bodies need to wake and then sleep, inhale then exhale, eat and eliminate and so on. If you doubt that, try not sleeping for a few consecutive nights and see how well you function.

In the same way, our economy needs to grow and expand, slow and rebalance, like inhaling and exhaling.

Just like our waking and sleeping patterns, where we tend to be awake and functioning about two-thirds of the time and asleep about one-third of the time, our economy tends to grow about two-thirds of the time and then slow for maintenance and repair, debt deleveraging, cost-cutting and consolidation for the remaining one-third.

“Forcing” the economy to grow and function without that rest period is like depriving the body of sleep. It can only lead to chaos, insanity… and eventually death — or the “coma economy” I describe in Chapter 2 of my recent book, The Demographic Cliff.

Our last major boom, prior to the ’80s, was from early 1942 into late 1969. After that, we declined into late 1982. That was a cycle of 27 years of growth and almost 13 years of decline (or two-thirds up-time and one-third downtime).

Economists seem to miss this crucial fact. They seem blind to the fact that demographic dynamics create innovation, and that the economy is organic in nature, needing growth and slowing cycles for advancement.

They don’t comprehend that our greatest innovations come in the very slowdowns that create challenges and force consolidation, cost-cutting and new breakthroughs to survive.

Then those new innovations are adopted progressively in the next boom until they saturate the economy and growth naturally slows down again.

The same occurs with demographic waves of boom and bust, alternating between innovation and growth. Businesses and consumers only tend to get more complacent, inefficient and indebted in good times… so things need to be shaken up every so often.

My point is this: if we don’t allow the economy to go through natural cycles of growth and slowing, innovation and adoption, investment and deleveraging, inflation and deflation, then the very innovation process that drives progress winds down and economies become lethargic.

We need to slow and deleverage for several years. Then we can eliminate massive amounts of debt and create new innovations to spur long-term growth and productivity again.

Governments continue to fight against this natural force. Ultimately, they’ll fail. Be ready when that inevitable day comes — and I am betting strongly it will begin within months, not years.

Harry

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Categories: Economy

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.