Back on December 23, we presented one of the past year’s most disturbing reports, the BCG’s “Ending the Era of Ponzi Finance” which explained, quite succinctly, why the economy of the developed world, which is nothing but one big ponzi scheme, is approaching its inevitable end, in which existing principles will no longer be applicable nor available to kick the can down the road. The drivers for this are numerous (and all listed in the report), with soaring public and private debt only one of the main forces behind the coming collapse into a Keynesian singularity. Yet perhaps the biggest threat of all has nothing to do with the world’s balance sheet, but its income statement, and specifically the category for Research and Development, or, as it is better known in refined economic circles, “productivity” – it is here that things are rapidly turning from bad to worse, and why the chart below (which we felt a need to emphasize, hence the repost) is probably the best summation of what the world has to look forward to, or, as the case may be, not.
Why is productivity important? Simple – without major reinvestments in growth, be it capitalized or expensed, which serve to promote the betterment of all mankind, and not just fatten the bottom line of some mega multinational corporations, and their shareholders, the world’s glory days are sadly and certainly behind us. And with more and more spending allocated to basic welfare programs and debt interest satisfaction at both the public and private ledger, there is increasingly less capital available to promote productivity improvement or boost corporate capital expenditures (a topic long discussed on Zero Hedge, and now even picked up by Bill Gross).
As for productivity, this also goes back to a long discussed topic: namely not the quantity of a given nation’s labor pool, but more importantly its quality. And with America rapidly becoming a workforce consisting of gerontocratic, part-time workers, one can give up on all hope for future step-wise productivity improvements. Sadly jobs are now, more than ever, a political ploy by those bounded by a 4 year career horizon to preserve their grasp on power, which means that ever more job quality will be sacrificed to preserve the illusion that America is keeping up with its “trendline” growth of 100-200K jobs added each month. Which is also why the chart above may in fact be an optimistic assessment of what truly awaits the world as it mean reverts to a long-term growth trendlline, somewhere below the 0.5% GDP grpwth per year area.
This is BCG’s brief and concise assessment on the issue:
Just as important as the number of available people in an economy’s workforce is the productivity of that workforce. Consistent increases in productivity have made possible the economic transformation of the developed world over the past 200 years and of emerging markets today. There are signs, however, that the rate of improvement in productivity is in decline. In a provocative paper, the renowned growth research Robert Gordon, of Northwestern University, makes a compelling case that growth in GDP per capita has been slowing since the middle of the twentieth century. He argues that “the rapid progress made over the last 250 years could well turn out to be a unique episode in human history.”
Of the factor Gordon cites for this phenomenon, the most important is diminishing returns from innovation. In the 1920s, the Russian economic Nikolai Kondratiev identified a pattern of economic growth consisting of successive “long waves” of economic development, in which periods of rapid growth were interspersed with periods of slower growth and financial crisis before a new cycle of growth began. Later, the Austrian economist Joseph Schumpeter showed how these long waves were associated with major advances in basic innovation – for example, the steam engine, electricity, and the automobile.
According to Gordon, the problem today is not merely that the incremental productivity impact of the most recent wave of innovation, associated with information technology and communications, has diminished in recent decades. Rather, he argues that the space for truly fundamental innovations that result in step-change improvements in living standards is getting smaller and smaller. As he puts it, the invention of indoor plumbing was orders of magnitude more important than the invention of the iPad, Twitter, and Facebook.
But not to those companies’ handful of shareholders, which is precisely what happens in a world in which sovereign growth and stability is a needed sacrifice and trade off to perpetuate the corporate model of earnings above all.