Will real growth go back to that in the Middle Ages?

May 19, 2011

Zurich, Switzerland

Dow up 80...oil still below $100... gold still below $1,500....---------------------------------------------- Don't Miss! ----------------------------------------------

He's the Oracle of Omaha.

He's the world's most successful investor.

Your guess is right.

The Warren Buffett Quiz. Click Here to participate


Oil has a long way to get back to its 2008 high. But it's still 3 times what it was in 2005 and 5 times its price in 2001.

In the battle between inflation and deflation, it's not clear to us who's winning. Prices are rising, but in the context of a general deflationary funk. Try as they might, the feds just can't shake the Great Correction. It leaves them struggling to loosen monetary policy to free-up the economy...and succeeding only in tightening the noose around the consumer's neck. Here's the AP report:

NEW YORK (AP) - High gas prices are driving a wider wedge between the wealthy and everybody else.

The rich are back to pre-recession splurging: Saks Fifth Avenue and Nordstrom customers are treating themselves to luxury items like $5,000 Hermes handbags and $700 Jimmy Choo shoes, and purchasing at full price.

"The average shopper isn't in the game, except for necessities," said Faith Hope Consolo, chairman of retail leasing and marketing at Prudential Douglas Elliman. At the same time, among the rich, "Luxury products are selling like bread."

J.C. Penney, Wal-Mart and home-improvement retailer Lowe's Cos. all said they're noticing their customers are consolidating shopping trips to save money on gas as the average price hovers at $4 a gallon.

More than a half-dozen corporate earnings reports this week show that for the affluent, rising prices are merely a nuisance. For others, they can mean scrimping to put food on the table.
Of course, this has the obvious nasty feedback loop. The middle and lower classes have less to spend. The economy sinks along with them.

But we're not going to worry about them. We warned them!

Instead, let's turn to another subject.

Yesterday, the Daily Reckoning set off a bombshell...or at least a stink bomb. We wondered aloud if real growth rates in the developed countries- particularly in England and America - hadn't returned to their pre-Industrial Revolution rates. Is it possible that real growth regresses to the very low levels of the middle ages or before?

Why would that happen?

It's not a matter of Fed policy. Or of tax rates. Or even of debt. It's deeper than that. More basic. More important.

Each time humans make a breakthrough, their rate of growth speeds up. They then take advantage of it. They fill up the economic niche it opens for them...as fully as their new technology allows. And then what? Growth then goes back to 'normal.' But what's normal? Apparently, normal is very low or negligible rates of growth; that's what we had before the Industrial Revolution began.

Which, of course, only gives rise to a whole group of questions.

First, is it true? Is human history a long spell of stagnation or low levels of growth...punctuated by sudden bursts of above-trend growth?

If it is true, is it also true that the developed economies have reached the limit of the 'cheap energy' dividend...which began with the large-scale exploitation of coal in the 18th century, followed by the wide use of oil in the 19th and 20th centuries?

And if that is true, what next? Are there no new sources of cheap energy?

What about nuclear?

Well...a possibility...but recently nuclear power was dealt a huge setback. It's not cheap, not when you add in all the safety features... and the cost of the occasional emergency. Many nations are now re-examining their energy policies to decide whether nuclear has any role to play at all.

What about conservation...energy saving measures...going green?

Well, yes...you can stretch your energy. You can probably even increase your standard of living, by using it more efficiently. But you don't get above-trend economic growth gains by reducing the inputs of energy. You appear to get rapid growth only from big breakthroughs that make new energy available...and put it to work for you.

*** So, what can you expect? The critical component of growth has suddenly become three times as expensive as it was five years ago. The economy can probably continue to 'grow'...but how much? Without a new breakthrough, what can it expect? About the same level of growth as before the new technology came on line - negligible growth, in other words.

And if that is true, how will investors make any money?Answer: they won't.

Hmmm....this is getting interesting.

'Bill, let me get this straight. You're saying that the kind of growth the US saw in the 18th, 19th and 20th centuries was just an anomaly...right?'

Well, that's the implication.

'You're saying that when the world gets its fill of a new technology - even if it is something as big as oil - that it grows up to the limit that that technology makes available...and then it comes to a halt.'

Yes, that is what this analysis suggests. Let's say you look back at when the bow and arrow was invented. It probably enabled primitive hunters to get more game. They could support more people. So, the human population grew. But once the bow and arrow was widespread, the population probably stopped growing. We had squeezed all the juice we could out of that innovation.

'And you're saying that the investment returns of the past couple hundred years actually may reflect this anomaly...and that investors may never again realize anything like it.'

Well, yes. Not in the advanced, mature economies.

'Then, it sounds like I should just forget about investing all together.'

Nope. First, there are huge parts of the world that are not 'built-out' yet. Where energy use is still very low. These areas can still make rapid progress as they catch up. They're like tribes that hadn't taken up the bow and arrow. When they got it, they could make progress.

You ought to be able to participate in their progress, too, simply by buying companies that are operating in these growth areas. And they're not just foreign companies. US, European and Japanese companies are all taking advantage of growth in the developing world.

Second, there is still the opportunity for making money the old fashioned way...by compounding earnings, not capital gains. We're so used to stocks and real estate going up that is it hard to imagine a world with stagnant prices. But that is what we could be facing. Slow rates of growth should mean very slow or negative price appreciation in America's capital stock. Dividends will become more important. And people who get wealthy will probably do it as they did for centuries before the Industrial Revolution - either by saving and compounding small gains over many years, or by taking it away from someone else.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Will real growth go back to that in the Middle Ages?". Click here!

4 Responses to "Will real growth go back to that in the Middle Ages?"


May 20, 2011

I live in India. I have heard from my father that when they were employed their salaries were around a 1000 times less than mine. But the fact is that in their world they had much higher purchasing power than me. They owned a house with reasonable space around it. And I own a flat. They ate vegetables and fruits that they grew on their land. And I eat vegetables and fruits with contain high doses of chemicals and pesticides (like Endosulfan). They could get most things they need from the shops near by. I have to take my car travel to neat by supermarket since most of the small shops closed out. They could walk around their backyard and do work on their land. I have to take my car and find a park that doesn't have polluted air. And last but not the least, they could come back from work and go to sleep after their dinner. I spent my nights reading equity master and similar sites trying to guess how the world is going to change.

Noe you suggest the world is going back to middle ages? Well, I am game. I love sustainability rather than growth. After all, why do you need more money than what is required to sustain your loved ones. May be, when you die, newspapers will applaud you as the man who shorted Euro to make billions overnight. But who cares. You are no better than the guy in the next grave.



May 19, 2011

I wish to continue my theory that defence expenditure is a WASTE, it does not create wealth. The great Einstein said :"Two things are eternal - the universe and THE STUPIDITY OF MAN. and I am not so sure about the first !!"
We are stupid about the practice of religion,wanting ours to be considered the very best route to salvation. Therefore there should be conversions. Opposition leads to wars and suicide bombers, followed by massive securiy measures and expenses that do not produce wealth.
Then there is the search for HAPPINESS through possessions, bigger better cars and so on. Simple living taught by Gandhiji can lead to contentment and less emotional misery. Less needs and desires may affect demand for luxury goods, which leads to less jobs and lower wages.
What is needed is a revolution in thinking about the basics of life -- being close to nature; being in harmony with our fellow men; being contented that we can fill the ever demanding for more well that is the stomach with enough to survive in good health, but not much interested in meals at five star htels and restuarants
It is going to be a very tough job changing mind sets on a world wide scale, surrendering the lust for power by nations, giving up indivdual search for happiness through more and more possessions, which ultimately we cannot carry with us to the next world.
Finally removal of poverty. This goal should be combined with population control though it will mean smaller markets years down the road. But it will save on natural resources and more important CONFLICTS.
An unrealistic vision is what most will say. My answers are for the long term of humanity by tackling the curse of STUPIDITY that Einsstein referred to in his wise comment. SULTAN FAZELBHOY



May 19, 2011

There is a MISSING LINK in your analysis. The trillions that are spent on armaments and wars, which is basically a waste because instead of creating wealth, it is all about destruction and more destruction.


Maulik Suthar

May 19, 2011

“The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency. The only thing we have to worry about is the printing press and inflation.”

--- Warren Buffett

"There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they'd all be millionaires by now...as far as I know, most of them are still gainfully employed, which ought to tell us something."

--- Peter Lynch

"I don't read economic forecasts. I don't read the funny papers."

--- Warren Buffett

So will not mind the economy direction, Interest rates, Govt deficits, geopolitical tensions, election results etc.

I will mind only one thing = My Business.

Maulik Suthar, Gandhiangar, India

Equitymaster requests your view! Post a comment on "Will real growth go back to that in the Middle Ages?". Click here!