Porc..
<< GDP growth can come from two sources. One is the reinvestment of
savings and profits. The second is from credit creation beyond those
savings. >>
>It can also come from from increases in the size of the labor force, and
increases in the productivity of both labor and capital. There has been
an increase of 17,000,000 workers in the U.S. labor force over the
course of the 1990's. Assuming an average of $50,000 per year of gross
output per worker, that alone accounts for an $850 billion increase.
And, lowering impediments to the free flow of labor and capital, a major
theme of the past two decades, increases the productivity of both, and
therefore total output, without any claim on existing savings and
profits.<
I agree with you. But you are saying the same thing from another direction. It is the investment of savings and profits in new factories, semiconductor fabs, or whatever else that provides the jobs for the new workers. And the higher levels of productivity come from new equipment for the existing workers that is also from investment of savings and profits. What you are saying and what I am saying are one in the same viewed from different perspectives. You can't have the new jobs and higher productivity in any meaningful way without the reinvestment of savings. That's why savings is important. But building those factories and buying that new equipment on credit is different than doing it with savings because credit causes misallocation, excess, and other problems.
That was the point of my post. You can achieve enormous GDP growth in the short term by extending credit, but you can also wreck the economy over a longer term period of time.
Credit extension also makes the existing capital appear more efficient and profitable while it's in progress without that actually being the case. That's part of the mis-allocation process. During credit extension, businesses that are NOT profitable appear to be profitable and businesses that are average appear great. Both earn higher than sustainable returns on capital and equity. This causes new investment where there is no REAL profit, just short term credit illusion.
Also, any REAL increase in the efficiency of the existing capital other than through investment will still be met with competitive pressures in one form or another. That's why capitalism works for all of us.
In my view, the 4th quarter 5.6% growth was nothing to be pleased about. It was the result of the Fed being scared to death about the leveraged nature of the financial system and the impact of the bubble bursting. They flooded the system with credit to reflate the bubble and ease the credit crunch. That's something that prior easy credit caused. Some of the new credit went into financial assets, some went into consumers living beyond their means, and some went to finance business investment. But it's all credit expansion which is not good from a long term perspective. Although I will concede that for many decades it has been fooling most business people and Wall St.
Wayne |
