Growing the economy

[BrntOrngStmpeDe]

kind of macro economic question.

Do we have to 'GROW' the economy to fix the economy? I hear that word all the time. To me it seems to imply growing the country (ie immigration). Grow the consumer base internally and externally. Grow the exports etc.

Does a country have to 'grow' in these ways to be competitive? how about comfortable?

Is there ever a point where sustained GDP, sustained population, sustained wages etc. will work? Or is it always 'if you're not growing, you're losing'?

Does this growing always eventually lead to inflation?

 

[Musburger]

Virtually the entire world economy now runs via a debt-based monetary system. Almost all money exists because of debt (credit) creation. Typically, when someone starts or expands a business, purchases a home, etc. they borrow money. The money did not previously exist. This is part of the process known as fractional reserve banking. Banks keep only a small portion of their deposits - something like 10% on reserve - and lend out the rest. For example, if a bank has $1 million in deposits, it can make loans up to $10 million. Loans must be paid back plus interest which requires growth in the form of future income.

Without growth, loans are defaulted which results in a contraction of the economy. The bottom line is simply, until the world uses another kind of monetary system, growth is essential or the system collapses. Generally, booms (credit expansions) end in busts (credit contractions). Often this leads to a reset and the cycle begins anew. When the booms grow too large, you get depressions like what occurred in the 30's and what should have occurred here after the NASDAQ bubble burst. Instead, government, the federal reserve, and foreign central banks have used a combination of stimulus (expanded government debt) and low interest rates (Greenspan, Bernanke's ZIRP) to avoid the political consequences that would follow an economic contraction. Also, the larger corporations, particularly in the financial system, are so over leveraged that a contraction would not only bankrupt them, but likely would destroy the economy.

So the goal is to sustain "growth" (credit expansion) at all costs. The beneficiaries of growth include bond holders. At some point, in order to pay the bond holders, assets must be sold off, taxes and fees raised, benefits and entitlements slashed, etc. This is what is happening in Greece, Ireland, and soon Spain and Italy. It Eventually it will happen in Japan and the United States. When that happens, all bets are off as to how the various populations respond as well as what the government will do.