When All You Have Is A Hammer (Economic Efficiency)

everything looks like a nail:

“Once excess capacity appears, the economy gets trapped in a vicious cycle,” Lin said. “The financial sector in developed countries may require more rescues in the future and the financial crisis may erupt in some developing nations.”

Developing economies can avoid the fallout from the global recession by investing in projects with “returns high enough to generate higher growth,” Lin said, helping to boost government revenue and offset the costs of fiscal stimulus. “The main policy objective should be to create demand as quickly and efficiently as possible.”

And how did we get all that "excess capacity"?  Why we built it this way!

And now, having done so, the guys who have nothing to sell but more loans want us to..... borrow more money!

PIMCOs McCulley is saying the same (dangerous) thing:

July 15 (Bloomberg) -- Pacific Investment Management Co.’s Paul McCulley said the Federal Reserve should push inflation above its long-term target to coax consumers to spend money if the U.S. economy stays mired in recession.

That man ought to be locked up as an enemy of the nation's prosperity; this sort of nonsense is pure self-serving tripe, and I'm going to prove it with mathmatics.

Folks, we went from a personal deficit of $200 against roughly $8,600 in per-capita income (a 2.3% deficit) to over $4,000 against roughly $25,000 in per-capita income, or a 16% deficit.

We managed to do this through debt.  That is, we promised to pay in the future, $4,000 more than we made in 2005 on average, and that number went from a tiny percentage of our income (2.3%) in 1981 to a very significant percentage (16%) in 2005.

Folks, it should be obvious that this deficit cannot continue to grow forever.  Eventually you must spend less than you make and pay down that debt, or you will get into a situation where you are unable to make the payments and default.

We are in this mess economically because we built capacity we do not need, and the World Bank wants us to take on yet more un-serviceable debt in order to "bring up capacity utilization"?

Are they crazy?  No.  Just blind.

The ugly facts are that there can be no durable recovery in the economy until the excess capacity is removed, since there are no huge productivity boosters on the horizon, the only other way you can grow demand (that is, you must boost not only GDP-per-capita but more importantly per-capita income so that true demand is generated) is to reduce the debt load in the system.

Note that per-capita GDP compared to per-capita income has gone the wrong way since 1981.  That is, the "spread" (as a percentage) between per-capita GDP and per-capita income has increased, which is exactly what you would expect as debt service saps the funds in the economy available to go toward per-capita income!

In numbers, in 1981 per-capita GDP was $13,600 while per-capita income was $8,476, a "spread" of 60%.

In 2005 per-capita GDP was $42,200 while per-capita income was $25,036, a "spread" of 68%. 

Lower "spreads" denote a greater return of GDP into the hands of people - that is, a more efficient economy.  The wider the spread the more "parasitic drains" there are on GDP - that is, the greater the amount of GDP that winds up somewhere other than in the people's hands.

The ugly truth is despite the "personal computer revolution" and "robotics", all of which are vaunted "efficiency improvements", per-capita purchasing power as compared against GDP, that is, the amount of money available for consumers to spend in the economy (and to service debt) compared to gross domestic product, better stated as economic efficiency, has decreased by about 12%.

This is exactly what one would expect since much of the debt is in fact not "personal" - it is owed by corporations and governments that have "levered up", and they must pay interest too.  As a consequence larger and larger portions of GDP are diverted not to per-capita income where consumers can spend it, save it, pay debt with it or form capital with it, but rather are diverted to the non-productive use of paying interest and in doing so damages the economy.

"Stimulating demand" cannot be done on a true basis except by either:

1. Dramatic productivity improvements to narrow the spread (that is, make possible dramatic wage increases paid for a given fixed GDP and money supply.  Note that doing this by "pumping money" raises BOTH - that is in fact inflation, and does nothing for the ratio as both numerator and denominator change.)
2. Defaulting the excess debt so that the percentage of parasitic drag on the economy from debt service is reduced, thereby contracting the spread and improving economic efficiency.

Those are the only two ways to make it happen folks. 

Anything that drives the efficiency ratio the other way (that is, which drives the spread higher) in fact does economic damage.

The World Bank (and PIMCO) are wrong and promoting a self-serving agenda, and must be treated as all shameless self-promoters deserve.