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This is a really complicated question. Some things to consider: 1) Capitalism needs ever-increasing consumption to sustain itself. Imagine a metric: amount of
by tjpaudio 7y ago
This is a really complicated question. Some things to consider:
1) Capitalism needs ever-increasing consumption to sustain itself. Imagine a metric: amount of stuff consumed by a person on average. If that number doesn't increase every year, you get a recession. Keep an eye on consumer spending and M1 (the velocity of money). (btw, this is why the long term view of capitalism is grim, it ultimately cannot be sustained. but who knows maybe we learn how to harvest metals out of meteors and we all have our own private jets in 100 years. that would be great for capitalism)
2) Most recessions are triggered by a catalyst. The most recent one was caused by financial instruments that over-leveraged real-estate. It won't be that this time, but there are others at play now. Student debt defaults could rise if unemployment dips, causing another lending crunch, but likely only debt holders would be hit hard (localized recession). I am also keeping my eye on the overnight repo market - banks are holding less cash and it's causing some interesting new problems at the fed, but unclear how that could ripple to the economy. Certainly the trade war could push up the cost of goods as well and cause consumer spending to dip. A lot of economists have been searching for a catalyst scenario but there doesn't seem to be one.
3) Slower growth could be the new-norm. There is a large chance financial assets won't see the kind of appreciation over our lifetime that our parents saw. It is possible that 1970's era stagflation could return.
4) Liquidity trap, maybe? The aforementioned fiasco that unfolded this past week in the repo market would signal a potential risk.
Are we headed to a recession? Hard to say.
- chrisco255 7y agoOn point 1) you're incorrect. Services make up nearly 80% of the U.S. economy. Our economic growth in recent decades has not been due to an increase of stuff. https://2016.trade.gov/publications/ita-newsletter/1010/services-sector-how-best-to-measure-it.asp https://2016.trade.gov/publications/ita-newsletter/1010/serv... I work for a multi-billion dollar company and we just sell ones and zeroes.
- tjpaudio 7y agoI see you took my use of the word stuff quite literally. Services are stuff too, and get included in M1 and consumer spending. I'm not wrong.
- chrisco255 7y agoYou mentioned harvesting metals out of meteors so I took you at face value on that word. Point is that it's more about efficient use of labor and capital. And we still have a long way to go in realms of automation technology, energy tech, virtual reality, finance, biotech, medicine, space tech and countless products and services that will continue to grow the economy for decades if not centuries to come. That being said, a recession will happen at some point. Difficult to speculate as to when, my guess is that if we are, it won't be a deep one. M1 money supply is not typically used as a measure of economic growth. Money supply can increase while the economy is tanking (see Venezuela). Real gdp or other similar figures are typically used.
- tjpaudio 7y agoM1 is for measuring velocity, not growth. Velocity of money tends to better model the health of an economy than does GDP.
- idoh 7y agoRegarding 1), what do you mean when you say that "capitalism needs ever-increasing consumption to sustain itself"? I don't think that this has been established. I'm using the standard dictionary version of capitalism: "an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth."
- mindcrime 7y agoI don't think that this has been established. It hasn't. That's only true for a very specific aspect of capitalism, which is the speculation based, "buy equity and resell it later at a profit" model. But nothing specifically dictates that capitalism has to work this way. Investors can get a return on their investment through, for example, dividends. One could also argue that in a truly free market / capitalist environment, a LOT of the trappings of contemporary "capitalism" would not exist... corporations, for example, violate the connection between one's actions, and liability for the consequences of those actions. We rationalize that buy saying it encourages investment (and it probably does) and allows larger companies (it does)... but one can fairly ask if those ends justify allowing this violation of fundamental principles.
- idoh 7y agoThanks mindcrime, that's a really interesting answer. It is fair to say that some things normally associated with capitalism depend on growth, e.g. equities. On the topic of corporations, I can see the point about liability. There could be a world without corporations, and instead use partnerships with pass through liability. I wouldn't take that trade though, because if anything the world needs more innovation, and for the most part the liabilities are financial, and the counterparties are aware of the risk. Some liabilities do seem unfair to limit liability, for example environmental ones, because it hurts people who never agreed to assume any of the risk.
- mindcrime 7y agoIt is fair to say that some things normally associated with capitalism depend on growth, e.g. equities. Yeah, I think that's true. If people expect perpetual growth, that seems to imply constantly growing revenue, which would seem to imply the need for constantly growing consumption, which would seem to imply the need for perpetual population growth, etc. My only point is that capitalism, in "textbook form" at least, doesn't specifically demand that. Now, maybe it's an inevitable emergent aspect of capitalism... I honestly don't know. Whether or not that is the case would be an interesting thing to research.