The twentieth stage of America’s Financial Endgame™ will occur when the cycle of innovation resumes, and the economic productivity of labor and capital assets enters into a phase of explosive growth. The reason for this is because stability lays the foundation of innovation. Once the financial chaos subsides and entrepreneurs begin looking for ways to re-deploy capital more profitably and ways to generate productive innovations, the economy at large will benefit. This sustained growth trajectory is a critical part of the economy’s return to fundamental viability.
To comprehend this fully, one needs to understand where economic growth really comes from, plus the difference between nominal and real growth.
At its most fundamental level, the “economy” represents that aggregated total output of all products and services that are generated from the labor and capital available to the nation. The way that the economy grows is when the efficiency of how labor and capital assets are used increases so that more products and services can be generated from the same amount of aggregated input. This is one of the reasons why effectively allocating labor and capital is so important.
When capital and labor is spent to chase after asset bubbles, it is effectively “wasted” from an economicc perspective. The reason for this is because bubbles all eventually collapse, with all of the apparent gains being compensated by de-valued capital and mis-allocated labor. There are many reasons why bubbles form, ranging from tax incentives, government incentives, monetary policy, to irrational exuberance. Each of these can be equally destructive to the long-term viability of the national economy.
All of this comes back to the eventual driver of explosive economic growth. This driver is the re-allocation of labor and capital to productive uses. After the economic devastation of the crash has dissipated, there will be large amounts of assets that are being sold for extremely low prices, and large amounts of skilled labor that is available for relatively low prices. These factors will combine to create an rich bed of opportunity for entrepreneurs to create value. The sustained trajectory is expected to continue for an extended period of time if the financial crash wipes out the government sponsored sources of mal-investment that has historically skewed capital and labor allocation.
Nominal vs. Real Growth
Following on after the conversation about growth is drawing the distinction between “Nominal” and “Real” economic growth. The word Nominal means “in name only” … effectively speaking, this means the numerical or reported growth of the economy. In many cases, the nominal rate of economic growth will be considerably higher than the real rate of growth. This is almost always because of increasing debt leverage that is indirectly subsidized by central banks.
The way this works is that individuals and companies borrow for the purpose of spending and investing. This net spending results in higher incomes for other people who continue to borrow for spending and investing. The thing that ultimately stalls and collapses this cycle is when the borrowed capital is mal-invested into either consumption goods with no rate of return, or investments with a net rate of return that does not cover the carrying cost of the debt. Typically, the way that this stall and collapse takes place is that the investments purchased with borrowed capital default on their interest payments, with triggers defaults on the part of the borrowers, which triggers defaults / insolvency on the part of financial institutions, and ultimately leads to another crash.
The Key to Sustained Growth
Ultimately, the key to sustained economic growth is for capital and labor to be deployed efficiently. This means that the resources are pursuing projects of real fundamental value. As more people work on ways to produce more things that people want, the mix of consumption will shift away from what is no longer valued to the new products and services. As this process repeats over and over again, the overall aggregated output of the economy will continue to grow without gimmicks or sleight of hand.
In the end, growing the economy is really about making certain that business activities are oriented around fundamentals vs. capitalizing on artificially low interest rates, going after government incentives, or chasing a value bubble. It is well known that the current system of government incentives and entitlements are unsustainable. Once they finally become insolvent and are discontinued, it will remove the distorting effect that those programs have on economic activity, and pave the way for sustained real growth.