The Pool of Real Wealth

Last Thursday, the people of Britain voted in a referendum to leave the European Union (EU). Most commentators view Britain’s exit (“Brexit”) from the European Union as bad news for economic growth in the UK and the euro zone. As a result, it is argued, the growth rate in the rest of the world will be also badly affected.

 

David Simonds cartoon on British economyWhere is the UK economy going next? London bookies await your bets!

Cartoon via theguardian.com

 

It is more likely that, whether the pace of real economic growth over time will weaken or strengthen is going to be set by the pace of expansion in the pool of real wealth.

A strengthening in the pace of economic growth implies a strengthening in the rate of growth of the pool of real wealth. Conversely, a weakening in the pace of economic growth implies a weakening in the rate of growth of the pool of real wealth.

The ability of an economy to generate a rising rate of growth of the pool of real wealth is determined by the ongoing expansion and the enhancement of the infrastructure. This permits the increase in the rate of growth of the production of goods and services to support people’s life and well-being.

The key for this is an ongoing allocation of some portions of real wealth toward the formation of capital goods (i.e., the enhancement and the expansion of the infrastructure).

NB: The allocation of real wealth here means that a portion of real wealth is channeled toward the activities that are engaged in the expansion and the enhancement of the infrastructure.

Now, if real wealth were to be directed toward the production of final goods and services only — while an inadequate amount is allocated toward the expansion and the enhancement of the infrastructure — this will amount to a consumption of capital.

Over time this is going to undermine the economy’s ability to pursue rising economic growth. In fact a prolonged neglect to allocate a sufficient amount of wealth toward the enhancement and the expansion of the infrastructure is likely to result in a stagnant or even in a declining pool of real wealth over time.

This means stagnant or declining real economic growth — a fall in people’s living standard.

 

How Will Brexit Affect the Wealth Generation Process?

If the process of wealth generation is currently in good shape then Britain’s exit from the EU shouldn’t have any negative effect on real economic growth. This, however, might not be the case.

It is likely that the reckless monetary policy of central banks in the UK and the eurozone has inflicted a severe damage to the process of real wealth formation.

Loose monetary policies (i.e., monetary pumping and the artificial lowering of interest rates) sets in motion the diversion of real wealth from wealth generators toward non-wealth generating activities. This in turn over time weakens wealth generators ability to expand the pool of real wealth.

Since the 2008 financial crisis, following the lead of the US central bank, the central banks in the UK and the eurozone have aggressively lowered interest rates and pushed monetary liquidity to the banking system.

In the UK, the central bank policy rate was lowered from 5% in January 2008 to 0.5% currently. In the eurozone the policy rate was lowered from 4.25% in July 2008 to 0% at present.

 

1-CB policy ratesAdministered interest rates (main refinancing rates) of the BoE and the ECB – click to enlarge.

 

The yearly growth rate of the Bank of England balance sheet jumped from 22.2% in January 2008 to 163.8% by October of that year. The yearly growth rate of the European Central Bank balance sheet jumped from 15.3% in January 2008 to 55.1% by November of that year.

 

2-BoE balance sheetGrowth of the BoE’s balance sheet in 2008 – click to enlarge.

 

 

3-ECB balance sheetGrowth of the ECB’s balance sheet in 2008/9 – click to enlarge.

 

Unfortunately it is not possible to establish the magnitude of the damage that these loose monetary policies have inflicted on the process of real wealth formation. (It is not possible to calculate the size of the pool of real wealth since we cannot establish the total of various heterogeneous goods and services.)

We suggest that in the event of a plunge in real economic growth, this is going to happen not on account of the Brexit but in response to the severe damage that previous reckless monetary policies have inflicted to the process of real wealth formation.

In response to the Brexit, it is also highly likely that both the UK and the euro zone central banks will be ready to push more money in order to “keep” real economic growth going, thereby inflicting further damage to the wealth generating process.

Also, the current highly regulated EU centralized economic framework is restrictive toward opening up markets, promoting free trade and ultimately economic growth. In this respect BREXIT, which is an act of decentralization will provide more scope for competitive markets and hence should be an agent for economic growth.

 

Real GDP and Economic Growth

The popular way of thinking assesses economic growth in terms of so called real GDP. I have noted elsewhere that the whole concept of GDP is a hollow one.

Changes in the so-called real GDP are in fact depicting changes in money supply. Consequently, fluctuations in the growth rate of money supply are manifested in the fluctuations of the real GDP.

Based on the lagged growth rate of money supply it is likely that the yearly growth rate of UK real GDP is forecast to close at 3.5% by Q4 from 2% in Q1. By Q4 next year the yearly growth rate is forecast to climb to 4%.

For the eurozone, I forecast the yearly growth rate of 3.6% by Q4 versus 2% in Q1. For the Q4 next year the growth rate is forecast to settle at 4.3%.

 

4-UK Real GDPPercentage change y/y in UK real GDP growth, plus model forecast – click to enlarge.

 

5-EMU real GDP growthPercentage change y/y in EMU real GDP growth, plus model forecast – click to enlarge.

 

Conclusion

We can thus conclude that based on the lagged money supply growth rate it is quite likely that we could have a strengthening in the growth momentum of real GDP in both the UK and the euro zone.

In terms of true real economic growth the likely acceleration in the monetary pumping by central banks is going to undermine further the process of real wealth formation.

As long as the pool of real wealth is still holding, central bank policymakers could get away with the myth that they can grow the economy. Once the pool starts to stagnate or to decline, the myth that central banks can grow an economy is shattered.

One could only hope that notwithstanding central banks damaging policies wealth generators could keep the pool of wealth growing.

 

Charts by AASE (Applied Austrian School Economics)

 

Chart and image captions by PT

 

This article appeared originally at the Mises Institute

 

Dr. Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics (AASE), provides in-depth assessments and reports of financial markets and global economies. He received his bachelor’s degree from Hebrew University, master’s degree from Witwatersrand University and PhD from Rands Afrikaanse University, and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Biggest Stock Market Crashes Tend to Happen in October
      October is the Most Dangerous Month The prospect of steep market declines worries investors – and the month of October has a particularly bad reputation in this respect.   Bad juju month: Statistically, October is actually not the worst month on average – but it is home to several of history's most memorable crashes, including the largest ever one-day decline on Wall Street. A few things worth noting about 1987: 1. the crash did not presage a recession. 2. its...
  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • The Falling Productivity of Debt
      Discounting the Present Value of Future Income Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.   We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article)....
  • Precious Metals Supply and Demand
      Fundamental Developments The prices of the metals shot up last week, by $28 and $0.57.   Heavy metals became pricier last week, but we should point out that the stocks of gold and silver miners barely responded to this rally in the metals, which very often (not always, but a very large percentage of the time) is a sign that the rally is unlikely to continue or hold in the short term. [PT]   Last week, we said:   “One way to think of these moves is...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com