21 November 2010

The Way We Measure and Target Growth

In my posts, articles and analyses I often argue and demonstrate that the way of money creation and banking is not sustainable even if forgetting about the new, creative instruments and all the off-balance sheet vehicles that modern financial industry has invented. But it turns out that we are reaping what we are sowing (surprise-surprise!). What we want is more-less stable economic growth; paradoxically, how we target and measure it is bound to produce unsustainable results.

World GDP in 2009 was approximately 58.2 trillion US dollars. Let’s say we think that 4% is a nice stable annual growth rate that we should set as a target. This means that in dollar terms GDP in 2010 should be 60.5 trillion US dollars (58.2 trillion US dollars plus 4%), up by 2.3 trillions. Ok, in reality global economic growth will be higher in 2010, but let’s use 4% as an example. In 2011 the targeted World GDP should already be 62.9 trillion US dollars (60.5 trillion US dollars plus 4%), up by 2.4 trillions. What we see is that despite of a stable growth rate, in nominal terms the economic growth is expected to be bigger and bigger. This is further illustrated in the figure below which shows the targeted World GDP growth up to the year 2200.

Like magic, instead of a steady 4% annual growth we have an unsustainable exponential path. If this is what we want, then our monetary system needs to provide enough money for enabling it. Naturally, it is unsustainable too. But perhaps we should rethink the way we define, measure and target growth and success?    

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