English for Business III. Physical vs. financial

1. English for BusinessIII. Physical vs. financial Karl Seeley, PhD Hartwick College

2. A potential contradiction • The resource-based view of growth implies reduced growth • Resources are getting noticeably harder to procure • Price is up, quantity is stagnant • If growth depends on resources, economy should be slowing down

5. A potential contradiction • The resource-based view of growth implies reduced growth • Resources are getting noticeably harder to procure • Price is up, quantity is stagnant • If growth depends on resources, economy should be slowing down • No clear evidence of that

6. Resolving the contradiction • The model is wrong • Resource effect showing up in high unemployment • Interface of physical and financial economies a. Time scale

7. Is the model wrong? • There’s some good evidence in the model’s favor • Relationships between resource and GDP • Through time • Across countries • But models are not reality • Necessary simplifications to aid understanding • You can always simplify the wrong thing

8. Unemployment • Globally unemployment is high • US still at 9%, even 18 months into “recovery” • Unprecedented long-term unemployment • “Unprecedented” since the 1930s … • When resources are expensive, it’s expensive to hire people  fewer jobs • But then how is GDP going up, if it’s also expensive to replace people with resources?

9. Physical vs. financial • The resource-based model of growth is about the physical economy • Take resources from environment, use them to do needed/wanted things • It’s also about the ease/possibility of supply • Demand is mediated by the financial economy

10. Financial markets and demand • Financial markets allocate credit • The right to claim part of today’s output • In exchange for a promise to hand over part of tomorrow’s output • They also create claims on current output out of thin air • Again backed by promises about future output

11. Demand and output • Producers respond to claims on output • If I think someone will buy my product at an acceptable price, I’ll produce it • Even if it gets harder to produce, still respond to demand • If demand is high enough

12. Cash vs. credit • “Cash” is based on output already made and sold • Credit is based on a promise to hand over output in the future • Credit turns into cash • As soon as I sell some output—even if I sell it to someone for credit—what I have is as good as cash • Credit creates demand • As long as people believe the promises behind it

13. Credit and growth • Credit can cause an economy to grow • Even in the face of some resource trouble

15. Credit and growth • Credit can cause an economy to grow • Even in the face of some resource trouble • But credit creates claims on future output • Which can grow out of proportion to likely future output

16. Tech bubble Stable ratio between current output and claims on future output Housing bubble Net worth data from U.S. Federal Reserve, Flow of Funds, Table B.100, “Balance Sheet of Households and Nonprofit Organizations” GDP data from Bureau of Economic Analysis, Table 1.1.5, “Gross Domestic Product” Author’s calculations

17. Credit and growth • Credit can cause an economy to grow • Even in the face of some resource trouble • But credit creates claims on future output • Which can grow out of proportion to likely future output • US economy still carrying “too many” claims • Particularly if future growth is going to be slower • Additional “devaluing” of claims in future? • Current output is above long-run viable trend?

18. Time scale • The resource-and-growth model is more about long-run tendency • May not predict short-run fluctuations well • Provision of credit can “fight the tide” • For a while … • Is this just a cop-out?