It is commonly accepted that “true” economic growth is the growth driven by technological innovation, and it is roughly approximated by a country’s GDP per capita growth. However, as I argued in an earlier post, short-term economic growth numbers could be distorted by monetary and fiscal policy choices. For example, a government may boost short-term GDP numbers by borrowing money through the sale of its long-term debt (say, twenty year bonds). By doing so, it employs the fundamental “time machine” feature of finance, which allows for the exchange of an uncertain future payoff for a certain payoff today. Ultimately, the repayment of the long-term government debt would be driven by the overall economy twenty years from now, i.e. people working, producing, consuming, and paying taxes then. Some of these people may not even be born today – how can we know for sure the number of workers and how productive they will be twenty years from now?
All great truths begin as blasphemies.
— George Bernard Shaw
Let me start with the proverbial “Five Monkeys” story.
Start with a cage of five monkeys. Inside the cage, there is a banana hanging from the ceiling and a ladder placed under it. Before long, a monkey would go to the ladder and start to climb towards the banana. As soon as he touches the ladder, he and all of the other monkeys are sprayed with ice-cold water.
After a while, another monkey makes an attempt to reach the banana. Again, as soon as he touches the stairs, all the monkeys are sprayed with ice-cold water. This is repeated again and again until the monkeys learned their lesson: climbing results in ice-cold water for everyone, so no one climbs the ladder.