Optimism / pessimism survey

2009-02-08

in Canada, Economics, Geek stuff

If you were given the following options, which would you choose:

  1. An absolute guarantee that the Canadian material standard of living in 2200 will be identical to what it was in 2009 – that is to say, the same number of computers, lightbulbs, sandwiches, appendectomies and everything will be consumed.
  2. For the material standard of living in 2200 to be determined by the economic and technological development that occurs between now and then?

For those who believe that long-term growth in wealth can be maintained, the level of prosperity in 2200 can be expected to be much higher. For those who are fearful or either stagnation or catastrophe, the certainty of present levels is more appealing.

Note that I am not saying anything about the distribution of the material standard of living. For the purposes of this survey, please ignore the question of whether the top 10% of the population end up consuming 10%, 30%, or 50% of the material goods and services consumed.

Report a typo or inaccuracy

{ 26 comments… read them below or add one }

Hilary February 8, 2009 at 7:23 pm

2

Tristan February 8, 2009 at 7:43 pm

Pessimist.

Anyone who thinks wealth is going to continue increasing needs to account for how that will happen with world population leveling off. Anyone who thinks we’re going to maintain a 3% population growth for another hundred years is an idiot. Also, anyone who thinks 3% economic growth for another hundred years is possible believes that our real wealth will double almost 3 times by 2200. Unless they aren’t very good at math.

R.K. February 8, 2009 at 8:09 pm

I would take the constant-wealth guarantee. I don’t think we’re going to make it to 2200.

Tristan February 8, 2009 at 8:37 pm

I was at a flea market today, and I could have bought a 1930 20$ bill for 50$. The bill says “promise to pay the bearer upon request the sum of 20$”. It says that because the bill isn’t money, it’s a promissory note for money, which is a commodity, and whose value is determined by the market directly – because its production is determined by its market price and the contingencies of the world, rather than by a man in a room.

Now, if the person holding that bill in 1930 had successfully run the bank, i.e. exchanged the dollar for the 30grams of gold it was worth at the time, before the standard was abolished in 1931, he would today have something worth more than 900$, not 50$.

Milan February 8, 2009 at 9:46 pm

Tristan,

Increasing in value from $20 to $900 is almost exactly equivalent to 78 years of annual growth at 5%.

20*(1+0.05)^78 = 899.07

Over a long span of time, a 5% return isn’t unusually high.

Milan February 8, 2009 at 10:00 pm

Between 1930 and 2008, the S&P 500 increased at an average rate of 7.86%.

If you had invested $20 in 1930 in an index tracking fund, it would now be worth $7313, minus taxes

20 * (1+0.0786)^78 = 7313.79

In the long run, even small differences in rates of return make a huge difference in yield.

Milan February 8, 2009 at 10:09 pm

According to the inflation calculator, $20 in 1930 dollars is worth $246.22 in 2007 dollars.

As such, an ounce of gold is worth about $73.51 in 1930 dollars. The index tracking investment is worth $594.09 in 1930 dollars.

Tristan February 8, 2009 at 11:05 pm

Milan,

An ounce of Gold is worth what you can get for it. If you have a 20$ bill in 1930, it is worth exactly 1.505 grams times twenty, or in other words, about 30 grams, or just over one ounce. The gold standard Canada was on until the great depression forced the state into massive monetary inflation pegged the dollar at 1.505 grams of gold, which was the same as the U.S. gold standard.

The gold standard in Canada was abolished April 10th, 1933. Up until that point, gold was not a traded commodity with regards to currency, because gold was itself currency.

Milan February 8, 2009 at 11:14 pm

That isn’t really a response to the point that investing in stocks would have been a better choice in 1930 than cashing in the bill for gold.

Clearly, keeping your money in bill form in a non-interest bearing place (say, under your mattress) isn’t a smart long-term strategy.

. February 9, 2009 at 12:03 am

Declining Declinism
Don’t believe the historians and economists who say America’s best days are behind us.
By Daniel Gross
Updated Saturday, Feb. 7, 2009, at 7:12 AM ET

The dumb, willfully blind optimists who dominated the late boom have slunk into exile. They’ve been replaced by the ardent declinists, the bears, and the prophetic historians, armed with copies of Gibbon and Malthus and wielding reams of data. There are economists predicting double-digit unemployment through 2011, with the housing and stock markets reeling through 2010. Historians, meanwhile, warn that the United States may be losing some of its capitalistic essence as the government increases its involvement in the financial sector. At Davos, Niall Ferguson, a brilliant, young, Oxford-educated, Ivy League-employed historian (Harvard), said the United States isn’t in another Great Depression but rather a “Great Repression,” in deep denial of its problems. The go-go Age of Leverage is over, and a go-slow Age of Big Government has begun. High levels of debt, imperial overreach, and heightened government influence in the economy mean the United States is in for a Japan-style lost decade, in which it could struggle to chart growth of 1 percent.

Tristan February 9, 2009 at 1:13 am

“That isn’t really a response to the point that investing in stocks would have been a better choice in 1930 than cashing in the bill for gold.”

That really depends how long you don’t need the money for. You certainly would have been better off in the mid 30s.

Another thing this extreme long term viewpoint covers up is the possibility of investing in material assets during periods of high inflation or deflation. I.e., if you hold lots of solid assets, you can pick new ones up cheap during deflation, or you can quickly pay of devalued debt during inflation.

In other words, both inflation and deflation benefit the rich at the cost to the poor. Stable currencies which encourage simple savings techniques will be best for the working classes. The lack of solid value in currency encourages over spending – credit cards are an example of this (which should simply be illegal), but the first experiments with paper money, in France, show that paper money tends towards spending rather than saving.

Tristan February 9, 2009 at 1:30 am

The other thing about paper money is that it’s basically about trust – you have to trust that the money you are paid in will hold its value long enough for you to spend it. If you didn’t trust that, you’d exchange it immediately for some other store of value. (Gold, beans, gold and beans, oats, it doesn’t matter – you should probably buy more than one thing anyway). So, in other words, to hold US dollars or bonds now means that you believe that the US will be able to continue to pay back its debt without printing the payments.

Does anyone really believe this anymore?

Canada doesn’t seem as bad, but since our GDP is 1/10th of the american one, a 60 billion dollar stimulus package will be just as difficult to repay as a 600 billion package in america. However, the actual cost of the package in the US is, I belive, now 1.5 trillion.

Canada, like the US, has the benefit of being held as a reserve currency by other states. This increases the value of our currency, and helps us benefit from the massive price index imbalances between the 1st and 3rd world. However, the benefit comes with a cost – external control – investors can choose to sell off their Canadian dollars if they choose, if they think that the future repayments/interest won’t buy as much of a trade surplus for them as dumping the currency now. In other words, there can be a run on a country’s currency just as there can be a run on the banks. If there is an international gold standard with exchange rates that are “fixed” (but they are “fixed” by the quantity of gold, which does get moved around in cases of trade surplus, so they are not really fixed at all), there is no need to hold reserve currencies to hedge against the possibility that someone holding your currency might run it.

The entire post-71 financial system reminds me of nothing other than the Continental division of power in Europe up till 1914. Countries take sides, either debtors or lenders, and try to set it such that the system can be made to collapse by anyone, but its in no one’s interest to see it collapse.

The problem is, if it ever does become in someone’s interest (probably the Countries which have been saving, buying up the gold sold off by the US and Europe) to see the system fail, to see the fiat currencies destroyed, it might happen. If a state believes that returning its currency to a Gold standard will allow it to benefit from the confusion, inflation or deflation, of a crises – in the form of being able to basically buy up other states, then why shouldn’t we expect a state to do exactly this?

There is a lot of talk about China not being able to do anything about the US budget because it is so dependent on US consumption, and that is true. However, if they are asked to double their treasury holdings, they have a serious decision to make. Do they spend money they could use for other things, a trillion dollars, to buy a loosing investment? Or do they risk the collapse of their consumption base? Both are bad decisions – the US must rely on the first being a worse decision than the second. But just as soon as it’s feasible to imagine massive Chinese consumption of Goods, the Rem can very easily be increased in value, and China could consume its own goods. Sure, Chinese people are a lot poorer than Americans, but there are 3 or 4 times as many – which means only the top 25% need to be as rich as 100% of Americans to make up the demand deficit.

Do we really think China will take that long to build up to that kind of potential domestic consumption? Think of the strategic benefits of creating a run on the US dollar – inflation benefits the first recipient of the money (china), who can then run rampant with 2 trillion dollars buying up US owned solid assets. Two trillion!

Tristan February 9, 2009 at 1:35 am

“in which it could struggle to chart growth of 1 percent.”

1% growth is massive. It means your economy, as a whole, becomes twice as rich every 70 years. If that wealth was spread out equitably, that means there is literally twice as much money for social programs per person, every 70 years. You can own twice as many houses, every 70 years. You can buy twice as much single malt scotch, every 70 years.

It’s massive growth, unbelievable to any pre-industrial revolution human.

And, by the definition of “pessimism” in this post – exactly the kind of growth some expect not to see any longer. To pick the “pessimist” choice here means you think overall growth will be negative.

Anonymous February 9, 2009 at 9:01 am

Keeping things static until 2200 would just delay the reckoning.

Either humanity will eventually progress from its present state into a sustainable one or it will not.

Anon February 9, 2009 at 9:18 am

Sustainability is just a technical problem.

Milan February 9, 2009 at 11:10 am

Achieving societal sustainability will require the use of far more than just technical means.

More than anything, sustainability is a political problem.

Milan February 9, 2009 at 11:14 am

Tristan,

I haven’t read it, but this report may interest you:

China’s Holdings of U.S. Securities: Implications for the U.S. Economy, January 13, 2009
February 2, 2009
United States Congressional Research Service

Sarah February 9, 2009 at 2:35 pm

I wavered a bit about Canada, but came down in favour of the pessimistic view given the difficulties of transportation here in a future with very limited oil supplies. For most other developed countries the choice of ‘pessimistic’ would have required a lot less deliberation; indeed in reference to the UK or US I would certainly choose guaranteed stability for a 100 or even 50 year timespan, perhaps less.

Milan February 9, 2009 at 2:47 pm

Logically, isn’t the amount of sacrifice higher for longer lock-in periods? Shouldn’t we expect optimistic people to be more willing to accept a 50 or 100 year deal than a 200 year one?

Tristan February 9, 2009 at 5:03 pm

“Shouldn’t we expect optimistic people to be more willing to accept a 50 or 100 year deal than a 200 year one?”

I don’t think so. It’s not an irrational view to believe the world will be much poorer a hundred years from now, but much richer 500 years from now. I don’t have an argument for this, but it seems intuitively plausible, although I don’t personally find it intuitively likely.

Milan February 9, 2009 at 5:09 pm

It’s a difficult question to answer because it is so artificial. No such offers actually exist.

One big factor would be the nature of the transition from ‘protected’ time to ‘unprotected time.’ The most probable (though still unrealistic) transition would be for the 2200 economy to carry on where the 2008 economy left off. That leads to the point about ‘delay[ing] the reckoning.’ In the absence of economic and technological development, we have no reason to think we will be more capable of managing ourselves in 2200 than we are now.

Less probable (unrealistic) transition types could include an instant jump from the ‘protected’ level to the business-as-usual level that would have been achieved without the ‘protection.’

In any case, all this is too caught up in the mechanics, where the intent of the survey was simply to gauge whether people think economic growth or decline is more likely between now and 2200: specifically, by assessing how tolerant they would be of giving up the possibility of growth as insurance against decline.

. February 9, 2009 at 5:44 pm
Litty February 10, 2009 at 4:00 pm

I would choose the first option. People go crazy when things stay the same. It is preferable to have a world with ups and downs, rather than one where there is nothing to fear or aspire to.

Litty February 10, 2009 at 4:01 pm

I meant the second option, sorry.

Tristan February 11, 2009 at 10:26 am

“It is preferable to have a world with ups and downs, rather than one where there is nothing to fear or aspire to.”

There is nothing to fear or aspire to other than the increase or decrease of wealth, of the standard of living?

Is everything we want in life just expressable as a standard of living? This seems absurd. If we had a decent, honest, non-hypocritical society (i.e. one where democracies didn’t systematically oppose democracy), I don’t think stability is an impossible goal.

If you want stability, it’s very easy, just compare the 1945 to 71 period with the 71 to 2009 period – the first is far more stable, and there was more growth. So, why is all this deregulation of currencies good then?

. February 11, 2009 at 3:10 pm

If we look ahead 20 or 30 years, it seems likely that the world will be very much poorer. Personal autos may be rare. Electricity may be unreliable. It is likely that we will have much less in the way of goods and services than we have today. A growing population may add to our problems. If the smaller supply of goods and services is divided among more people, living standards are likely to be much lower than they are today.

If the world becomes much poorer, I would expect social security and Medicare to be drastically scaled back or even eliminated. There will be so little goods and services in total that society cannot afford to set aside much for the disabled and elderly.”

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