Avoiding economic traps

Economist Edward Hugh notes in In Search Of Lost Demand that

"There are countries which are not so heavily in debt, and which do have a large growth capacity and a huge quantity of so called “pent up” demand - the so called Emerging Economies...these economies are still only around 40% of global GDP, so it is demand in 40% which is having to pull the other 60% with it. The interesting part is that in the space of a decade these economies have surged from 20% to 40% of the total. If the same trend continues by 2020 they could easily constitute 60%. Then things could be different, since we could have 40% of the total living from exporting to the other, faster growing, 60%. But we aren’t there yet"

Can the emerging economies avoid the traps that have entangled the developed world? As an example there's the liquidity trap that the Bank of Japan finds itself grappling with.  It's a long range question, but worth considering given that macroeconomic policies have played a large role in guiding the developed countries into the mess they are in now. 

Economic policymakers seem to act as if exponential trends will continue indefinitely. Yet it is well documented that there are limits to growth. Policymakers in the emerging economies would do well to learn lessons from the mistakes that have been made that led to the current global crisis.

Exponential trend breakdown: a novel analytical tool

Economic policymakers seem to act as if exponential trends will continue indefinitely.  Yet it is well documented that there are limits to growth.  Mark at Illusion of Prosperity has done an excellent job of identifying trend failures in measures of economic activity.   Good examples can be found at the following links:

Industrial Production

Epic Exponential Trend Failure of the Day

40.7 Million Missing Jobs

I ran a search on the terms "exponential trend failure" over at the RePec database (Research Papers in Economics) and came up with no relevant results.  Mark could package up all of his analysis into a paper and it would be legitimately be a novel analysis.

I also ran a search in Google Books for the terms (exponential "trend failure" economics) and the only thing that came up was the blog Illusion of Prosperity. Mark is on to something.

Prelude to the fall

The following is a section from a Wikipedia article titled Crisis of the Third Century.  I have highlighted in bold certain statements that highlight economic consequences of this breakdown leading up to the final fall of the Roman Empire.  Think of it as an illustration of possible future consequences of an economic crash.

With the onset of the Crisis of the Third Century, however, this vast internal trade network broke down. The widespread civil unrest made it no longer safe for merchants to travel as they once had, and the financial crisis that struck made exchange very difficult with the debased currency. This produced profound changes that, in many ways, would foreshadow the very decentralized economic character of the coming Middle Ages.
Large landowners, no longer able to successfully export their crops over long distances, began producing food for subsistence and local barter. Rather than import manufactured goods from the empire's great urban areas, they began to manufacture many goods locally, often on their own estates, thus beginning the self-sufficient "house economy" that would become commonplace in later centuries, reaching its final form in the Middle Ages' manorialism. The common free people of the Roman cities, meanwhile, began to move out into the countryside in search of food and better protection.
Made desperate by economic necessity, many of these former city dwellers, as well as many small farmers, were forced to give up hard-earned basic civil rights in order to receive protection from large land-holders. In doing so, they became a half-free class of Roman citizen known as coloni. They were tied to the land, and in later Imperial law their status was made hereditary. This provided an early model for serfdom, the origins of medieval feudal society and of the medieval peasantry.
Even the Roman cities themselves began to change in character. The large, open cities of classical antiquity slowly gave way to the smaller, walled cities that were common in the Middle Ages. These changes were not restricted to the third century, but took place slowly over a long period, and were punctuated with many temporary reversals. However, in spite of extensive reforms by later emperors, the Roman trade network was never able to fully recover to what it had been during the Pax Romana (27 B.C.—A.D. 180) of the first century A.D.
While Imperial revenues fell, Imperial expenses rose sharply. More soldiers, greater proportions of cavalry, and the ruinous expense of walling in cities all added to the toll. Goods and services previously paid for by the government were now demanded in addition to monetary taxes. The steady exodus of both rich and poor from the cities and now-unremunerative professions forced Diocletian to use compulsion; most trades were made hereditary, and workers could not legally leave their jobs or travel elsewhere to seek better-paying ones.

Prices up, earnings down

According to the BLS release dated October 16,

CPI for all items increases 0.6% in September as gasoline prices rise

while at the same time 

Real average hourly earnings falls 0.3 percent in September.

The conclusion one can draw from this data would be that less goods and service were consumed in the month, or alternatively stated, that real PCE actually declined if consumers didn't take on additional debt.  In any case the American consumer is getting the screws tightened.

Cost of food near exponential trend

Here is a chart of the BLS CPI index for food only:

What's remarkable is how stable food prices were until the Nixon years and the subsequent skyrocketing of the index.  Dumping the Bretton Woods exchange system hasn't been good for the cost of food.  Oil prices seem not to have affected this metric as food prices kept rising during the long period of low oil prices in the 1980's and 1990's.

A better phrase for this sort of chart would be a "hockey stick".

Inspired by Illusion of Prosperity.