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Chart1. Copied from US Budget (Obama Budget) FY2011 published Jan 2010 |
This post is the intro to many analytical articles on debt, growth, resource scarcities and economic paradigms which I plan to publish in the next several months. Between these rather dense analytical pieces I will leaven the blog by posting extracts from, and linking to various news items culled from MSM publications and the blogosphere.
As we have seen in the budget summary here, the current wisdom is that the US consumption growth rate (GDP growth rate) will soon (2010) grow at a rate slightly higher than the growth rate of the last decade, and that the annual US budget deficit will decrease as a result of this growth. A view of Obama admin thinking on growth through 2015 is shown in Chart 1 above. In words, the picture says that after a GDP dip in 2008 and 2009, GDP will begin growing at the trend line prior to 2008 -- or perhaps slightly faster.
My own belief is that there is a very strong likelihood (~80%) that US consumption (GDP) will grow at a significantly slower rate in the next decade than in the last decade. The primary growth inhibitors will be debt, and the rising price of the natural resources necessary for sustained growth.
US private, not government, debt will probably be the inhibitor of growth early in the decade, with resource scarcities and US government debt adding to the growth inhibitors later in the decade. Energy, and most particularly oil, is likely to be the natural resource whose scarcity, and therefore price, will most impede US growth. "Conventional oil" aka "cheap oil" is now a depleting commodity.
Slower consumption growth than forecast will exacerbate unemployment, which will further depress demand. If my forebodings are correct, increased government spending on appropriate programs is the only (short term) way to decrease unemployment, and thus reduce the likelihood of an economic spiral downwards. It will be interesting to see how far the Obama administration is willing to push such an agenda.
More government spending implies larger annual deficits, more government accumulated debt, and larger taxes on higher incomes. These actions themselves constitute a major shift in the current American economic paradigm, Such a shift will be fought tooth and nail by US corporations, US banks, the US military and most US politicians.
If such a shift in thinking were to occur, many once sacred cows begin to be open to slaughter:
Military budgets can be reexamined and reduced, the "40 hour" work week can be reduced to spread the available work among more workers, medical care can be rationalized, economized and improved, current government subsidies to the agriculture and oil industries can be redirected to sustainable non polluting energy infrastructure, government RandD dollars can be redirected from "full spectrum military dominance" to investing in future green technologies ... and so on.
In short, if we can accept the idea that we will be forced to reduce the consumption growth rate "soon", we will be forced to abandon the Anglo American economic paradigm which, for the last half century, has sacrificed all other national goals to the maximization of "GDP growth".
Let's start with looking at "debt" as an inhibitor of growth.
America is the most powerful and wealthiest country in the world. Our consumption, with a GDP of about $14 trillion, is about one quarter of the entire world's consumption, and three times bigger than the consumption of China -- the next largest GDP. We spend much more than half of what the entire world spends on war making activities, making the military gap between one nation (us) and the rest of the world, the largest in human history.
For the last four decades, since President Nixon unilaterally told the world America would not guarantee to buy the US dollars in their banks with the gold in our banks, as agreed to in the 1944 Bretton Woods agreement, the entire world has been running a global financial experiment. An experiment which has never been tried in the entire history of mankind.
For nearly 40 years now world "money" has become divorced from any natural resource -- this is the first time this has ever happened, in "peace time", on a global scale. The world's bankers and the world's politicians have been sufficiently confident in the power, the responsibility and the "transparency" of the United States financial system, that the US dollar has become the international unit of trade. The world runs on printed pieces of paper (fiat money) and debt. We, in the US currently possess the only keys to the printing presses, and it is our banks, primarily, which showed the world the way to "leverage" bank balance sheets to issue enormous amounts of credit and thus create massive debts.
With our power and our wealth, there is nothing to prevent us printing as many pieces of paper, or creating as much debt as our hearts may desire -- except for our perception of the confidence of other nations in the "value" of our printed paper, and our perception of their confidence in our banks ability to "issue credit".
The idea that the US is "bankrupt" which is peddled by doomsters is nonsense. As long as we have the keys to the printing presses, the worst that can happen is that our standard of living falls.
However, if the US government continues to bail out US banks and neglects to bail out the middle class through mortgage relief and investments in jobs, unemployment will rise, the American middle class will shrink further, the gap between rich and poor will widen, and the clamor against immigrants and open trade will become deafening. American politicians will begin to blame foreigners (China?, Middle East?) for Americas problems and another war will be just around the corner.
The recent US "credit crisis", the unprecedented and, to a certain extent unknown, amounts of debt overhanging the industrial world, and the evident opacity of the US banking system caused by unregulated "derivative" instruments, has shaken the confidence of the world in our (America's) ability to maintain an orderly global financial system.
As we will see, US consumption growth of the last two decades has been financed by debt. The size of this American debt as a multiple of GDP is unprecedented in "peace time". America the nation is in debt to the world, mostly to China. Middle class Americans, attempting to maintain their traditional rate of consumption growth in a decade of falling wages, are hugely in debt to American banks whose assets are held by wealthy Americans. American banks. freed of almost all restraints in the late 1990s and encouraged by American politicians and cheap money "leveraged" their balance sheets as never before, and flooded the world with debt.
Most of the charts I will be displaying in future posts will be based on the "Flow of Funds" quarterly report issued by the US Fed. This report is quite detailed, balanced and accurate. However, it reports only those data which are on the balance sheets of US entities. It does not and cannot report the data hidden from sight in the "shadow banking" system, nor can it report "bad loans" still on the books of banks which cannot write them off for fear of technical insolvency. These last two items -- off balance sheet liabilities, and bad loans exacerbate, the debt problem we all know we have. Only time will tell how large these invisible items are. The current idea is that off balance sheet liabilities and bad loans will right themselves as consumption growth occurs.
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