Current growth-thinking, and what is just plain wrong with it.

Alternatively, the title of this blog could be: the myth of GDP growth.

What is bothering me for some time now, is the focus on GDP growth, while often, people do not realise what this growth actually constitutes, and what the reasons for the rise in GDP are. So I have made the chart below, which should make it clear (perhaps some clarification is needed).

The light blue part of the bars is U.S. public debt. The orange part of the bars is nominal U.S. GDP excluding public (federal) debt. Strikingly, the share of nominal GDP excluding federal debt as a part of total GDP is becoming smaller and smaller.

The dark blue line indicates the percentage change (yearly) in nominal GDP excluding debt. This share is falling since somewhere halfway of 2007.

The U.S. debt as a percentage of GDP is nearly 90, but this is when you include only the general government debt. It becomes worse when you include household debt:

By the way, the picture is even bleaker when taking account of financial sector debt. Total debts are 350% of GDP!

Obviously, if one would subtract household and government debts from U.S. GDP, one should conclude that the U.S. owes far more to its creditors than it generates every year. How does it plan on paying off this debt? Question: it does not.

Now the thing is: GDP might be growing by 1.5% on a yearly basis, debts are growing even faster. Apparently, the only way the U.S. economy can sustain a growing economy is by financing this growth by taking on debt. No, actually it is worse. The statistical decline of the economy is prevented by the accumulation of debt.

It is like I would produce paintings, and every year the paintings are getting worth less and less, but I can still say that their value is increasing year on year (because I have taken on a debt that I add to the value of the paintings).

So if we were being honest, we would admit that GDP is declining. In the U.S., but in many other advanced countries as well.

And then there is the issue of all the future liabilities that are not taken into account yet.

Given all the implicit liabilities of the U.S. for healthcare, ageing, etc., it becomes very difficult to imagine how these debts are ever goint to be paid off (again, the U.S. is an example, as the same goes for other countries). Estimates of the implicit future liabilities are seriously shocking. In some estimates for the U.S., they amount to 4 times the size of the economy.

The U.S. has some options left: restructure debts/plain default, inflate debts away, and structurally reform the economy to make it efficient and flexible again in order to boost GDP. The first two options seem impossible given the size of the U.S. debt market. U.S. creditors will not like it, to say the least. But that is another issue. The last option is just insufficient. Now, this is of course a very big problem, and that is an understatement. It seems to me that there is not an easy way out for the U.S., and sooner or later, these problems will have to be recognised, preferably before the bond market recognises it and the U.S. office of debt management faces Greek-style financing conditions.

For now, the problems are being ignored and even made worse by the accumulation of deficits, in order to continue living in a myth of a growing economy.