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2016 Theme #4: The End-Game of Debt-Fueled “Growth”
2016 Theme #4: The End-Game of Debt-Fueled “Growth”
This week I am addressing themes I see playing out in 2016.
A number of systemic, structural forces are intersecting in 2016. One is the end-game of debt-fueled “growth.”
We can summarize the official “solution” to the Global Financial Meltdown of 2008 in one line: borrow and blow trillions–of yen, yuan, dollars, euros, reals, you name it.
The goal of borrowing and blowing trillions was to re-invigorate “growth”— any kind of “growth,” no matter how wasteful, unproductive or even counter-productive it might be: wars, nation-building, ghost cities, needless MRIs, useless college diplomas, bridge to nowhere–anything the borrowed money was squandered on counts as “growth” in the Keynesian status quo.
Unsurprisingly, this strategy yields diminishing returns as the negative returns on all this debt-fueled spending piles up. While the yield on the “investment” is either negative or only fleetingly positive, the interest due on the debt is forever. That’s the source of diminishing returns in a nutshell.
The diminishing returns on additional debt is clearly visible in these charts.
Global debt has soared but this massive stimulus has yielded subpar “growth” (and the final costs of all the astounding mal-investment have yet to be totaled):
Has borrowing and blowing $9 trillion solved any structural problem in the U.S. economy? No.
While total credit in the U.S. has exploded, GDP (a measure of actual output) has under-performed for years. The tiny decline of credit in the 2008-09 financial meltdown almost collapsed the global economy. The strategy of borrowing and blowing trillions has backed the global economy into a corner: expand debt or die.
While U.S. bank credit has expanded by 40%, GDP has risen 21.7%–roughly half the rate of credit expansion. This is diminishing returns on a vast scale.
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A Hard Look at a Soft Global Economy
A Hard Look at a Soft Global Economy
MILAN – The global economy is settling into a slow-growth rut, steered there by policymakers’ inability or unwillingness to address major impediments at a global level. Indeed, even the current anemic pace of growth is probably unsustainable. The question is whether an honest assessment of the impediments to economic performance worldwide will spur policymakers into action.
Since 2008, real (inflation-adjusted) cumulative growth in the developed economies has amounted to a mere 5-6%. While China’s GDP has risen by about 70%, making it the largest contributor to global growth, this was aided substantially by debt-fueled investment. And, indeed, as that stimulus wanes, the impact of inadequate advanced-country demand on Chinese growth is becoming increasingly apparent.
Growth is being undermined from all sides. Leverage is increasing, with some $57 trillion having piled up worldwide since the global financial crisis began. And that leverage – much of it the result of monetary expansion in most of the world’s advanced economies – is not even serving the goal of boosting long-term aggregate demand. After all, accommodative monetary policies can, at best, merely buy time for more durable sources of demand to emerge.
Moreover, a protracted period of low interest rates has pushed up asset prices, causing them to diverge from underlying economic performance. But while interest rates are likely to remain low, their impact on asset prices probably will not persist. As a result, returns on assets are likely to decline compared to the recent past; with prices already widely believed to be in bubble territory, a downward correction seems likely. Whatever positive impact wealth effects have had on consumption and deleveraging cannot be expected to continue.
The world also faces a serious investment problem, which the low cost of capital has done virtually nothing to overcome. Public-sector investment is now below the level needed to sustain robust growth, owing to its insufficient contribution to aggregate demand and productivity gains.
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