Massive new debt hides years of negative GDP growth in EU and USA

[Charles Brown]

Massive new debt hides years of negative GDP growth in EU and USA

http://orientalreview.org/2014/09/29/massive-new-debt-hides-years-of-negative-gdp-growth-in-eu-and-usa/

Mon, Sep 29, 2014

Brasil, Canada, China, Europe, Global Meltdown, India, Japan, Russia,
South East Asia, United States

By Jon HELLEVIG (Finland)

In a groundbreaking study Awara Group reveals that the real GDP growth
of Western countries has been in negative territory for years. Only by
massively loading up debt have they been able to hide the true picture
and delay the onset of an inevitable collapse of their respective
economies. The study shows that the real GDP of those countries hides
hefty losses after netting the debt figures, which gives the
Real-GDP-net-of-debt.

The moral of the study is that it is that GDP growth figures as such
reveal very little about the underlying dynamics of an economy if one
does not simultaneously attempt to analyze what part of the growth is
credited to simply artificially fueling the economy with new loans.

The study has found that the Western countries have lost the capacity
to grow their economies. All they have left is a capacity to pile up
debts. By massively accumulating new debt, they are able to keep up a
semblance of at least sluggish growth, or of hovering around the zero
growth mark.

If this massive debt would go towards investments, then there would be
nothing wrong with it. But, it is not. The debt is going towards
financing the losses in the national economies and essentially it all
is wasted on consumption that the countries in reality cannot afford.
The Western countries act like a 19th century heir to aristocratic
wealth, borrowing from year to year to keep up the former lifestyle,
while the estate is relentlessly dwindling. Sooner or later the
prodigal heir would be forced to face reality and sell the remaining
property to stave off the creditors, downgrade his dwellings, and rein
in spending. Inevitably, the European countries and the USA will have
to curb their excessive consumption, too, but for the time being they
are putting off the final reckoning with new debt rather the way a
drunkard reaches for the morning after drink to put off sobering up.
In the case of the EU and the USA, we are speaking about a debt binge
that has been going on for a decade.

While the situation has been generally bad for the last decade or so,
it took a dramatic turn for the worse, or should we say for the
catastrophic, following the onset of the global financial crisis in
2008. The shocking figures depicting the virtual crippling of the
Western economies from 2009 to 2013 are illustrated in Chart 1. It
depicts the development of real-GDP-growth per country in years 2005
to 2013. The chart shows that during this period Russia has been able
to deliver real non-debt fueled GDP growth, whereas the Western
countries are running huge deficits. The accumulated growth of the
Russian economy from 2005 to 2013 was 147% while the Western countries
accumulated losses from 16.5% (Germany) to 58% (USA). In the case of
Russia, the real-GDP-net-of-debt figure is also corrected to adjust
for the calculation error caused by an erroneous GDP deflator that
Russian Statistics Agency (Rosstat) has used. We have discussed the
persistent problem of Russia’s GDP growth having been underestimated
due to the use of a wrong GDP deflator in the study Awara Group
Research on the Effects of Putin’s Tax Reforms 2000-2012 on State Tax
Revenue and GDP

Chart 2 shows the real GDP growth net-of-debt after deducting the
growth of public debt from the GDP figure. Net of debt we see the
scale of the Western economies, for example the Spanish economy, which
amounts to the staggering figure of minus 56.3%. This while the
conventional official method of crediting GDP growth with growth of
debt would give only minus 6.7%.

The analysis shows that by these measures Russian economic growth,
unlike that of the Western countries, has been comparatively healthy
and not debt-driven. Russia has in fact a resoundingly positive ratio
by these measures, where GDP growth has exceeded growth of debt by a
staggering 14 times (1400%). The figure is astonishing when compared
with the Western countries that have been flooded with new debt.

Chart 3 shows how much the accumulation of debt in the Western
countries exceeds the official GDP growth. The USA is leading the pack
with an increase in the debt load in years 2004 to 2013 of USD 9.8
trillion (in the chart in euros, EUR 7 trillion). In those years, the
growth of the USA public debt exceeded the GDP growth 5 times, which
is illustrated by Chart 4, comparing the proportion of growth of debt
to that of growth of GDP.

The comparison of growth of debt to growth of GDP reveals the UK, as
the country that has amassed the most amount of new debt relative to
GDP growth, having a new-debt-to-GDP-growth ratio of 9 to 1; in other
words UK has taken on 900% new debt relative to the GDP growth. But
the picture is grim for all the Western countries surveyed, less so
for Germany, while Russia’s debt increase amounts to only a fraction
of the GDP growth.

The analysis shows that by these measures Russian economic growth,
unlike that of the Western countries, has been comparatively healthy
and not debt-driven. Russia has in fact a resoundingly positive ratio
by these measures, where GDP growth has exceeded growth of debt by a
staggering 14 times (1400%). The figure is astonishing when compared
with the Western countries that have been flooded with new debt.

The above figures are adjusted taking into account public debt
(general government debt), but the situation is even worse when we
consider the effect of private debt on the GDP. New debt of
corporations and households have at least doubled private debt of most
of the Western countries since year 1996 (Chart 5).

Reviewing these figures, it becomes evident that in reality Western
economies have not grown in the past decade, rather the countries have
massively inflated their debt load. With these levels of debt reached
this cannot continue for long. There is a real risk that the bluff
will be called sooner rather than later dropping the Western economies
to GDP levels that they can carry without debt leverage. But in that
situation they will not be able to serve the accumulated debts leading
to catastrophe scenarios.

We have not included Japan and China in the analysis due to the
difficulties attributed to finding consistent data for all the input
variables. For those countries we have come across problems of
fractured data that do not capture all the relevant years;
inconsistent data across the samples we looked at; and uncertainties
about conversion of the input data into euros. (We are sure that major
research houses could overcome such problems, having greater and more
sophisticated resources than ours). This exclusion of Japan and China
is regrettable as Japan is the country worst affected by the problem
of debt-fueled GDP growth, having a public debt to GDP ratio of well
above 200%, and would therefore have been very instructive for our
purposes.

Japan has been essentially living on debt since the early 1990’s.
However, some of the more irrational Western analysts want to take
Japan as a prime example to follow, arguing that since Japan has been
able to pile up debt for some 25 years now, all the Western countries
would be able to do it as well for the foreseeable future. In this
they fail to grasp that Japan earlier had the luxury of being the sole
country living on such exorbitant levels of debt. Japan has enjoyed
great support from the Western countries to be able to continue that
practice, not least for political reasons. Another important
consideration against the idea that Western countries could continue
to accumulate debt is that they have, since the early 1990’s, rapidly
lost their economic hegemony in terms of share of world trade and
global GDP. I have written about this in a recent article entitled Why
the West is Destined to Decline

The West is fast shrinking in economic significance relative to the
rest of the world. This is demonstrated by comparing the GDP of the
Western powers as represented by the G7 countries (USA, Japan,
Germany, France, UK, Italy and Canada) with the GDP of emerging
powers. As recently as 1990, the combined GDP of the G7 was
overwhelming in relation to that of today’s 7 emerging powers: China,
India, Russia, Brazil, Indonesia, Mexico and South Korea (not
necessarily constituting one political block). In 1990, the G7
countries had a combined GDP of USD 14.4 trillion and the emerging 7
had a GDP of USD 2.3, but by 2013 the tables had been turned, as the
G7 had USD 32 trillion and the emerging 7 had USD 35 trillion. (Chart
6).

With the challenge of the ever increasing share of world economy
belonging to the emerging countries, it becomes clear that the Western
countries will not be able to profit sufficiently from world trade to
service their debt loads.

For the time being the Western countries benefit from the privilege of
having currencies that the rest of the world still largely trusts as
reserve currencies. In essence, the USD and the euro enjoy a kind of
monopoly status. This is what allows Western countries to gain access
to cheap debt and fuel their economies with central bank financing
(quantitative easing or “printing of money”). But the risk is that,
with the deteriorating debt situation and diminishing share of the
global economy, they will forfeit this privilege, perhaps even in the
near future. What would follow from this is sharply more expensive
financing and inflation, with hyperinflation as the eventual outcome.
In this scenario – which I consider inevitable over the next 5 to 10
years – the economies of Western countries would essentially collapse.

The problem is that there is no way of averting this scenario, because
the Western powers have lost their competitive advantages as economic
powers. Eventually, their economies must shrink to match their
resource and population bases. (I have written about this in the
article referred to above). But it seems that the ruling Western
elites have no intention of facing up to these realities. They will
try to keep up a semblance of prosperity with ever new debt, as long
as they can. The political parties of the West have been essentially
converted into voting machines with one singular concern – that of
winning the next elections. To do that they will continue to engage in
what amounts to bribing of the electorate – creating new debt that
fuels the national economy.

But there is no way to turn back this historical tide. Just as the
aristocrat of the old regime eventually squandered his legacy, so will
the Western powers. This inevitability of the process is what makes it
really scary, because I am afraid that the Western elite might be
tempted to bail itself out from this doomsday scenario with a war of
epic proportions. We are now truly approaching the Armageddon between
the West, with its desperate economic circumstances, and the emerging
world powers.

Jon Hellevig is a business consultant and economic and political
observer. He is the co-editor and co-author of Putin’s New Russia and
several books on philosophy and political and social sciences.