Can the economy grow again without Chinese and U.S. debt?
Filed under: Economy
These days, it is hard to know what's real and what's not. The U.S. reported 3.5% gross domestic product growth in the third quarter, during which time China says it grew at an 8.9% rate, according to Fortune. That all sounds great. But it doesn't take much digging to realize that both countries are using borrowed money that someone will have to pay back later to create the illusion of growth -- without creating much in the way of jobs.
This bothers me because the current financial crisis was caused by a debt bubble, and now we are trying to crawl out of its wreckage by creating an even bigger debt bubble. It has been said that insanity is doing the same thing over and over and expecting a different result. By that definition, if the world's economic policymakers think that borrowing more money will lead to bubble-free growth, they're insane.
Let's look at the U.S. first. Sure, there's a case to be made that every dollar of federal spending during a depression leads to $1.50 in economic activity. But with the U.S. national debt at $12 trillion and the federal deficit at $1.4 trillion -- not to mention the $23.7 trillion in potential government obligations to prop up the financial system -- it all seems a bit much.
That 3.5% GDP growth came from a 7.9% boost in federal spending -- which helped create a 22.3% rise in durable goods spending and a 23% increase in construction spending. But with unemployment up to 10.2%, the jobs situation just keeps getting worse, and it could be three years before it improves.
More Debt, With Less Bang for the Buck
And with 70% of economic growth coming from consumers, that can't be good. That's why uber-economist Mark Zandi wants between $125 billion and $150 billion in new stimulus -- with $50 billion to $60 billion of it dedicated to further extensions in unemployment benefits, according to CNNMoney.
Meanwhile, China's growth was helped along by $1.27 trillion in new loans -- up 136% from the same period in 2008 -- and that money went to infrastructure, manufacturing, and real estate, according to Fortune. And in the middle of 2009, its total lending reached 140% of GDP at midyear -- compared to 84% of the U.S.'s $14.3 trillion GDP.
And it's beginning to look like China's getting an ever-declining payoff from all the debt. From 2000 to 2008, it took just $1.50 in new credit to generate $1 of GDP growth in China, but now that ratio is 7:1. To put this into some perspective, the U.S. is a laggard here -- just before the financial crisis hit, the ratio was only 4:1. But of course, since China buys $1.2 trillion of our debt, we're just outsourcing the borrowing.
I wonder whether a bigger bubble growing and bursting is inevitable. Such fears may help explain why gold is trading at $1,119 an ounce.
What is needed is equity-led growth. That means investors buying stock in privately held, fast-growing companies and betting that the growth will create jobs and innovation. While the dot-com bubble showed that this kind of equity-led growth can get out of hand, its downside is less severe than what happens when debt bubbles burst.
Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter.
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Reader Comments (Page 1 of 1)
11-12-2009 @ 11:52AM
Paul Del said...
We have been in debt for a long time, pumping money into the economy makes a lot of sense, if the Federal Government had not bought some of the debt from companies, banks etc., we would have been in depression, lets say the China pulls it's money out of the US economy what do you think would happen?, why do they encourage people to use credit cards?, in today's society people live with debt, there is a lot of greed out there, seems to be everyone for themselves at the expense of the economy, we have become a spoiled nation and now we are paying the price
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11-12-2009 @ 12:09PM
ajgorm said...
Question of the day..Peak ! top of the pyramid the glass is full ! Supply and demand if you meet the demand with better productivity where do you go from there if everyone else has hit PEAK at the same time ? So if China grows we shrink if we grow and China shrinks this could get nasty they have more people than us. But then we all have nukes too. SO where do the sheep GRAZE ? REALITY101. SAVE our planet..can we put people to work helping other people for no cost at all with just the spirit of giving. The Awakening process ??
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11-12-2009 @ 1:26PM
ED said...
Politicians of all types are now, and have in the past, tried to solve their political problems with economic solutions. Too bad they don't understand how our free economic systems work. Also too bad that they spend our hard earned incomes to get reelected to offices they think they have a devine right to have. I have watched these yahoos screw up this country long enough.
Listen up guys. Jobs are created by people creating inovative products that can be sold to people like us. Manufactured here in our country with a right to make a profit. Sold to the world on a level playing field rather then some back room agreements by the Presidents of countries who know nothing about the economics of making a living for themselves. Come on folks and learn about the people you are electing. Don't accept the political spin they hand us. Vote! But know who you are voting for.
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11-13-2009 @ 1:08PM
Paul Del said...
Ed, your right on unfair trade, this is a global economy, lets say we pull away from trading with these other countries!, just look at everything in your house, 9 our of 10 they are not made in the United States, if they were you could not afford the prices, the problem was all the greed that exploded the housing market, then came Wall Street investing huge amounts of capital into an over blown market, as for the politican! they are all alike, does not matter who is voted out, they have another greedy one replacing them, our dollar is worthless and one day China will become the number 1 economy in the world, that is sad
11-12-2009 @ 1:58PM
Bob said...
Now that we know that google is recording our ever move..and selling it.....
Severn million people died directly as a result of the great depression. This one should kill about 20 milllion at a minimum. I remember stories from my mom standing in bread lines, no medicine, children dying all over because there was no food, bacon grease for butter. We are now on the brink and the nuclear missles will only make it go faster in a blink of an eye.
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