Can the economy grow again without Chinese and U.S. debt?
Nov 12th 2009 10:30AM
Updated Dec 4th 2009 4:37PM
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.