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Debt And The Economic Degrowth Frontier

Economics / Global Debt Crisis Aug 07, 2011 - 06:00 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleWELL KNOWN LIMITS
There are basically two choices: degrowth by choice - or forced by uncontrolled debt growth finally becoming uncontrollable, and inevitably destroying economic growth.

The opposite "hopeful paradigm" is well known: the so-called "growth economy" is able to profit from rising amounts of debt relative to GDP for a long way up the curve. This is sure, but the single-minded  pursuit of growth pushes this mindless quest over the threshold into forced degrowth, when debt soars beyond well known thresholds.

For the so-called advanced industrial, or "mature postindustrial" economies (apparently the same thing!), the threshold is set much higher, than for lower-tech societies lighting the debt fuze. For the OECD-type "mature democracies", all of them with ruling political elites who have never been so unpopular, and therefore unrepresentative, the debt level from which economic growth almost never returns, and always decreases, in about 92 percent of cases for 22 OECD countries, through the study period of 1946 - 2009, is 90 percent of GDP. 

Source: The 90% debt/GDP threshold: 1946-2009, for 22 advanced economies, 'Debt and Growth Revisited', C M Reinhart, K Rogoff

Beyond the 90 percent threshold, the hit on expected and likely economic growth rates is very strong: as much as 1 percent less economic growth for 1 percent debt growth as a percentage of GDP. Country cases can vary to a large extent.

One example is Japan's highly successful flirt with economic death since the start of the 1990s, an ongoing superproduction, where the national economy registered average annual growth rates of 3.9 percent a year, while debt was in the 60 - 90 percent of GDP range, but only 0.7 percent average annual growth, after debt soared past 90 percent of GDP, in an unstoppable process resulting in Japanese public debt now standing (early 2011) at around 227 percent of GDP, and its economic growth close to zero or possibly negative.

The USA exhibits a similar programmed and predictable crash of economic growth with rising debt, as do Greece, Ireland, Portugal and Italy - although, surprisingly not Spain, which however only "needed" about 67 percent of GDP as its sovereign debt load, to experience a near-perfect implosion of its entirely speculative property boom, based on debt, entraining the rest of the Spanish economy in its fall. Where tight-knit sets of interdependent economies exist - the European case - the declining rates of economic growth which are inevitable as their debt loads rise, for the Debt Stars, will drag down the growth of less-indebted countries, the Also Rans, in a classic case of "bad apples".

With a globalized economy, the same will apply. This is exactly the case we have today: it will be no surprise at all if global economic growth takes a hit from the current and ongoing "debt panic" of Europe, the USA and Japan. It will be a big surprise if this is not the case.

The reality and credibility of present-day calls by politicians like Obama for "more economic growth" is laughably low. Political leaders who chart a remorseless one-way path to hyper-debt cannot expect economic growth to recover. They are giving it the kiss of death. Apparently their PhD economists, as well as their speechwriters do not understand or are unable to explain how simple the growth-killing process really is. We can therefore help them with a child-level example.

If the Obama Gang of junior school kids borrow an ever-rising number of lollipops in the schoolyard, ever day, there will come a day when the lollipops have to be paid back, as well as consumed and handed out in deference to the Neighbourhood Bully (Wall Street). Current consumption of the popsicles will have to diminish, unless more borrowing takes place but come what may, more and more will have to be handed back to the lenders. Also, we must add, woe and betide if the lenders start raising the popsy interest rates which apply !

Obama could or might have a popsicle factory hidden inside the ruins of Rustbelt America, but sugar prices are rising quite smartly along with gold, at least until recently, making it more and more difficult to keep the Neighbourhood Bully, and the lenders happy: his only solution will soon be counterfeiting and faking lollipop production, with the Fed working really hard on that great quest. But unhappily this in turn will inevitably also take more and more of current consumption, making the process less and less Happy Time and this is guaranteed. Finally, that schoolkid named Obama has to default, move to Washington and get a job under an assumed name.

Back in the real world, with its unreal or plain fantastic sovereign debt crisis, it is perhaps "surprising" to Obama's PhD economic advisers that US economic growth plays so anaemic, as debt goes on growing in relation to GDP. This is because keeping their job means they are obliged to not see the multiple and self-reinforcing reasons why rising debt cuts growth. This includes the famed boost to export performance that a weaker money, due to rising debt, is expected to confer. Dollar devaluation has to crawl up its own J-curve to arrive in the Comfort Zone, and this is very well-known and proven. The weakened US dollar will itself - and at first - tend to reduce economic growth, not raise it.

The only real, and final solution is de-growth. To be sure this is much easier from a time before the debt crisis, than during the final throes of the debt crisis. But in either case - voluntary or forced by debt - economic growth will disappear. Preparing for that is better than pretending it is all a big surprise.

The de-growth economy cannot be dissociated from the de-growth society and culture. The key terms are many, but include "multi-functional", for example by surprise discovery that any private car is also a taxi or potential taxi. When organized and programmed for secure operations in defined geographical sectors of a city, the car-taxi fleet can progressively supplant or replace over-sized and energy wasteful classic buses and trams. More transport for less energy.

For an impressive number of decades - at least 4 - we know about decentralized office working, using either fax machines or cellphones and laptops. The techno gimmick has no importance relative to the simple government-level and legislative hit needed to realize decentralized office working, and perhaps a 33 percent reduction of daily urban passenger movements, almost literally "overnight". Leading economic indicators like gasoline consumption and air pollution, street accidents and stress will of course diminish, but it is not at all sure than human happiness or real economic output will fall.

To be sure there is no point multiplying the examples because Happy Changey Obama and his lookalikes, and above all the Neighbourhood Bully do no want change - but only want to moan and whine about the disappearance of economic growth. Their so-called programme is therefore cast in stone: push sovereign debt to the precipice edge, and then further. We all know the 92-percent-certain result of falling economic growth and, knowing this, we cannot have any patience or sympathy for economic growth fanatics like Obama whose very own method - of continually increasing the debt load - makes it impossible to have economic growth.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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