April 21, 2008

Pre-Conditions for a Sustained US Economic Revival

by Ron Robins, MBA

From my blog: Enlightened Economics

The US has achieved many periods of sustained and rapid economic growth.
And it can do so again. However, as history demonstrates, a big bust results if
the growth is spurred by excessive monetary and credit expansion. For the past
25 years or so the US economic expansion has followed the woefully excessive
monetary and credit expansion script. The US will not be able to pull itself out of
the present economic malaise without dealing with its inordinate levels of debt
and ‘exponential’ credit growth.

It is rather sad when most economists and investment industry professionals do

not talk about the enormity of the debt and credit expansion problem.
Unfortunately, it seems these ‘experts’ are either told to shut-up, prefer to
overlook the obvious, or to simply lie about it being a problem! After all, what
bank economist wants to tell his bank that its customers should reduce their
borrowings, and thereby reduce the bank’s lending and subsequent earnings!
More than likely the bank’s stock price would plummet. There is simply no
incentive for most establishment economists to be truthful and every reason for
them to lie.

For the US to experience a true long-term economic revival, I believe four

things need to happen.

1. US debt growth will have to about match, dollar for dollar, GDP and
income growth.
Presently it takes around $6 of new debt to create $1 increase in GDP and
$4.75 of new debt for every $1 increase in national income. This is bubble
territory. Look at this historical chart showing the explosive growth of America’s
debt in relation to its national income.
 Source: Michael Hodges America’s Total Debt Report/financialsense.com

If income grows slowly while borrowing grows rapidly, eventually there is a

solvency problem. That is where the US is today. If the borrowing were
primarily to increase overall productive capacity – the increase in production
would have created greater income to help offset massively increased
borrowing. But this has not happened. Much of this bloated US debt load is
concentrated in the financial, mortgage and government sectors, and for the
financing of its trade deficits. The debt contraction will be particularly acute in
areas related to the financial and mortgage industries and generate
extraordinary difficulties for the economy at large.

2. Debt to GDP ratio has to come down by around one-third

Debt at around 350% of GDP and growing 50-100% faster than the rate of GDP
growth for more than 25 years – is utterly unsustainable. Following on from
point 1 above, the US is basically beginning to experience an insolvency
problem. Credit availability is declining while default rates soar. As a result, it
has to reduce its overall debt burden. Nations frequently resort to inflating their
money supply to deal with their debt burden, as Germany did in the early 1920s
and Zimbabwe is doing today. So with the significantly increased amount of
money swashing around, debts not being indexed to the growth of the money
supply, are more easily paid off. Present moves by the US Federal Reserve now
indicate that this is the path they have chosen. According to shadowstats.com,
the broadest measure of US money supply is growing at an annual rate of
around 17%!

3. Personal savings rates have to move beyond 10% per annum– from
around zero at present.
High growth economies have high savings rates. It is that simple. The savings
go towards spurring productive capacity – rather than to consumption – and
produce fast income growth. In most years between 1952 to the late 1980s, the
US enjoyed a personal savings rate above 10% of income. (See this graph by
the Bureau of Economic Analysis.)

4. The above 3 conditions have to persist.

It is no secret as to what are good, or bad, macro-economic conditions. The
above are key conditions that have to be met to ensure true, long-term, high
growth macro-economic performance.

Summary
The message is that the US must significantly reduce its overall debt levels,
avoid building-up new debt in excess of GDP or income growth, and for
individuals to start saving again. I have no-doubt that these conditions will be
met. But before they are met the US is likely to experience an extended period
of rolling recessions over many years. And a depression cannot be ruled out
either. During this process I expect to see among Americans a transformation to
higher consciousness and a growing understanding of economics and its
relationship to natural law and the environment. Americans, and people
everywhere, will come through this much wiser. A new global Enlightened
Economics framework will be created and form the basis for improving living
standards and quality of life for all in our world in the years to come.

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© Ron Robins, 2008. Permissions: Provided full credit, which includes title, my name,
and link to this post is given, anyone may print or re-produce this article in part, or in
full, to any relevant web page.