Those Stubborn Facts: A World Awash in Debt

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bubble, China, debt, economy, Those Stubborn Facts, United States

Number of countries (including the U.S. and China) whose total debt

was more than three times greater than the size of their economies,

mid-1990s: None

 

Number of countries (including the U.S. and China) whose total debt

is more than three times greater than the size of their economies,

now: 25

 

(Source: “Ten economic trends that could define 2022,” by Ruchir Sharma, Financial Times, January 3, 2022, https://www.ft.com/content/432d78ee-6163-402e-8950-d961b4b1312b)

(What’s Left of) Our Economy: The Good Economic News that Trump Has Missed

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bubble, bubble decade, business spending, CNBC, Commerce Department, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, investment, Jeff Cox, personal consumption, real GDP, Trump, Wilbur Ross, {What's Left of) Our Economy

Here’s how badly the latest figures on U.S. economic growth (for the first quarter of this year) have been misunderstood: Even the Trump administration, which has displayed no hesitation to take credit for good economic news even when undeserved, failed to note a big possible silver lining.

As noted in last week’s coverage of these figures on gross domestic product (GDP), the inflation-adjusted growth figure reported by the Commerce Department in its initial read for the first quarter was a measly 0.69 percent. That’s the worst such performance since the 1.19 percent annualized contraction in the first quarter of 2014.

So it’s not entirely surprising that Commerce Secretary Wilbur Ross seized on this discouraging news to emphasize that “We need the President’s tax plan, regulatory relief, trade renegotiations and the unleashing of American energy sector to overcome the dismal economy inherited by the Trump Administration. Business and consumer sentiment is strong, but both must be released from the regulatory and tax shackles constraining economic growth.”

But especially given the rise in sentiment noted by Ross, it’s at least somewhat surprising that he didn’t make more of the strong rise in business spending revealed in the new GDP report. For it lends significant support to President Trump’s claim that his election is already liberated many of the “animal spirits” – i.e., a surge in business optimism – often needed to spur more hiring and especially more corporate spending on new plant and equipment.

For example, in absolute terms, such business spending rose sequentially by 9.1 percent at an annualized rate in the first quarter. That’s the fastest rate since the fourth quarter of 2013, when it jumped by 9.2 percent.

At the same time, back at the end of 2013, the economy expanded at a 3.90 percent real annual rate. In the first quarter of this year, after-inflation growth was only 0.69 percent annualized. So business spending punched far above its weight as a growth engine. As RealityChek regulars know, that’s an encouraging indication that the nation’s growth recipe is becoming more production oriented, and therefore healthier and more sustainable in the long run.

In fact, higher business spending accounted for all of the first quarter’s growth. (Other sectors of the economy contributed to and subtracted from the overall result, too, but their net effect was zero.) As a result, its relative contribution to expansion was its strongest since the first quarter of 2014, when such investment boosted real GDP by 0.84 percentage points but the economy actually contracted at a 1.19 percent annual rate.

And on a standstill basis, business investment in the first quarter represented its highest share of real GDP (13.34 percent) since the third quarter of 2015 (13.48 percent).

Not that one quarter’s results – which will be revised twice more in the next two months alone – are anywhere close to definitive. But the Trump administration had much more to crow about than it seemed to realize.

At the same time, the new GDP data showed that the economy remains way too personal consumption- and housing-heavy – the toxic combination whose bloat so powerfully inflated the bubbles that produced the previous decade’s global financial crisis.

As previously reported on RealityChek, at their pre-crisis peak, in the second quarter of 2005, the combined consumption and housing share of real GDP hit 73.27 percent. The comparable first quarter total was 73 percent even – not much lower. And that share was up slightly from the fourth quarter’s 72.95 percent.

So the United States is still a long way from achieving former President Obama’s goal of creating “an economy that’s built to last.” But from what we know of the first quarter’s growth this year, the economy made some progress that’s worth noting.

P.S. Partial credit for this post goes to CNBC’s Jeff Cox, whose report here first called my attention to the good business spending results.

Making News: More Press Hits Plus a Bubble Warning from 2004

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BBC, bubble, bubble decade, Dayton Daily News, debt, Mainstream Media, Making News, manufacturing, manufacturing trade deficit, Manufacturing.Net, Paul Solman, PBS, Trade, Trade Deficits, World Trade Organization, WTO

I’m pleased to report a few more media appearances – along with the (re)discovery of a speech I gave more than ten years ago that warned that the U.S. economy was becoming dangerously bubble-ized. Nearly as striking as my predictions were the reactions of the Mainstream Media moderator of the event.

But first the press hits. I just saw that my latest finding of a new monthly record American manufacturing trade deficit was picked up November 5 by the Manufacturing.Net news site. Here’s the link.

On Monday, December 14, I was interviewed by the BBC on the round of World Trade Organization talks that took place in Nairobi, Kenya last week. The resulting segment isn’t in easily linked form, but if you send me a request, I can email you a short podcast featuring the perspective I offered.

And yesterday, a Dayton Daily News piece on manufacturing in Ohio featured some information I provided exclusively to the reporter. Click here to read it.

As for that speech, you can see the video at this link. It shows that I was fretting about the American economy’s dangerous over-reliance on debt-led growth as early as March, 2004, and also presents an early version of my argument that Washington’s offshoring-focused trade policies were at the heart of the problem.

But also fascinating is the skepticism of PBS’ Paul Solman. He couldn’t imagine for the life of him why Americans spending much more than they earned could lead to anything but the best of all possible worlds – and that whatever comeuppance the nation would receive would be eminently bearable. And that wasn’t the only one of his howlers by any means!

And don’t despair! Even though the entire video is nearly an hour and a half long, the first half hour or so contains most of the highlights.

(What’s Left of) Our Economy: Growth is Now Not Only Bubbly, but Increasingly Government-Fueled

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an economy built to last, bubble, bubble decade, GDP, government spending, gross domestic product, housing, inflation-adjusted growth, Obama, personal consumption, recovery, state and local government, stimulus, {What's Left of) Our Economy

Popes and Chinese leaders and the like come and go through history and through Washington, but the basic developments shaping the U.S. economy keep rolling on – and not for the better. So I’ve decided to focus today on those that have been revealed by the latest government report on the economy’s growth rate, and on two especially disturbing takeaways.

The first should be familiar to RealityChek readers: The makeup of the U.S. economy is still excessively dominated by personal consumption and housing, the same toxic combination that inflated the bubble of the previous decade whose bursting nearly collapsed the American and global economies. The second is less familiar largely because it’s much newer – and because the media hasn’t picked it up yet: Government spending is now unmistakably making a comeback as a significant growth driver – but not where you might think.

Although President Obama, as I’ve noted, has done a great job in identifying the need to create an “economy that’s built to last” in America, consuming and housing still comprise a bigger share of the total economy than during that bubble decade. When the recession started, at the end of 2007, these two components of the inflation-adjusted gross domestic product GDP) added up to 71.16 percent of the economy after inflation.

Thanks largely to the recession and housing bust (which fed on each other), this share fell to 70.94 percent by mid-2009, when the recovery officially began. That drop of course wasn’t big, but at least it represented progress. Since then, however, the numbers have resumed moving in the wrong direction. So it was welcome to learn, last Friday morning, that the economy grew at a solid 3.90 percent annual rate in the second quarter of this year, according to the government’s final (for now) reading. But less decidedly less encouraging was learning that the personal spending and housing share of the economy had hit 71.65 percent.

Indeed, that’s only slightly lower than the 71.67 percent figure for the first quarter, and considerably higher than the 71.13 percent during the second quarter of 2014 and the 71.19 percent of the second quarter of 2013.

The new prominence of government as a growth engine isn’t good news, either – that is, if you believe that the private sector is the nation’s best hope for better and sustainable prosperity and living standards (which you should).

That latest second quarter GDP report estimated that government spending at all levels in the United States grew at a 2.60 percent annual rate during that three-month period – its best performance by far since the 2.90 percent advance in the second quarter of 2010, when government stimulus spending was fueling much of the emerging recovery. Just as important, the second quarter government spending gain represented the third such rise in the last five quarters. You’d need to go back to the recovery’s earliest stages, starting in mid-2009, to find a stretch like that.

Government’s contribution to real growth, therefore, has picked up notably, too. According to the (for now) final reading for the second quarter of this year, government’s growth accounted for 0.46 percentage points if the 3.90 percent overall annualized expansion. That’s 11.79 percent of total economic growth. As with the government growth rate as such, that’s the biggest growth contribution in absolute terms since the second quarter of 2010, although then, government’s growth role accounted for 15.35 percent of that quarter’s (identical) 3.90 percent real expansion.

Also as with government’s growth per se, government’s contribution to growth has now been positive for three of the last five quarters – which hasn’t been seen since that early, public-spending-led phase of the current economic recovery. Significant as well – the government contribution to growth during this year’s overall strong second quarter has been much greater than in the last quarters when growth has been impressive.

For instance, in the second quarter of 2014, when annualized real growth clocked in at 4.30 percent, higher government spending only generated 7.67 percent of that growth. In the following quarter, the economy’s hot streak continued, but the government spending increase came to only 4.57 percent of that improvement.

One other important aspect of the resurgence of government spending: It’s happening largely on the state and local level, and this was especially the case during the second quarter. During that period, state and local government spending in real terms grew by 4.30 percent on an annualized basis – the fastest rate since way back in the fourth quarter of 2001. Federal spending was literally flat. 

To repeat a point I’ve made before: Nothing in this or previous posts should be taken as an argument that government spending is either “good” or “bad,” or that government now, at whatever level, is spending too little or too much. But again, if you consider the private sector to be likelier to generate healthier growth than government, the public sector’s increasing role in fostering economic vigor should be a matter of concern. The big remaining questions facing the nation is whether this rebound represents a return to pre-financial crisis norms, and whether that in and of itself should be praised or condemned. You can bet I’ll be weighing in on that matter before long!

(What’s Left of) Our Economy: No Country is an Island? II

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bubble, China, emerging markets, exports, Financial Crisis, interdependence, offshoring, recovery, Trade, {What's Left of) Our Economy

Two weeks ago, I wrote about the utter confusion in economics, business, and policy ranks about the spectacle of the United States continuing to grow much more strongly than the rest of the world on average. Unfortunately, the powers-that-be have made exactly zero progress in understanding this divergence and its implications for the United States.

The main problem continues to be an apparent determination to believe in and perpetuate myths about the (fortuitously linked) inevitability and desirability of global economic interdependence, and about the American and other government policies aimed at its intensification.

A recent Financial Times article, for example, illustrated the extent to which these misunderstandings have prevented recognition of fundamental causes of the 2007-8 financial crisis and its dismal aftermath, and therefore keep blinding policymakers to the most important steps needed to restore genuine financial health nationally and globally.

Author Chris Giles noted the uneven nature of the (disappointing) global recovery, which included strengthening American performance. Yet he painted a gloomy picture of U.S. and international economic prospects going forward because emerging markets, especially China, are now allegedly the countries whose successes are “most important for global trends,” and their growth has been slowing most dramatically.

What he – and so many others – have missed is that it was the outperformance of China and the other ostensible emerging markets that helped trigger the crisis, since their own superior vigor overwhelmingly depended on a global version of a Ponzi scheme. They amassed huge trade surpluses by selling to wealthier developed economies (especially America’s) whose factories and other productive, income-producing facilities they were increasingly replacing thanks largely to offshoring-friendly U.S. trade policies. Lending from these low-income and other surplus economies (like Japan’s) was the only way in which the resulting growth could be sustained, and six years ago, this particular global house of cards predictably tumbled down.

In other words, yes, according to some standard versions of counting growth and measuring its sources, the surplus countries led the global expansion before the crisis – and even until this year during the recovery. The trouble is, this has proven to be a disastrously unsound type of growth.

Especially strange: Giles noted that China’s unexpected acceleration in the last few months has been “driven by a resurgent export sector,” which of course reveals the crucial nature of third world net exporters’ markets, not the exporters themselves. Yet his China- and emerging “market”-centric portrait of the world economy remained unaffected.

The Wall Street Journal chipped in with its own version of the current globaloney with an October 21 article titled “Global Growth Woes Threaten to Beset U.S. Economy.” Just like the Financial Times‘ Giles, authors Josh Zumbrun and Chris Timiraos told readers that “Emerging economies, not the U.S., drove global growth for much of the last decade.” They went on to warn that gathering woes in these countries and Europe could “hobble the U.S. economy at a time when the world could use a reliable growth engine.”

The most important part of their article, however, presented evidence showing indisputably that the reality is anything but. Not only has America’s growth actually quickened as the rest of the world has slowed, but its economy is still relatively trade light (despite decades of bipartisan Washington efforts to increase its role). Hmmmm. Any chance that these twos facts are related?

Am I saying that the U.S. economy is out of the woods? Of course not. What I am saying is that America’s capacity for self-sufficiency and its resulting built-in immunity from the biggest international economic trends are invaluable strengths. Further, it is vital to preserve and enhance these strengths in the many industries and commodities where it’s feasible. Just as important is realizing that unless Washington is vigilant, its growth-hungry trade competitors will surely continue taking the path of least resistance by using U.S. openness to imports to grow at America’s expense by adding to their already high levels of U.S. marketshare.

New successes along these lines would spell trouble not only for the United States, but for the rest of the world as well – as it would refuel the same lopsided production, consumption, and lending patterns that helped trigger the last decade’s calamity in the first place. If Washington wants to keep strengthening global interdependence and interconnectedness, it will need to work much more effectively to ensure that the structure of this interdependence is actually durable. If it can’t, or until it can, its best economic strategy unquestionably will be acting unilaterally to speed up and improve the quality of its own growth.

Following Up: An Economy Less “Built to Last” Than Ever

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bubble, Following Up, gross domestic product, growth, recovery, sustainability, Trade, trade deficit

On Thursday, I pointed out that looking at how the nation’s economy is structured – the components of the government’s quarterly reports on the gross domestic product – is a good way to figure out whether America is moving closer to or farther from President Obama’s vitally necessary goal of creating “an economy built to last.” Below is another good way to measure progress toward genuine U.S. economic healing – comparing the growth of the overall U.S. economy with the growth of the U.S. trade deficit.

To my surprise, the message sent by those numbers is even more discouraging than that sent by examining how much of the economy is still comprised of personal consumption and housing – the toxic combination whose bloated growth triggered the last decade’s disastrous credit bubble. In fact, it’s downright shocking. Not only does the U.S. economy remain far from “built to last” status. By this measure, it’s becoming an even shakier house of cards.

As the President has explained, creating an economy built to last requires changing the country’s growth strategy from one based on borrowing and spending to one based on saving, investing, and producing. If the U.S. trade deficit is shrinking, that’s a sign that the nation is reducing its reliance on debt-fueled growth. Ditto for a trade deficit growing more slowly than the economy as a whole. By contrast, if the trade gap is growing, and especially growing faster than the economy overall, that reveals that too much of the growth remains debt-dependent – and that it’s consequently unsustainable.

I wasn’t completely surprised to see that, during the current economic recovery, the trade deficit has been expanding much faster than economic growth. Since the rebound officially began, in the second quarter of 2009, the gross domestic product after inflation is up 11.36 percent. But the real trade deficit has increased more than twice as quickly – by 28.39 percent. Moreover, the problem is considerably worse than these figures suggest, since they mask a dramatic improvement in U.S. trade in energy products.

What completely stunned me, though, was finding out that, according to this methodology, the current economic expansion is even more debt-dependent than the bubble decade’s expansion. That 2000s expansion lasted six years, from the fourth quarter of 2001 to the fourth quarter of 2007, and during this period, the economy grew by 18 percent accounting for inflation. Yet the real trade deficit grew only a bit faster – by 19.32 percent. Worse, this trade deficit growth preceded the energy revolution that began in this decade. And the current recovery is only five years old.

Optimists can point to the severity of the Great Recession (which was much deeper than the early 2000s slump) as one important reason for the trade deficit’s strong recent rebound. Further, trade flows globally were hit especially hard during the crisis and its aftermath. But the trade balance’s rapid deterioration despite the rapidly shrinking oil trade deficit in particular trumps that observation.

The $470.3 billion real trade deficit run up in the second quarter of this year is still well below its peak of $819.7 billion in the third quarter of 2006. But overall growth is much slower these days, too (the preliminary four percent annualized level in the second quarter notwithstanding). Until the gross domestic product starts outpacing the trade shortfall in growth, America will remain hooked on living beyond its means – and it will be more accurate to describe its economy as built not to last, but to implode.