• Pre-Conditions for a Sustained US Economic Revival
Posted by Ron Robins on April 21, 2008
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.
Enlightened Economics 
Stephen Porter said
Some changes to the tax system would be helpful to accomplish the above goals. Here are three examples:
Firstly, the present tax system encourages debt by allowing interest payments to be tax deductable, while discouraging savings by taxing interest earnings and capital gains. This situation needs to be reversed. Interest paid on debt should not be tax deductable, and this change can be made revenue neutral with offsetting changes to taxes on proceeds from savings and investment. Ideally, earnings from savings and investment should be tax free.
Secondly, there could be a national sales tax. The effect of this tax would be to discourage consumption and thereby encourage savings. The sales tax can be made revenue neutral by reducing income taxes.
Thirdly, a carbon tax on coal, oil and natural gas would help reduce global warming and encourage the development of alternatives. The carbon tax could be made revenue neutral by removing taxes on employment. Most new employment is created by entrepreneurs, but it is too complicated and expensive to hire someone. The red tape and costs involved with hiring an employee need to be reduced to the absolute minimum.
This revised tax system would help lay the foundation for future prosperity.
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TJ said
Good post, but would like to see some clarification regarding Item #3 – Personal Savings increase over 10% Maybe I’m just a blind Keynesian, but I’m thinking about Japan’s woes during the 1980’s which came on the heels of a tremendously high personal savings rate there.
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Ron Robins said
The reason for a US savings rate in excess of 10% in years to come, will, I believe, be due to: 1) the realization that much of the Medicare and Social Assistance programmes will be gutted to deal with both federal and state government deficits making people realize they must save for their own salvation; 2) that the price of their primary asset, their homes, will not increase much, if at all; 3) boomers in their fifties have nowhere near enough in savings for a comfortable retirement–so they will save every penny; and 4) the realization of the massive underfunding of most pension plans.
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