New Debt as a Disguise for Bankruptcy

2024 Author: Seth Attwood | [email protected]. Last modified: 2023-12-16 15:55

With this level of accumulated debt, this state of affairs cannot last long and will lead to disastrous consequences. With such a development of events, the economies of Western countries will face a complete and, what is most important and dangerous for the West, an imminent collapse.

Liberal economists usually smile when they talk about the national debt of the United States and the entire West and say that the size of the debt does not matter. And no matter how great it is, there is nothing to worry about.

Is it so? In 2001, the US national debt was about $ 2 trillion, today in 2014 it is approaching $ 18 trillion.

The real-time figure of the US national debt can be viewed here.

What, there is no difference between these numbers? Imagine an enterprise whose output is not growing, but the debt has increased 9 times and is almost equal to the value of the products manufactured by the enterprise? This is fine? And that's exactly how it is with the United States.

But besides the US national debt, there are debts of ALL "developed" countries. Ahead of all is Japan, whose debt is equal to 200% of GDP.

Jon Hellevig "Huge new debt obscures years of negative GDP growth in the EU and the US"

The key objective of this study is to identify real GDP growth after taking into account the effect of the growth of the national economy due to the growth of public debt. Currently, there is a well-established practice of adjusting GDP indicators in line with inflation indicators, resulting in the so-called “real GDP growth”. Given this circumstance, it will be quite natural to apply this method as well, in adjusting the GDP growth indicators, cleared of the influence of the growth of new borrowings, which should result in the indicators of “real GDP growth minus debt”. We believe this is a groundbreaking study, since we do not know if economists have ever raised this issue. Also, we are not aware that this issue has ever been discussed among scientists and analysts. Obviously, the problem of government borrowing is widely discussed, but here we are talking about adjusting GDP by deducting government debt.

The study found that Western countries have lost the ability to grow their economies. All they have left is the ability to build up debt. Due to the massive accumulation of new debts, they are able to create the appearance of sluggish growth, or hovering near zero.

If all these huge borrowings were channeled into investments, then there would be nothing wrong with that. However, this is not so - the funds received are directed to cover losses in national economies, and, in fact, are wasted on maintaining consumption levels that these countries cannot really afford.

Western countries behave like heirs to an aristocratic fortune in the 19th century, borrowing money year after year to secure their old way of life, while their fortunes are ruthlessly depleted. Sooner or later, the squandering aristocrat will be forced to face reality: to sell the remaining property in order to cover the claims of creditors, as well as to find a home within his pocket and tighten his belt tighter. So inevitably, European countries and the United States will be forced to reduce excess consumption. But for now they postpone the moment of final settlement on new debts, like an alcoholic who, getting up in the morning, first of all reaches for a bottle in order to delay the moment of sobering up. In the case of the EU and the US, we are talking about a decade-long debt binge.

Over the past decade, the situation has become more complicated, but a dramatic turn for the worse - or, more correctly, to disaster, occurred at the beginning of the global financial crisis in 2008. Chart 1 shows shocking indicators that characterize the actual collapse of the Western economies in 2009-2013. It reflects the dynamics of the growth rate of real GDP in various countries for 2005-2013. As can be seen from the graph, during this period Russia was able to ensure the growth of real GDP, while the Western countries plunged deeper and deeper into debt. For the period 2005 - 2013 the accumulated growth of the Russian economy amounted to 147%, while the accumulated losses of Western countries increased from 16.5% (Germany) to 58% (USA). In the case of Russia, the real GDP growth rate minus borrowings is also adjusted to correct for the calculation error associated with Rosstat's incorrect GDP deflator. We have already discussed the systematic underestimation of Russia's GDP growth rate due to the use of an incorrect GDP deflator in the Awara Group Study “The Impact of Putin's Tax Reforms 2000-2012. on the change in revenues to the consolidated budget and GDP”.

Chart 2 shows real GDP growth minus debt growth (after subtracting public debt growth from GDP). If we subtract debts, then we will see the real scale of the collapse of the Spanish economy - minus 56.3%, this is a terrifying figure. If we use the generally accepted official methodology for calculating the GDP growth rate (minus the increase in debt), then it turns out to be only minus 6, 7%.

As our analysis shows, in contrast to the economies of Western countries, even according to these indicators, the growth of the Russian economy is quite healthy and is not caused by an increase in debt. In fact, Russia demonstrates a noticeably positive ratio of these indicators: the GDP growth rate exceeded the debt growth rate by 14 times (1400%). Amazing. This figure is even more striking if you compare it with that of Western countries plunged into the abyss of new debt.

Chart 3 shows how much debt accumulation in Western countries exceeds the official rate of GDP growth. For the period 2004 - 2013 the undisputed leader in the growth of the debt burden was the United States, which added $ 9.8 trillion to it (7 trillion euros, as shown in the graph). During this period, the growth of public debt in the United States exceeded GDP growth by 5 times (500%). Chart 4 illustrates this by comparing the relationship between debt growth and GDP growth.

Comparing the rate of debt growth in relation to GDP growth shows that the UK, the country that has accumulated the largest new debt in relation to GDP growth, has a ratio of new debt to GDP growth of 9 to 1. In other words, the size of UK new debt accounts for 900% of GDP growth. But other Western countries, to a lesser extent Germany, which have become the subject of our study, are in a difficult situation, while the growth of debt in Russia is only a small fraction of GDP growth.

The above indicators are adjusted for the impact of the size of public debt (total public debt), but the situation looks even more dire if we take into account the effect of private borrowing on GDP indicators. New corporate and household debt has at least doubled private borrowing in most Western countries since 1996 (Figure 5).

Considering these indicators, we came to the obvious conclusions that in reality Western economies did not grow at all over the past decades, but rather they simply accumulated their debts en masse. With this level of accumulated debt, this state of affairs cannot last long. There is a real risk that this debt bluff will be revealed sooner rather than later and will bring down the GDP level of Western economies to the level that they can maintain without new borrowing. But in this case, they will not be able to cover old loans, which will lead to disastrous consequences.

We did not include Japan and China in our analysis due to the difficulty of finding reliable statistics. We faced the problem of partial information that does not cover all relevant periods, the problem of incompatibility of data for the samples that we studied, as well as the problem of inaccuracy in converting the input data into euros. (We are confident that large research firms can overcome these problems, for which our resources were not enough.) We regret that we had to exclude China and Japan from this report, because Japan is a country with an even more problematic GDP growth due to an increase in debt. The ratio of its public debt to GDP exceeds 200%, and therefore its example would be indicative for our purposes.

Essentially, Japan has been living on a direct basis since the early 1990s. At the same time, some of the more irrational Western analysts seek to present Japan as an example to follow, arguing that since Japan could build up debt for 25 years, then all Western countries can do the same for the foreseeable future. They fail to understand that in the past, Japan was the only country in the world that could afford to exist with such an exorbitant level of debt. Japan has always enjoyed significant support from Western countries and therefore could afford to continue this practice. And this was done no less for political reasons. Another significant consideration against the notion that Western countries could continue to build up debt is that since the early 1990s. Western countries began to rapidly lose their economic hegemony: its share in world trade and global GDP began to decline. I wrote about this in my recent article entitled "Sunset of the West".

The importance of the West in relation to the rest of the world is rapidly diminishing. This can be demonstrated by comparing the GDP of Western G7 member countries (USA, Japan, Germany, France, UK, Italy and Canada) with the GDP of today's developing countries. In 1990, the aggregate GDP of the G7 member countries was much higher than the aggregate GDP of today's seven developing countries: China, India, Russia, Brazil, Indonesia, Mexico, and South Korea (which do not necessarily constitute a single political bloc). In 1990, the aggregate GDP of the G7 member countries was $ 14.4 trillion, and the aggregate GDP of seven developing countries was $ 2.3 trillion. However, by 2013, the situation had changed dramatically: the aggregate GDP of the G7 member countries was $ 32 trillion, and the aggregate GDP of seven developing countries was $ 35 trillion. (graph 6).

Chart 6. Share of GDP of the G7 and seven developing countries

With the constantly growing share of developing countries in the world economy, it is becoming clear that Western countries will not be able to generate sufficient profits from world trade to service their accumulated debts.

Currently, Western countries benefit from the fact that the rest of the world still trusts their currencies and uses them as backups. Essentially, the US dollar and euro are taking advantage of their monopoly status. This is what allows Western countries to gain access to cheap debt obligations and stimulate their national economies through monetary policy pursued by central banks (the so-called "quantitative easing" program or, in other words, "printing press launch"). However, the risk is that with a worsening debt situation and a shrinking share in the global economy, they will not be able to take advantage of these benefits, most likely even in the foreseeable future. This will be followed by a sharp rise in the cost of borrowing and an increase in inflation, which eventually turns into hyperinflation. In this scenario of the development of events, which I consider inevitable in the next 5-10 years, the economies of Western countries will face a complete collapse.

The problem is that it will not be possible to avoid such a development of events, because Western countries have forever lost their competitive advantages as economic powers. Ultimately, they will be forced to shrink to a level commensurate with the level of their resources and population. (I wrote about this in the above article). However, the Western ruling elite does not appear to be eager to face reality. She tries to maintain a semblance of prosperity by constantly increasing more and more debts while she is still able to do so. Political parties in the West have essentially become vote-counting machines and are concerned only with how to win the next elections. To do this, they continue to bribe their electorate with new and new debts, thereby stimulating their national economies.

But this historical wave will not be able to unfold. Ultimately, Western countries will squander their inheritance, as the squandering aristocrats did in the past."