Green shoots, a return to trend growth??

Only one chart is required to understand why this happened, why we are not ever returning to trend growth and why a depression and probably the collapse of the USA is eminent. This is the chart that measures total debt as a percentage of GDP.

Th story of economic growth of the last 40 years – since the abolition of the gold standard in 1971 has been that the chart that measures debt as a percentage of GDP has been growing exponentially.

Another way of saying this is that economic growth has required debt to grow faster than the economy.

The justification for this growing debt has been that is is underpinned by rising asset prices. Right?

The trajectory of the graph is the typical hockey stick that characterises all exponential growth. It is becoming more vertical. In other words the amount of new debt required to generate one more dollar of economic growth is increasing rapidly. In 1960 one new dollar of debt produced 55 cents of new economic growth – as measured by the GDP – one new dollar of debt in 2007 generated 20 cents of growth.

The only way the USA can return to “trend” growth is if the rise of new debt returns to “trend” growth rates. This is clearly not going to happen. The house price, commercial property and stock market bubbles that “justified” this debt are all collapsing and have further to fall.

I could throw in another 10 charts or so to demonstrate a few more points that would make this argument clearer but I cant show them in this post an they are essentially unnecessary.

Why a depression? Do yourself a favour and look up the chart I have been referring to – one that goes back to 1870 and takes in the last 2 depressions.

When I look at the Australian chart – which is better than the USA – the debt to GDP ratio now id 3.4 times as large as it was in 1929 – 340%!!.

We in Australia think we have escaped the meltdown – our house prices are still rising thanks to short term incentives by the government to use the “go to” short term solution that has underpinned this delusion. We are still living in delusion land.

The basic mathematics of the model of growth that has existed since 1971 don’t stack up. A return to trend growth using the “old economic model” will require asset prices not only return to their old levels but continue to increase at a the same rate of the past. Dream on. It is all over, The USA is about to enter the same demographic trend that Japan is going through.

I will leave at this

OK, done. But we put it in the Miscellaneous section. It felt more comfortable. Perhaps you should consider starting a Shopping category.

I’m starting up a directory (*very* simple right now) of local Toronto (and GTA) blogs (by locals or about the city). Specifically, I’d like to collect an index of interesting local blogs with original content — and yours more than fits the bill. Would you consider adding it to the directory?

http://www.torontocitylife.com/blogs

Cheers!

-Aubrey