THE TRIUMPH OF HOPE OVER REALITY
I’m a cheerful person – really, I am – and with the sun shining on a shimmering sea outside my window, who wouldn’t be? But there’s a big difference between reasonable optimism and outright delusion, and the latter, it seems, has been taking a big hold over many of those whose job it is to forecast our economic weather.
This week, we’ve seen a pretty upbeat set of forecasts from the IMF (the International Monetary Fund), which has predicted that growth in world GDP (measured in international dollars at PPP rates of conversion) will improve this year, from 3.1% to 3.46%, rising steadily thereafter, to 3.7% by 2019, and nearer 3.8% by 2022. This seems to have reinforced an optimism percolating through the forecasting community, with some even opining that we may be approaching a nirvana known as “take-off velocity”.
In fact, and if the IMF is right, global economic output will be 24% bigger in 2022 than it was in 2016. To find a six-year growth record as good as this, you have to go back to the period from 2002 to 2008, when world GDP grew by 29%, and that ended well, didn’t it?
The trouble with “take-off velocity”, you see, is that, if the aeroplane is carrying too much weight, it can fly straight into a brick wall. “Weight”, in this context, means debt. The SEEDS database shows that the 29% growth achieved between 2002 and 2008, whilst adding $21.5 trillion to GDP, was accompanied by $44.7tn in net new borrowing. In other words, world debt grew by twice as much as GDP (if you’re a stickler for detail, the ratio was 2.09:1).
This couldn’t happen again, could it? Surely we’ve learned from the shock effect of the 2008 global financial crisis (GFC), haven’t we?
In 2016, global GDP grew by 3.4%, adding $3.9tn to GDP. Where debt is concerned, we do not yet have comprehensive data for the whole of the year, but we do know that world debt increased by over $11.4tn in the first three quarters of 2016.
In that nine-month period, governments borrowed more than $5.5tn, households $2.3tn, and non-financial businesses $3.5tn. That stacks up to $3.90 of borrowing for each $1 of reported growth, even if we assume that prudence reigned supreme, such that nobody borrowed at all in the three months running up to Christmas.
To be sure, we cannot make a one-for-one comparison between borrowing and growth. But we do know that a lot of this credit expansion went into consumption expenditures, not least because that’s what governments spend most of their money on. The calculations made by SEEDS suggest that, stripped of the spending of borrowed money, reported growth of 3.4% falls to an underlying level of just 1.2% – and even that probably makes some pretty generous judgments on the validity of a very big pile of borrowing.
Nor is that all – because debt is not the only hostage that current practices are handing to posterity. Debt, though it adds to the burdens of futurity, can at least be managed, if we let inflation accelerate, essentially bilking lenders by paying them back in devalued money.
This cannot work with other forms of futurity, most obviously pensions, where the same inflation that devalues debt simultaneously increases the burden of future payments, not just of pension commitments but also of welfare. It should come as no surprise whatsoever that pension deficits are continuing to widen alarmingly.
In short, claims that we are nearing “take off velocity” should be taken with a huge pinch of salt.
Indeed, we’d do better to steer very well clear of any kind of take-off – until the pilots on the flight-deck of the world economic aeroplane have sobered up.