The incredible shrinking global economy

The incredible shrinking global economy

Much of the money that would normally fuel economic growth is now being used to merely pay the interest on debts.

Thomas Nast cartoon.
19th Century cartoon by Thomas Nast is as fresh as today. (Image via Wikipedia)

WASHINGTON, March 26, 2014 − Barack Obama is only one of many chief executives of countries around the world who is being forced to adjust the GDP of his country from 2014 to a lower figure. Furthermore, he is one of many who must continually defend stagnant economies.

I remember when I was growing up that the economy to watch was Japan’s. Japan was to baby boomers what China is to millennials − the rapidly growing and intimidating powerhouse that is “robbing” opportunities from the west in general, and the United States in particular.

Today, when we think of Japan, we think of high-end and quality products, particularly in the technology sphere, if anything at all. Most young adults today would find it shocking that the lyrics of a very popular rock song in the 1960s would discuss the plight of native Americans and would include “And all the beads we made by hand, are nowadays made in Japan.”

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If Paul Revere and the Raiders were to write a song like this today, it would certainly include China and dollar stores.

Television, radio, magazine and other media were dominated by the rise of Japan, and this prominence persisted into the 1990s. Then, something happened. It was almost as if Japan had disappeared overnight. It had entered, what economists called “the lost decade,” which has been transformed into the “lost decades.” This was (and likely still is) a period during which Japan significantly faded from the global economic scene.

This long, steady decline was not merely due to the rise of China as some have said. Japan itself actually began to shrink in influence. What happened?

Much of the Japanese decline is attributed to a land and stock price boom, followed by a sudden, painful and prolonged bust. But there was a more fundamental problem operating the levers behind the curtain all along, a problem almost universally shared by economies around the world: growing, almost unstoppable debt.

Since the 1990s, the Japanese gross public debt as a percentage of the Gross Domestic Product (GDP) reached 100 percent. Today it is over 200 percent. Ever since the debt exceeded the GDP, Japan’s economy has largely been limping along.

Again, this is a problem facing countries around the world. According to George Melloan in the Wall Street Journal, worldwide debt as a percentage of GDP has jumped 36 percent since 2008. That debt to GDP ratio is over 200 percent worldwide.

Much of the money that would normally fuel economic growth is now being used to merely pay the interest on debts. Just over the past few years, The United States has joined this unfortunate group of chronic, serial debtors. Over 7 percent of the U.S. federal budget is spent to pay interest on the national debt alone. That is one of the fastest growing items in the federal budget. It is also a budget item that governments have little power or incentive to shrink.

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Melloan argues that, instead of being alarmed by widespread deficit spending and loose monetary policies meant to stimulate the economy, most of these countries are forging ahead. According to Melloan, the world’s economies are actively trying to fight what they see as widespread deflation.

But the Wall Street Journal column notes,

“…central-bank worries about deflation may be misplaced. Couldn’t it be that it is the mounting global debt that is dragging down economic growth, not a lack of fiscal or monetary stimulus? Yet central banks seem wedded to the so-called monetary stimulus course set by the Fed after the stock-market crash of 2008.”

The vast majority of those countries burdened by this massive debt have found themselves struggling as they pursue the U.S. government’s supposedly conventional wisdom.

Ultimately, every part of an economy is aggressively pursuing the necessary capital in a continuing quest to grow. When governments crowd out that necessary business capital with deficits, debt and interest on the debt, economies will struggle indefinitely so long as such policies are perpetuated.

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