Who’s to Blame for the Weak Global Economy?
One of the most important things for all investors to remember is that the global economy is tightly tied together. Gone are the days when one country could, in isolation, remain immune to the effects of the global economy. With the problems that America has endured following the Great Recession, we certainly can’t look to the rest of the world to help our economy accelerate.
In addition to weak organic economic growth, the stimulus plans implemented by nations around the world have created massive levels of government debt. This government debt is pervasive throughout the global economy. While I’ve commented many times about U.S. government debt and the problems we will incur in the future, America is not alone. From Europe to Asia, the global economy is awash in huge levels of government debt.
The real trouble is that in spite of trillions of dollars of government debt, the global economy can’t accelerate. New data regarding the Japanese economy is quite clear in this matter. Japan’s economy decreased during the September quarter by 0.9%, which is an annualized rate of decline of 3.5%. (Source: “Japan’s economy shrinks, recession looms,” Reuters, November 12, 2012.)
The Bank of Japan has a policy meeting next week and another on December 19–20. Considering the trillions of dollars Japan spent over the last 20 years trying to revive its economy, the only result has been a massive increase in government debt. According to the International Monetary Fund (IMF), Japan’s government debt as a percentage of gross domestic product (GDP) is estimated for 2012 to be approximately 230%. This compares to the government debt as a percentage of GDP for the U.S. estimated for 2012 at 107%, the United Kingdom (U.K.) at 88%, Spain at 90%, Greece at 170%, and Italy at 126%. (Source: International Monetary Fund, last accessed November 12, 2012.)
So what do all these numbers tell us? Several things, including the fact that increased spending is not the answer to generating long-term growth. If all it took to generate growth for the global economy is increasing government debt, we would obviously have no problems, but we do! This means that past policies of spending more than you take in from revenue simply do not work.
Now, the situation is different when the global economy is operating extremely poorly or is in the middle of a financial crisis, and when increasing government debt to facilitate a transition period does make sense over a short period of time. The problem is that this must be short-term, which must be more than offset by taking in surpluses at all other periods. Of course, with politicians in power, running a surplus is not conducive to getting votes.
This comes down to a question going back centuries: how can you get elected as a politician by balancing the books of the government? Running a surplus is never a popular strategy. Politicians want to dish out favorable projects and hire more people to gain favors and, ultimately, votes. Balancing the books and reducing government debt by running surpluses is never attractive, even though it makes the most sense for the country and, ultimately, the global economy in the long term.
I think one measure that might make sense to contain the future growth of any government debt is an almost automatic system in which the level of surplus of deficit is a reflection of GDP growth. For example, when the GDP grows past a certain amount, surpluses are mandated, and when the GDP is below a threshold, indicating a recession, budget deficits are allowed over a very short period of time and government debt is allowed to grow. However, as soon as the “crisis” period is over, a balanced budget is then mandated and, ultimately, surpluses, when the economy regains its trajectory.
In some manner, the decisions have to be taken out of the hands of politicians, as they’ve shown over the ages that they are inept at coming up with policies that are good for their country and the global economy over the long term. Politicians are only interested in getting re-elected (or otherwise staying in power, back before the days of voting). We need to have policies in place that will help the global economy by reducing all government debt in a manner that politicians can’t adjust and essentially pay off voters. Will it happen anytime soon? Not likely, as it’s far too logical and, obviously, no self-interested politician would ever suggest taking power out of his or her own hands.