I’m not an economist but…

If I am told that the total value of an economy is US$14Trillion I am suitably impressed.

Graph: Real Gross Domestic Product

If you now tell me that consumption makes up 70% of this country’s economy…


(see GDP composition by sector)

… and I am told that consumers had till very recently no savings:

Graph: Personal Saving Rate

… the inescapable conclusion is that this country’s GDP is sustained by debt:

Graph: Household Sector: Liabilites: Household Credit Market Debt Outstanding

That looks about right I say.

That being the case, I can only conclude the following. Other than for financial services, the very nature of “service” is such that once it is consumed there is no residual value. Thus an economy that is composed of well over 70% of services begs the question of how much real wealth is generated by the service sector. In other words, how much residual value is this economy generating? And in the event that profits generated by the financial services sector should be put towards the purchase of a car or towards a luxury cruise or a holiday in Sharm el Sheikh or a pair of shoes, how much residual value is there left from these purchases that can be sold onwards for more money than the original purchase price?

Answering this question would help us understand the real condition of the wealth structure of society.

But lets not get too technical here.

If I were an economist, the above information tells me (or should tell me) that this situation is tenable for as long as society has stable or increasing disposable income. Because in the event disposable income should be declining, than we would reach a point where in the absence of savings society’s ability to assume more debts is impaired. And if debt can no longer be expanded, then GDP progression would be compromised too… right… ???


FRED Graph
Oh dear! I say! That’s a bit of an unexpected development what! (for best results, say that in you best Oxonian accent)
Looks to me like disposable income has been declining on a relative basis for well over 30 years.
But if the ability of society to assume debt has been steadily declining, then it follows that GDP should have been declining too. But that was clearly not the case. So, it would look to me like something or someone must have stepped-in to make up the difference…

Graph: Federal Government Debt: Total Public Debt

… there it is … government has more than picked up the slack particularly in the past few months…

As an economist, I can look at this data and I could draw some conclusions. One of the conclusions I would have to draw inevitably is that for the best part of 30 years there has been no shortage of credit creation thus spending. I mean, credit creation has been on the up and up and has not abated in 30 years… never…

And yet, for all the fuss and circuses, GDP progression only really stumbled along at a rate in the low single digits.


FRED Graph

Now as I show you here, other than for a time lag there is absolutely no difference between government debt and the debt of individuals and corporations. Thus if we have reached the point we have reached today, what on God’s green earth can make an economist think that even more spending can make things right or even just improve anything?

Can anyone explain that to me?

Here is a bit of interesting research. This is a report on how many days each member of society has to work in order to pay his/her share of the public debt brought to you courtesy of your government:


It makes for some surprising reading.


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One Response to “I’m not an economist but…”

  1. Must read (Mike Shedlock & Contrary Investor) « Guido's temple of the absurd Says:

    […] https://guidoromero.wordpress.com/2009/10/08/im-not-an-economist-but/ […]

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