Friday, November 6, 2009

Importing Goods for IOU's

Before we dive into the chart, let me explain what it shows....

I took the average 'real quantity index' of GDP and its components* (Table 1.1.3) throughout each of the past six decades to determine the "average" annual 10 year growth rate (i.e. not just Q3 2009 vs. Q3 1999, but Q3 1999 through Q3 2009 vs. Q3 1989 through Q3 1999). The result is the "average decades" performance of each component with the thought that this would allow us to see broader trends without the recent noise.

The way to interpret the chart is to view the absolute levels of each component (to see which areas are growing faster / slower) AND to compare those levels with that of GDP as a whole (if an area is growing faster than GDP, it is becoming a larger share of the economy).

And the Economic Trends Are?

Consumption and investment have grown faster than the broader economy as a whole over the past 50 years. In the past, this was mainly due to government spending becoming a relatively smaller part of the economy, which had continued to be the case until the most recent downturn. This trend has continued throughout this decade, with consumption and investment growing at an even faster pace than that throughout the 1980's or 1990's. All else equal, this should have meant a large jump in GDP, but all else was not equal.

Why Not?

The difference over the past decade has been that we've produced significantly less goods for the world (we've consumed them all ourselves), BUT continue to show strong demand for the world's goods and services (i.e. we're consuming those too). In other words, we're consuming at a greater rate, but not producing at a greater rate. This can be seen in the chart above... imports have grown 7% per year over the past two decades to meet our consumption demands, but while exports were able to keep up with that 7% pace throughout the 1990's, they slowed to 4% per year over the past decade.

The result?

Consumption and investment grew by 4% and 4.5% respectively over the past decade, but the economy only grew by a little more than 3%. Prior to this past decade, growth in imports was offset by growth in net exports, or in other words... the world was just becoming global. We produced goods/services for the world and they produced goods/services for us. Then, this past decade saw a sea change... on the margin we produce "IOU's" (i.e. debt or currency) for the world and they continue produce goods/services for us.

And that is not sustainable.


* C = Consumption; I = Investment; G = Government Consumption; Ex = Exports; Im = Imports; GDP = GDP