Mainstream opinion in the US seems to have declared the recession over and is preparing for a recovery. Doubts remain about the recovery's strength and durability, but the message is clear - the world's biggest and richest economy is getting back on track. The truth is very different: the economy hasn't really grown for years and may never do so again. Here is my past, present and future guide to the economic decline of the USA.
The US economy hasn't grown this century
Reported GDP grew from $9.8 trillion in the year 2000 to $14.3 trillion by the end of 2008 scoring an impressive 45% gain. But if you strip out the effects of population growth and inflation, the real gain on a per capita basis is more like 10%. Even this growth has to be measured against the increase in America's debts over the period:
In real terms, the US economy has grown a little over a trillion dollars during the first eight years of the century but at the same time its government, companies and households have racked up approximately 25 trillion dollars in debt. "Growth" resulting from taking on unaffordable debts is not genuine because it reverses when the debts are repaid or more usually lead to widespread defaults. The underlying truth is that the American economy stalled long before the current crisis and an illusion of growth has only been maintained by reckless borrowing which has taken total debt to over 350% of GDP.
Positive GDP growth means nothing if it's borrowed from the future
Although a return to positive GDP growth is widely expected during Q3 2009, this is again "borrowed from the future" growth, though this time it is the government sector that has been racking up the debts.
The government has made up for a fall in demand as consumers and businesses tighten their belts (or go bust) by borrowing and spending record sums. The 2008 deficit was a record $450bn but the 2009 deficit is 3-4 times as much. This, together with unparalleled low interest rates and "quantitative easing" (printing money), has unsurprisingly forced some life into the economy but again it's borrowed growth, which inevitably has to reverse at some point.
For real growth to return there needs to be a private sector revival but that is not going to happen while:
Could a change of policy see a return to growth?
Theoretically the government could set the scene for a real recovery by allowing the Amercian economy to purge the boom excesses and by taking an axe to public sector spending. But removing the stimulus of excessive government spending and removing props supporting weaker banks, companies and households would bring about a recession of such magnitude it would collapse both the banking system and the government finances.
This is a genuine Catch 22: struggle on with a flawed system with no hope of genuine recovery or strike out on a new path which would provoke depression-type conditions before a recovery begins. The politicians will chose propping up the current system with all means at their disposal until a change is forced upon them.
The road to collapse
I hope I've already shown that the government's attempt to borrow America to growth will fail but then what? Here's my guess (actually I'm pretty sure of what will happen; it's the timings that are a guess):
After the collapse: chaos and stagnation or reform and recovery?
If I am right and 2011 is the year when the US financial system, government bond market and the dollar collapse, what then? Will a phoenix rise from the ashes? Often currency and debt crises are followed by reform and recovery. Whether the US will rebuild depends on the response of the political system to the collapse.
The presidential elections of 2012 will feature much talk of fiscal responsibility, restoring the value of the dollar and a fresh start but whether this will convert to action depends on the willingness of America's political elite to put country before special interests and discipline before political expedience. I have my doubts. Argentina's long history of inflation and hyperinflation, reforms blocked by entrenched interests, deficits and currency crises, political cronyism and industrial decline is more likely to offer the model for post-collapse America.
In Argentina people rioted, prices soared and GDP is still well down on 1994 levels
After the collapse, the long term threats to a resumption of US growth will be the imminent challenges of an ageing population and an end to cheap energy. This is a big topic and I have only space to touch upon it but:
Energy While I don't believe there is an insoluble energy crisis waiting to plunge America back to the Dark Ages, there are looming problems and the solutions will be enormously expensive with massive investments required in infrastructure, new technologies and generating capacity.
Population The US has a younger population profile than many Western countries but nevertheless the number of retirees is projected to increase by 56% and the number of over-85 year olds by 134% by 2050. This will impose a massive strain on America because it is unprepared - its citizens haven't saved enough and the government has made unaffordable promises on health and social security.
Meeting both challenges will require a high level of forward planning, discipline and sacrifice from a country which has indulged itself in the present by pillaging the future for four decades or more. As the Argentinian experience has shown, a dollar collapse will not automatically promote good leadership and effective policy. Even if the task of economic rebuilding is faced with a new resolve and competence, the energy and population challenges will make a return to rapid growth a tall order indeed.
I am not American but I know the country very well and have studied its political economy since the early 1980s. It gives me no pleasure to say this, because I love the country, but America is in irreversible decline. if it's any comfort to American readers, the problems in other countries like mine (Britain) are similar or worse and the outcome could be much the same. We will all have to get used to lower living standards.