7 Unsustainable Processes
Was this 1999 paper ahead of its time? You decide. These 7 processes sound like the warning(s) of James Grant, Grantham, Taleb, and Roubini all put together.
(Note: Many of the events mentioned in the paper occured slightly in 2001. I’m not claiming that this paper predicted the recent financial crisis).
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Introduction (Via Godley @ Levy.org)
The U.S. economy has now been expanding for nearly eight years, the budget is in surplus, and inflation and unemployment have both fallen substantially. In February the Council of Economic Advisers (1999) forecast that GDP could grow by 2.0 to 2.4 percent between now and the year 2005, and this forecast has since been revised upwards (Office of Management and Budget 1999). Many people share the CEA’s optimistic views. For instance, in his New Year message (Financial Times, December 29, 1998) Alan Blinder compared the United States’s economy to one of its mighty rivers–it would “just keep rolling along”; and President Bill Clinton concluded his Economic Report of the President with the words “There are no limits to the world we can create, together, in the century to come.” This paper takes issue with these optimistic views, although it recognizes that the U.S. economy may well enjoy another good year or two.
This paper first looks at where the current growth has come from, examining, in turn, fiscal policy, foreign trade, and private
income expenditure and borrowing. This examination shows that current growth is associated with seven unsustainable processes in
the United States[.] The paper then presents a number of medium-term scenarios based on models of the United States and world economies, considers some of their implications, and discusses appropriate policy responses.
The 7 Unsustainable Processes (Via Godley @ Levy.Org)
1.The fall in private saving into ever deeper negative territory
2. The rise in the flow of net lending to the private sector
3. The rise in the growth rate of the real money stock
4. The rise in asset prices at a rate that far exceeds the growth of profits (or of GDP)
5. The rise in the budget surplus
6. The rise in the current account deficit
7. The increase in the United States’s net foreign indebtedness relative to GDP
Additional Excerpts (Via Godley @ Levy.Org)
It should be added that, because its momentum has become so dependent on rising private borrowing, the real economy of the United States is at the mercy of the stock market to an unusual extent. A crash would probably have a much larger effect on output and employment now than in the past.
A long period of stagnation in the United States, still more recession, would have grave implications for the rest of the world, which seems to be depending, rather irresponsibly, on the United States to go on acting as spender of last resort indefinitely.
This paper makes no short-term forecast. Bubbles and booms often continue much longer than anyone can believe possible and there could well be a further year or more of robust expansion. The perspective taken here is strategic in the sense that it is only concerned with developments over the next 5 to 15 years as a whole.
Click Here To Read About 7 Unsustainable Economic Processes (As Pdf)
