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Is 0% GDP Growth in the US a Realistic Possiblity?
Pinnacle Digest writes: Daniel Amerman’s latest article is nothing short of a doom and gloom report. However, despite the article being overly negative towards western economies, Amerman explains, in great detail and statistics, exactly why we may be headed for a prolonged period of minimal or even no economic growth. Although a positive mindset is important to have in life and investing, we can’t ignore the facts in Amerman’s latest article. His statistics are outright shocking.
First off, Amerman explains to the reader that all projections, be it earnings projections, government deficit projections and stock market valuations are based on the historically normal growth rate (3.5%).
Amerman questions if this growth rate is realistic given the lackluster GDP we’ve been experiencing in recent years. He states that “there are strong historical reasons to believe that the United States growth rate could drop from a long-term historical rate of 3.5%, to an annual rate of 1.3%.”
Why does he believe this?
1.) The debt overhang
2.) Aging population
3.) Adjusting for population growth
The Debt Overhang
This is where things get scary. Amerman explains that nations with heavy government debt (over 90% debt to GDP) face toxic economic environments.
“An excellent historical analysis of this issue can be found in the working paper, "Debt Overhangs: Past and Present", which was published by the National Bureau of Economic Research in April, 2012. Authored by Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff, it examines 26 different "debt overhangs" that have occurred around the world since 1800, with "debt overhang" being defined as public debt exceeding 90% of GDP for at least five years. Among the many nations studied were the United States, the United Kingdom, Japan, Canada and Australia.
The analysis determined that while growth averaged 3.5% per year when public debt was less than 90% of GDP, it went down to only 2.3% per year when public debt was more than 90% of GDP. This is a reduction of 1.2%, or a little more than a third of annual economic growth.”
This may not sound like much of a reduction, but when you consider that a 1.2% drop in GDP growth (from 3.5% to 2.3%) is the difference of an economy doubling in size in 20 years to an economy barely increasing 50%, its impact is massive.
Amerman goes on to explain that “If household income were to rise and fall with the overall economy (it has been growing at a lower rate in the US), then if the United States had had today's debt overhang during the period from 1985 to 2008:
• Median household income would be about $38,000 a year, instead of $50,000 per year.
• Government spending would be much less, or taxes much higher, or deficits much higher - or some combination of the three.
• Social Security would be running a huge annual deficit, and it would have started years before.
• The day to day standard of living for the entire nation would be appreciably lower, and would be seen in everything from cars driven, to the size of average homes and apartments, to food, to electronics and restaurant sales.
• Half of the growth in corporate profits would not have occurred - and the stock market would be far lower.”
Click here to read Amerman’s shocking article on all the issues that could bring GDP growth into negative territory.