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Growth on Credit

by Sebastian Gerhardt Wednesday, Aug. 31, 2005 at 4:30 PM

"The US economy grows but depends on the rest of the world supplying hundreds of billions of more goods to the US every year than come from the US.. This will not last forever.."


On the weak spots of the “new economy” in the US. The excess of imports over exports grows and grows. Public indebtedness at a record high.

By Sebastian Gerhardt

[This article published in: Junge Welt, 8/17/2005 is translated from the German on the World Wide Web,]

At the end of the 1990s, the US seemed an economic wonderland: economic growth around three to four percent with a falling interest rate, declining interests and rising profits. In 1991 there were 108 million employees beside agriculture and in 2001 there were 133 million. Since the middle of the 1990s, the unemployment has declined significantly. In October 2000 the official jobless rate at 3.9 percent was at its lowest level since 1970. However the wages and salaries did not rise correspondingly. Quite the contrary, lower and medium wage incomes continued stagnating while working hours increased. Truly an economic wonderland for the propertied class. Deficits in the state budget declined. After 1998 a surplus of the public sector was even achieved. While the Maastricht criteria were debated in Europe, the US budget realized a surplus of more than one percent of the gross domestic product (GDP). The “new economy” seemed to change all economic laws. Productivity increases through new technologies should lay the basis for a “new prosperity” – even if this prosperity was distributed very unequally.


The negative sides of the long upswing were hardly noticed. The exports of the US economy rose quickly but imports increased even faster. In the boom year 2000, the import surplus reached four percent of the gross domestic product. Private households became heavily indebted for their consumption. In 1993 the spending of all private households surpassed their total incomes for the first time. Since then the huge debt mountain of private households has grown along with the annual encumbrance of incomes through interest and service on interest. In 1993 the debt service on the average amounted to eleven percent of private incomes. Since 2001 debt service was constantly above 13 percent although the interests are still low in an historical comparison.

Credit relations in the US have a very different structure than in Germany. In Germany the total economic financing accounting shows that the indebtedness of the state and businesses (net borrowing) is defrayed. The mediation between owners of assets and borrowers occurs through the banking system. In the US, on the other hand, the business sector as a rule shows a positive balance. Borrowing usually occurs on the capital market. However at the end of the 1990s, American busine4sses spent more than they collected. With that the total balance of the private sector (households and businesses) skidded into the red. Private indebtedness and the deficit in foreign trade exploded.

This brief survey is based on several simple purely arithmetical relations between the national economic authorities. The ancient philosophers know: “Even the gods cannot create something out of nothing” (Lucretius). The real existing capitalist market economy cannot do what the gods cannot do. Therefore the foreign trade balance equals the difference between national incomes and private and public spending. If we consider the taxes to the state, the foreign trade balance equals the balance of the private sector plus the balance of the public sector. Starting from these connections, economists at the Levy Economic Institute ( presented several critical analyses of the US economy in the last eight years that balance costs and revenues and focus on creditors and debtors. The group around Wayne Godley, Dmitre Papadmitriou and Anwar Shaikh identified the weak spots of the “new economy” even before the beginning of the crisis in 2000.

Borrowing Record

The wind turned in 2001. If far-reached repayment of public debts was predicted previously, public borrowing rose with the economic crisis with tax cuts for businesses and the “war against terror” at record highs. In contrast, private budgets and businesses limited their spending in crisis – and brought them nearly in balance with revenues. The minus in foreign trade since 2002 corresponds almost exactly to the deficit in the federal budget. Since 2002, both form the “twin deficit” of over five percent of the GDP. How this deficit can be reduced is not yet known. This means, the US economy grows but depends on the rest of the world supplying hundreds of billions of more goods to the US every year than come from the US. In the past, the interest of the exporting countries, Japan, Germany and China was large enough to continue the ;s[peculation on US growth. However this will not last for ever.

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