Abu Dhabi, UAEMonday 23 September 2019

Will the US be wealthy giving up its addiction to borrowing?

Per capital wealth in 102 global economies including the US will fall if they suddenly lost their ability to borrow

Most global economies will see their per capital wealth decline if they suddenly cannot borrow. Reuters
Most global economies will see their per capital wealth decline if they suddenly cannot borrow. Reuters

The US economy is consistently ranked among the world’s strongest. But cut off its addiction to debt and exhaust its gold and currency reserves, and a very different picture would emerge.

The nation’s health as measured by gross domestic product per capita would plunge into negative territory without its dependence on borrowed money, according to data compiled by Bloomberg.

In fact, the US would fall almost to the bottom of a ranking of 114 economies by GDP per capita. Only Italy, Greece and Japan would fare worse. That is a seismic shift from America’s comfortable No 5 spot on a list based on conventional measures.

To get this measure, Bloomberg took each economy’s 2020 GDP as projected by the International Monetary Fund as a starting point. It then adjusted the number by removing the ability to borrow, while adding reserves to create an alternative wealth measure.

US per capita income of $66,900 would be slashed to a negative $4,857 using this measure. That is a total loss of almost $72,000 for every man, woman and child.

The US is not alone, though; it is pretty grim across the board. Among the 114 economies included in the final list, 102 would experience reduced per capita wealth if they suddenly lost the ability to borrow.

Japan ranked dead last, with more than $93,000 of income erased per person. Its per-capita income of $43,701 in 2020 would flip to a negative $50,000 and its rank on the list would plunge 96 spots, from 18th to last.

Nor is the UK immune in the alternate, borrowing-free universe. With debt and reserves at 83 per cent and 5 per cent of GDP, respectively, its economy would see per-capita wealth drop 10 spots to No 29 in this measure – from $43,522 to $9,779.

China would see its relative ranking gain a few spots, since its holdings of gold and foreign currency are the world’s largest at $3.36 trillion or roughly 22 per cent of GDP. That dwarfs second-place Japan, with $2.1tn.

Luckily for Americans, a debt-free economy is unlikely to happen anytime soon. Even with growing trade wars against China and others, and the Trump administration’s projected $1tn budget deficit in fiscal 2020, the US debt market allows for ample liquidity and the US dollar is considered the world’s reserve currency.

The U.S. will need to continue to borrow. The IMF projects America’s government debt to average 109% of GDP over the next five years. Reserves, having averaged $425 billion between 2014 and 2018, would account for less than 2% of the projected $22.2 trillion GDP for 2020.

Updated: August 31, 2019 07:53 PM

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