Illusionary Economic Growth : Impending Catastrophe?

Economic growth in the United States has increasingly become an illusion. We know from basic economics that real, long-term, economic growth is derived out of purchase of new and improved capital and a better educated work-force. As a nation, we are admirably doing just that as approximately 18 percent of the total value of our production as measured by Gross Domestic Product is being invested in these factors of production and has been growing since the 2001 recession. However, as directly indicated by a rapidly growing trade deficit or negative National Income and Products Account balance, we are subsidizing that growth by borrowing needed funds from foreign countries. If our economy, for example, continues to grow at a rate of 3.5 to 4 percent a year (which equates to about $400 billion over previous year), but we have to borrow over $664 billion from foreign countries to make this growth happen, then can we really call this economic growth? This article asserts that all economic growth sustained by using up other nations' surpluses or savings at the expense of future generations is simply illusionary. Were it not for a favorable capacity to borrow 80 percent of the rest of the world's savings (Arends, 2004), it would have been highly unlikely that we could have ever overcome the 2001 recession and be where we are today in terms of measured economic growth. Can this borrowing practice be sustained? In other words, can we continue to borrow our way into prosperity and avoid the unpleasant reconciliation of our increasing debts with the rest of the world? According to the latest CNN survey of leading American Economists (January, 2005), we can expect moderate economic growth for the year 2005 (growth of about 3.3 percent). This may be true if their predictions are based simply on recent trends. However, surprises almost always happen and are very hard to predict. Perhaps it is not a question of what will happen, but a question of when a period of adjustment must occur. What specific factors, then, could cause a major economic downturn to happen? This article discusses this issue of illusionary growth and pinpoints some of the key factors or potential exogenous shocks which could catch us off guard and send our economy into a catastrophic situation