Wednesday, October 10, 2012

Life, Debt and GDP

I am reading an interesting piece on the relationship between Debt and GDP, this continued from my reading last week on Debt and the Exchange Rate… I am trying to figure out at what point I should start to feel good about increasing GDP and lowering exchange rate. Since increase borrowing can increase GDP but only marginally so that the trade off is not worth the borrowed money and increase borrowing can lower our exchange rate since we artificially flood the market with currency we did not earn. Our Governments have trained us to react to certain stimuli without giving us the real story behind those stimuli.

Marginally increasing GDP and lowering exchange rate through excessive borrowing, doubling our debt is nothing but window dressing, eye candy and false positives as it is not sustainable or real, unless we earn way more than we borrow and debt repayment is a low percentage of every dollar earned, currently our debt is over 140% of GDP and 80 cents out of every dollar goes towards servicing the debt. Our Governments love to play with words, “we grow the economy” or “we lowered the exchange rate” even when the reasons for these claims are there for all to see… Yes because they doubled our debt or consumed the NIR.

Starter Fluid is rich mixture with low auto-ignition temperature sprayed into a spark plug hole of an engine to get added fuel to the combustion cylinder quickly. It is not used to continuously power the engine but as an added booster to kick start the process… Borrowing should be like starter fluid to the economy, borrowed money is injected into the economy to kick start the process, once kicked started the process is supposed to be self-sustaining, generating the energy/funds required to drive the economy, create new investments and pay back the loan. You cannot run a business on only borrowed money, you can however inject borrowed money from time to time in order to improve the process of auto-income generation by the business but if the only money coming out of the business is money borrowed then that business is not sustainable and will fail, it is only a matter of time, it is not if but when.

The Jamaicans economy is like a failed business borrowing large sums of money, most of which is not being used to kick start the process of income generation but is being used for day to day operation of the country, to finance the over the top lifestyle of the people. Most of the money coming out of our economy is borrowed money because we have failed to use this money to make the right investments and common sense decisions needed to put our economy in auto drive. Not only that our borrowed money through imports is used to drive other people’s economy, every time we buy imported items from overseas we are building overseas economy at the expense of our own and don't get me started on the interest and loan repayment which is like a chain wrapped around a swimmers leg.

It seems the in-thing in Jamaica these days is to talk about GDP as a measure of success or failure of any Government without understanding that GDP rate is just one of many Economic indicators use to determine the state of a country's economic and social health. GDP is the measure of goods and services produced within a country in a given period and not a measure of welfare, it tells us nothing about Income distribution and the lives of people. Along with Economic indicators we also have social indicators which show us the standard of living of all the people within the country. The whole purpose of Government is to service the needs of the population and the whole purpose of the economy is to also service the needs of the people, both Government and the Economy exist only to better the lives of all the people and if they fail to do that then, they are both completely useless as the only thing that matters is the standard of living of the people.

Examples of other important Economic indicators are unemployment rates, inflation rates, Consumer Price index, income distribution, Balance of Payment and Balance of Trade, etc. All these indicators and more must be considered favorable, all moving in the right direction for the majority of the people to sit back and declare that all is right in their world. Favorable indicator in one and bad indicators in the rest means nothing and could still represent hardship in the lives of the people.

Hypothetically let’s say a country had a GDP growth rate off 20% but 25% of the people are unemployed, 23% live below the poverty line and Inflation rate is in double digits… The rich get richer and the poor get poorer. The country suffers from income inequality and a quarter of its population cannot read or write, supermarket shelves is full of imports but only the rich can afford it…The majority of the population suffers from poor standard of living, kind of like colonial Jamaica.

Hypothetically again, Let’s say we have 6 companies and five of these companies are foreign owned, and they produce a lot of widgets, tons of the stuff and sell so much widgets that our GDP jumped 10%, lets also say these companies pay meagre wages and piss poor benefits but make super-duper profits which they export back to their mother country… Yes our GDP is up by 10% but we are no better off because that super profit did not contribute to the increased welfare of the people, income distribution was poor.

In the above examples it makes no sense boasting about GDP to the population as their lot in life have not changed and in fact got worst. GDP is selective indicator used when someone wants to prove a point. Highlighting GDP without highlighting any other economic and social indicators means nothing as It does not give us a full understanding of the true state of the country and the plight of its people.

Then we have the Social Indicators:
  • Infant mortality rate:
  • Life expectancy at birth:
  • Availability of Healthcare
  • Availability of affordable housing
  • Literacy Rate
  • Employment Rate
  • Crime Rate
  • Etc.

So the next person who tries to big-up GDP had better come with the state of the remaining economic and social indicators. Yes we want GDP and all the economic indicators to move in the right direction but going crazy about one indicator as if it is the beginning and end of it all is Crazy and a complete waste of time.

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