What Happens When the World's Economic Growth Engine Goes Kaput

Dow up 198 points yesterday. Why? People think the Europeans are going to sort out their problems. But are they?

Europe is the world’s biggest economy. It is menaced by bank and government debt defaults. It is growing old and has far more social spending obligations than it can afford. It is paralyzed by competing national governments and decentralized financial institutions. It can say ‘drop dead’ in 17 different languages.

And if Europe goes into a deep or prolonged economic slump, the rest of the world follows. Because Europe is a big customer, not only for Asia, but for America too.

The only way out of the debt problem for Europe is growth. Austerity alone won’t do it. Europe’s debts can only be serviced if the economy grows. Not that we’re counting on it. On the contrary, we’re guessing it won’t happen.

Europe’s social spending can only continue if there is growth. Without growth, everything goes bad. Debts can’t be paid. Public workers can’t be paid. And neither the stock market or the bond market are worth nearly as much as people think they are.

Everybody assumed growth would continue — even if it were interrupted from time to time by recession. Every recession since the ’40s has been a relatively quick and relatively painless pause, not a major change of direction.

But now, something seems to have changed. Maybe it is a Great Recession, as some call it. Maybe it is a Great Correction, as we call it. And maybe the age of growth is over.

What a helluva thing that would be if it were true. When people lent money to government and private borrowers they were betting on growth. When the government extended its promises of pensions and health care, it was counting on growth. Take away the growth and the credits and promises turn bad. And if they’re bad, the whole capital and government structure is in danger. Without growth almost all the world’s major banks will go broke. Without growth, every government in the developed world will default (or worse). Without growth, the world we have known falls apart.

But why would growth stop?

We don’t know. But it stopped in Japan. Today’s output in Japan is actually lower than it was in 1991. What happened? Banks were over-indebted. Corporations were over-extended. Real estate and housing were over-bought.

The Japanese government has been able to hold things together…but only by over-doing it itself. Now, it has such heavy debt that the home islands may sink under the weight of it. Stocks and property have lost about 2/3rds their value. There are no more jobs than there were 20 years ago…

And still no sign of growth.

Could Europe go the same way? Yes, it could.

How about America? Ditto.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning