A previous post noted an article by this blog's author on china.org.cn demonstrating that for the first time for a century and a half the US had lost its position as the country producing, in gross dollar terms, the greatest amount of finance for investment - i.e savings. The US has been overtaken by China. In short the world's number one capitalist economy no longer produces the most capital. The New York Times noted this as Newsweek did later.
The 3rd quarter US GDP figures published this week however confirm another extremely striking statistic, this time concerning net creation of capital - that is savings minus capital consumption. This shows that in net terms the US, the world's number 1 capitalist economy, is currently producing no capital at all - currently US capital consumption exceeds capital creation. The US is at present subtracting from the world's stock of capital not adding to it.
This situation shows how deep has been the impact of the financial crisis on the US. The open visible wounds are the recession and rapidly rising unemployment, but hidden financial injuries under the skin of the US economy appear more serious.
The factual situation is shown in Figure 1. This illustrates US gross saving compared to capital consumption. As may be seen US saving, that is capital creation, has been declining for a prolonged period but had hitherto since World War II had remained above the level of US capital consumption.
The impact of the financial crisis has however driven US saving precipitately downwards. The Bureau of Economic Analysis statistics show US gross savings in the 3rd quarter of 2009 were $1.483 trillion or 10.4% of GDP. US fixed capital consumption was $1.852 trillion or 12.9% of GDP. Even given that saving and capital consumption are among the harder figures in GDP to compute the $369 billion gap leaves no doubt that at present the US is consuming more capital than it is creating. In net terms, the world's number 1 capitalist country is simply not creating any capital.
While there is no precedent in the last 150 years for the US falling behind another country for gross creation of capital, as has now occurred with China, there is actually one for the US consuming more capital than it creates. But this comparison illustrates strikingly the significance of the present situation of the US economy. The previous period when the US was literally creating no capital in net terms was in the depth of the Great Depression in 1931-34.
This trend is shown in Figure 2 which shows US net saving/capital creation - i.e. gross saving minus capital consumed. As may be seen for four years during the worst period of the Great Depression the US consumed rather than created capital. In every post-World War II recession prior to the present one however, even at the worst point of the downturn, the US remained a net capital creator - US gross saving exceeded US capital consumption. Net consumption of capital however reappeared in 2008 after 74 years, that is for the first time since 1934, and the situation significantly deteriorated during 2009.
Such trends show even more strikingly than the scope of the the fall in production that the current US downturn is something quite different to even a severe normal cyclical downturn. The fundamental financial heart of the US, its simple ability to generate capital, has been deeply damaged.
It is evident that such a situation whereby the US is a net consumer of capital cannot last for a prolonged period. It means, first, that currently the US is entirely dependent on flows of finance from abroad for capital accumulation.
Second, it is hard for the US to overcome the present situation. Due to financial factors, and the increasing speed of technological progress, consumption of fixed capital, that is its obsolescence and wearing out, tends to increase slowly with time - it has risen from 10.2% of US GDP in 1950 to 12.9% of US GDP currently. It is almost impossible to lower the rate of capital consumption - which means that the US has to save 12.9% of GDP simply to maintain existing capital stock at a constant level.
Finally, capital investment is the most important overall input into US economic growth - accounting for more than 50% of US growth throughout the period since World War II. A situation where the rate of capital formation in the US is severely depressed, therefore, will lock the US economy into a pattern of low growth - given such data the anemic US 3rd quarter growth figures, which at 2.8% were far lower than any usual US recovery, are unsurprising and will continue. As long as the above situation continues the US will remain, at best, on a low growth trajectory.
Such trends are inevitable when the world's number one capitalist economy, as a statement of fact, is simply not creating capital.