Unbalanced Economies and the Reversed sustainability effect

Reversed Sustainability Effect

Luis Beldroega

@luisbeldroega

In order for better understanding the implications on the world wide economy, I will presente a comparison between 2 different economies, their growth models, their history, strengths, shortages and consequences for the future, by the numbers

The economies of the United States of America & China

CHAPTER 1: Unsustainable Growth Models

FIRST THE BASICS

1. % of GDP Growth

As we can see, apart from the growth rate generated after covid, the US trend line of Growth is trending down over the years

Average percentage of GDP growth over the last 25 years is around 2%

According to the Bureau of Economics analysis, they estimate a rate of Growth for 2024, in the United States of around 2.8%

Concerning China, it has presented a stable/consistent line of growth over the last 2 decades, with an average rate above 5%
Current consensus around China growth rate for 2024 is for the country to achieve a 5% growth rate, according to available information at the moment

2. The Nation's Current Accounts

Since the 1990's there are no positive signs or values, anywhere on the US current account side, even more worrying-some is the negative trend over the years, and currently continues negative around 900 Billion dollars 
On the other side of the between the 2 nations growth and support models, in China, the trend is healthy since 1995, keeps being positive, currently around 250 Billion dollars

3. Gross Fixed Capital Formation, as a percentage of GDP

Notice bellow the world trend 👇

Currently the World Capital Formation, as a percentage of GDP, is at 26% of the World GDP

And now the 2 nation's divergence trend

As we can see in the charts, China has been massively investing over the years, as a percentage of the GDP, and also in long term value added infrastructure on all kinds of networks, building a based growth model to sustain their growth

Current available information about the massive build over the years with already visible results at scale, in China, are available in detail over the internet, nowadays more than ever, thanks in big part to the existence of the X platform and their current policy, and it can be fact checked, mostly trough data bases like the World Bank, the International Monetary Fund and others

About the US, concerning infrastructure and networks, please name if you can find one big and structural project on infrastructure or any kind of network (energy, communications, roads, ports, airports, high speed train, health, education, …) that the US have built and is operational, over the last 2 decades

Please note that I am not referring to digital and space infrastructure, like Space X, Starlink, Google, Social networks, blockchain, AI or other’s alike, but if you are thinking of these, currently in 2024, China already has almost all of them, the respective competitors already in place and are operational, with one of the latest being the recent information about Deepseek, where they run the same LLM's, with cheaper infrastructure, in a decentralized way, available to all

Meaning that the share of the Chinese market that the US and the EU had in the past, in these areas, will soon be deemed to almost disappear, as it is happening and we can see it already also, but not limited to, in the electric car industry within China, that is already self suficiente, in quantity and in quality

4. Gross Savings account

Nice to have a gigantic and good pocket of “coins” when we need them, to invest in the country, or to spend it, if the country has room and wants to boost growth through consumption

Personally I don’t like to see a total consumption higher than 50% of the GDP, with the exception of it happening occasionally, never above in a sustained and consistent trend over the years

The gross savings account charts of these 2 countries presented here, will also be needed on the 2nd chapter of this article

The value ones

A) TOTAL GDP /annually

The US has an estimated 28 trillion dollars of GDP for the end of 2024

China has an estimated GDP for the end of 2024 of around 18 Trillion dollars

At a glance and historically the US has the best performance, on the total amount of the GDP

But, we have also to pay attention to how much was already absorbed by the Debt

B) Debt in percentage of the GDP and value

Not only the percentage, but also focus on the total value differences and the ability of the country to pay the total value

Meaning:

US GDP at 28T with 125% of it in debt on the amount of 36T

China GDP at 18T with 94% of it in debt on the amount of 17T

On a deep dive, the US y/y Growth is completely absorbed by the Debt

The US situation is unbalanced

And how much the anual Deficit will eat parts of the GDP, if it is not managed well

C) Deficit as a percentage of the GDP

Concerning the Deficit, the patterns visible on the charts over the last decade are similar, with higher deficits rates visible on the US chart

Graph and info from the tradingeconomics.com website

Graph and info from the trading economics.com website

D) Inflation rate

Inflation destroys real growth

Usually, so called distinguished economists, like to consider as highly successful economies, the ones that run an inflation rate equal or higher than the current growth rate of the country, and this couldn't be more far away from the truth, because we are in this case in the presence of inflation driven growth, that is not real, doesn't serve anyone, erodes wealth from the medal and lower income citizens, and it is a failed theory

Because of this, here, I will use the charts of the Real Gross Domestic Product % of growth, because as you all know, it’s the GDP adjusted for inflation, thus making it constant

There are a lot of inflation related charts and analysis out there, but for this article it is more suitable to use GDP adjusted for inflation, when talking about inflation, because the issue of this article is related to growth models

Information and graph from the statista.com website

Information and graph from the statista.com website

In conclusion of this question related with Real Gross Domestic Product % of growth and the comparison between the 2 economies, the charts above are clear, so I will leave it with no further comments

(Note: the only reason why the chart representing China has an advanced projection and the one for the US has not, it is only because I couldn’t find in the same website one chart of China that would not have the future projection)

A word about the no danger for Growth in a deflationary process (if it happens) in a specific growth model

Another day, another article, I will argue and present the options where under a specific Growth model, implemented over the previous years, in a continuously systematical base, we will be able to see that when the main motors of the economy are in place:

Health, Education, key infrastructure, key networks, with high gross savings, high Investment strategies within the country, with positive current accounts, strong manufacturing capabilities, with a strong export network in place, and a surplus accumulated over the years on the trade balance, the country that has this in place, will be able sustain under this described Model of Growth, a low deflation rate in the range of -1,5% till 0%, having at the same time low interest rates in the range 0% till 1,5%, with no problems whatsoever

And in fact, it will probably be a positive thing, because Growth would be assured with all of the above, anyway you look at it

One of the keys to run a deflationary process, under the growth model described above, is to act upon the supply side of inflation, having inland a strong self suficiente manufacturing sector, focus on cutting waist in the production system, improve efficiency and rely mostly on autonomous and automation production facilities

In China, many of these processes are already working towards their export systems, and currently many are shifting some of their focus towards their internal market

Next, we should not forget that,

Not only it is important to pay attention to the percentage of the deficit, to the percentage of the debt to GDP and the inflation rate that is running it, but also,

We must know:

Who owns the debt, on what it is used for, and how much does it costs to pay for the debt

E) Who owns it:

US: around 30% of foreigners owns the US debt, data from 2023, and this is a more ore less agreeable number, under the information available in many websites and databases over the internet

https://www.pgpf.org/article/the-federal-government-has-borrowed-trillions-but-who-owns-all-that-debt/
Graph and information from the Peter Peterson Foundation website

https://www.pgpf.org/article/the-federal-government-has-borrowed-trillions-but-who-owns-all-that-debt/
Graph and information from the Peter Peterson Foundation website

China: there isn’t many information available on charts concerning who owns Chinas debt

However, what is known and written by several experts in private subgroups and within the Investment Banking support information, is that, after 2016, when China opened the window for foreign investment into their government debt, it is possible to expect that currently in 2024, China will be having between 5% to 7% of the government debt that is held by foreigners, signaling a very low dependency on foreigners to finance itself

The latest agreeable numbers that I could find, from 2023, would place the foreign holders of Chinas debt in the range of 3,5% till 5%

On the other hand we must also take into consideration, another important question, and it is important to consider that it is related to the government debt

On the Debt issue, in these 2 nations, it works both ways, one is directly, in the other is indirectly

China, not the world bank or the IMF, China lends money directly to many other countries in the world, using some of the huge reserves of US dollars that China has (the biggest outside of the US) to grant loans directly to other countries, mainly to some countries in Asia, Africa and South America

Also, most recently issuing bond loans based in US dollars in the open market, in November 2024, in Saudi Arabia, in the amount of 2 billion dollars, that were over subscribed at 39 billion dollars

This situations described above, are relatively known, but they have not been taking into consideration, by many renowned economists, as a plus (+) net generation of income revenue from interest rates of those loans (net inflows of capital) over those reserve assets in US dollars that are loaned, arriving directly into the government budget

The US also does this, but mainly does it indirectly trough the IMF and the World bank

F) How much does it costs:

As we can see on the data bellow (from January 4th), the US is financing his economy currently at an average of 4,5% rate, and China at an average of 1,6% rate

Additionally we have to add for each internal market, the spreads/premium that will be demanded by the banking system

I have no access to that information, but there are many experts out there that can provide an analyses by the numbers, but I would argue that most likely the spreads being applied within the US, are probably more than 2 fold the ones being practiced in China

Considering all of the above related to How much does it costs to finance the debt and also the economy, we can now access which country is hurting more their economy, with an additional and heavy financing burden

On the next chapter of this article, we will see where the debt and also the wealth that had been created by these 2 nations, where is it used and for what purpose

Chapter 2: The Reversed Sustainability Effect

But first (before the where the debt and wealth was applied), we have to look at another key “development strategy” that many governments use, because it also affects the Growth Models, a lot

Applying stimulus packages to an economy where the main economic variables are unbalanced (as shown above in the 1st Chapter of this article),

A Stimulus program that uses either of the following, 1. through printing money or 2. through fiscal stimulus, it will only serve to worsen the already bad economic and financial situation of the countries in this situation

Explaining

Considering that when a country doesn’t have the ability to retain those new funds within their economy, because:

A) Final Consumption expenditure (% of GDP)

Most of it is used for Total consumption

From the world Bank database website

From the World Bank database website

B) The nation’s Current Account is negative (please see charts in the 1st chapter), in this article

C) within b) The Trade Balance is negative, and it has been consistently negative over the years

D) fixed investment doesn’t hold the bar, because it’s very low, over the years (please see charts in the 1st chapter)

E) Savings less debt (net) are low or non existent (please see the savings charts on the 1st chapter)

Please note that the Debt from personal loans and credit cards, from auto loans, households, companies and CRE debt, are all higher than their respective counterparts on the savings and collateral accounts that would balance it, and they are currently not balanced, adding that, most of the times they are also highly leveraged

Nothing of the above is balanced or positive, concerning the US

The Result: all the the stimulus that were applied, in this unbalanced economy, they only acted like sugar ... it will create a sense of rush and energy, it will last for a short while, and then the economy will demand for more and more, sugar (stimulus)!!!

Because: This happens because the money will flow out of the economy, towards the lenders and to the ones that are producing the goods and the services that are feeding the country's demand. It will not stay there and because the structural problems are not corrected, the problem will not be solved, and it will only get worst

This is called Reversed Sustainability

The reason: The economy is using money (for the stimulus) that doesn't belongs to them, to secure the flow of their excessive consumption, allowing to continue the buying of goods and services that they haven't produced, minus the interest rate that they have to pay to their creditors, thus, asking again to the lenders if they can lend them even more money, to continue doing the same lousy business.

* The Capital account can only help for a while, until capital decides to "face reality".

* Then, when the risk of doing the same thing (lousy business) is too high, and someone else is doing it better, it too (the capital), will also start to flow out of the economy, from one day to the other, over the night.

It’s a growth fuelled debt situation, it is not growth, it’s only debt creation

One might wonder, when we see that the US is under this very same situation, with an unsustainable growth model, and having built this reversed sustainability effect, running it in a full blown speed, over the last 2 decades, what happens next

The country is not alone in this practice, there are several other countries in the world that are in this very same situation

So, what is keeping the US economy and finance at float, considering all of these unbalanced situations?

Capital Flows some of them from abroad directly into the stock and the bond market of the US

And also in far less amounts, the balance sheet at the FED and other institutions that are holding and hiding the rest of the losses

Since 2008, all of the losses that were accumulated in the FED balance sheet are still there, and more

From the tradingeconomics.com website

The ones that borrowed the money to the US, are heavily invested in the US stock market, the bond market and into owning US dollars

They are mostly invested into the above also because there is nothing else where they will invest into it (the economy is mainly fueled by debt creation, and is running in a vicious circle)

Treasury Department International Capital System (TIC), https://www.treasury.gov/resource-center/

data-chart-center/tic/Documents/mfhhis01.txt

The problem with Capital Flows is that, they are extremely volatile

Remember, Capital moves from one side to other, with a snap of a finger 👌

20 year's ago, one would need 2 weeks to move capital from "east to west" and vice-versa

10 years ago, you could do it in 3 to 5 working days

Currently, you open your app, and you give the order

That's why, the unbalance that will be created by the flight to safety "and there will be only a few of them (assets) that would be more or less considered safe" will happen fast

With most of current allocations being not liquid or fungible fast enough (ex: ETFs), the pressure on Colateral will staggering

(on a Fire sale, stock market is also not liquid)

Add to that, that all Colateral is leveraged at an all time high, and we will have something to reckon that was never seen before

Conclusions of the article

What I have described in the 2 Chapters above is an extremely dangerous situation, in economics, in finance and in the worldwide FX system, that we have and are leaving in it, not only right now, but also because it has endured, systematically, at extremely high levels, during the last 15 years, not only in the US, but also in several other countries

This can unbalance the world

1. The reversed sustainability effect, explained in this post

2. The unattended consequences, explained by Mr Willian R. White

3. and The Foreign Affairs of a country that still holds the reserve currency of the World

The above, have the ability to disrupt every Growth Model of every country around the world, as well as any Economic, monetary or fiscal police that a country or union of countries is trying to implement

Now more than ever this is at play

Hope this will never happen, but I see no way out of the current situation that I have described

Thank you for the time and the attention that you have dedicated to the reading of this article and I should also thank you in advance if you decide to fact check this article, with every tool and data that you can possible have or reach, and be useful to improve or correct this research

Learning is a process, not an ending!

I try it a little bit everyday

Personal note

The content of this article is a revisiting experience for me of the content that I have published here in this blog, on X former twitter, from 2011 till 2016, now having some time to update the current evolution of the Reversed Sustainability Effect

At that time, I had compared 12 nations, and the most staggering differences that I have found back then, where between the growth models of the US vs China

That’s why this time I decided to present the data only of these 2 nations, in this article

More information about the current situation that the US economy is facing at the moment, available on some of my posts on X (former twitter) here, About the US economy

Copyright from the info on the Charts

The sources of the data contained in each photo of this article, are visible and belong to the data providers with their names on the photos, with the exception of the % of the government Debt to GDP, those are photos from the IMF database and the mention to the IMF website is not visible on those photos

The research from 2011/2013 and the one of today reflected in this article is my own, by the numbers