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Wednesday, October 22, 2008

Economic growth based on credit cards?

Credit card based economic growth wasn't taught during my graduate studies at the University of Georgia. Investment can lead to economic growth, but I am not sure if I ever saw an established theory that suggested that a developing or developed country could indefinitely promote economic growth through consumer credit. Yet, that's exactly what we have tried to do over the past 10-15 years - although I hold no credit card balances, it is obvious that many people do.

This article in Business Week provides an interesting take on productivity and how the credit bubble might have masked the true economic growth of the U.S. and how it might impact the economic growth of the rest of the world. One tellin paragraph:

The bursting of the credit bubble suggests that the U.S. and global economies have a growth problem as well as a debt problem. According to the official numbers, economic growth in the U.S. has averaged 2.7% over the past 10 years. But by BusinessWeek's calculation, U.S. consumers have run up about $3 trillion in excess borrowing and spending over the same period—consumption that was not justified by income growth. Without that boost, which translated into new homes, cars, furniture, clothing, and the like, U.S. economic growth would have come in considerably lower. The global boom, too, was artificially fueled by out-of-control borrowing by consumers and businesses. "There was a sense of a bubble not just in real estate, but in that the underlying fundamentals were not supporting the market," says Michael Frantz, a Seattle-based managing director at project-management firm Point B, based on his conversations with clients.

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