Smart About Investments – Better off with Credits
This piece on credits is the second one in our “Smart About Investments” series of inspiring discussions on the learning curve and savings habits evolution of CEE citizens. On the other hand, the CEE countries didn’t use to have a saving tradition as people would spend all their monthly income until they started to spend all they received as pension from the public pension system. Our guest blogger Petr Gapko uses the Czech Republic’s example to prove that we are a lot better off now in terms of living standards, but almost entirely by becoming more indebted. Sociologists would immediately say this is quite natural after long decades under communist regimes, but economists remind both people and governments that bills must be paid sooner than later…
Guest post by Petr Gapko, Macroeconomic Analyst at GE Money Bank, Czech Republic
There is probably no doubt that we are a lot better off now than 15 years ago. But each of us has to realize that we have reached this state almost solely by taking on debt.
An uninterested economist would like the fact that, from his viewpoint, 2011 was certainly “very interesting.” At the start, the large global economies enjoyed relatively good growth, but there was a dramatic turnaround by mid-year.
The economic slowdown had the same effect as a shotgun discharged in a flock of starlings. And just as the flock flees in different directions when a shot is fired, the financial markets’ trust disappeared at that moment. Government debts face huge problems finding buyers, people are not consuming and companies are getting ready for a black future. Logically, the current situation evokes several questions: Why is trust that important? Was the optimism before the last and current crises exaggerated? Will we ever get back the confidence we had in the first half of the past decade? Will the view of the financial world change?
Money as a measure of happiness. We will evidently get clear answers to these questions in ten or more years’ time, although one aspect is worth considering now. Human welfare is usually measured in money. Consequently, the media is now dominated by reports on price rises, performance of the economy, layoffs and cuts. Therefore a country is rated according to the growth of its gross domestic product.
If more is produced and consumed in a certain country, the people living there must be a lot better off. This is an axiom of modern society.
Where, however, does economic growth come from? An economy grows if its population grows. More people require more food and more consumption. Hence, more has to be manufactured.
However, an economy can also grow when new technology that can produce more goods at the same cost arrives. In this case, efficiency increases thanks to “innovation.” And because in Central Europe we don’t have enough food and other staples, innovation only serves to improve our comfort.
The population of the Czech Republic has increased by just under two per cent in the last 15 years. Our annual gross domestic product (what is produced and consumed in our country in one year) adjusted for inflation rose by almost 50% in real terms over the same period! In money terms, it means CZK 1,124bn ($58bn). From the economic viewpoint, the claim that people were better off before is absolute nonsense. How have we managed to increase our wealth in such a short time? Is it really innovation that has powered the difference between the growth in the population and the growth in the economy?
The time to pay will come. Certainly, not all of it. The government (the same as some citizens) is buying part of consumption “on credit.” The increase in the Czech Republic’s debt over the last 15 years is enormous. Government debt has ballooned from CZK 150bn ($7.7bn) to CZK 1,344bn ($69.4bn). We have to adjust this datum for inflation, i.e. express it in the same units as gross domestic product. If we then take the real debt, it rose by CZK 1,053bn ($54.5bn), which means that each of us has bought consumption on credit totaling CZK 100,000 ($ 5,164) since 1996. If we deduct consumption purchased on credit, we find that the real gross domestic product adjusted for the increase in indebtedness rose only by CZK 71bn, i.e. just below three per cent.
If we compare the growth in gross domestic product adjusted for what we “bought with other people’s money” with the increase in the population, we find that, in the last 15 years, the economy grew by only one per cent thanks to innovation. There is probably no doubt that we are a lot better off now than 15 years ago. But each of us has to realize that we have reached this state almost solely by taking on debt. There will come a time in the future when we need to pay the bill and for some economies, this time has arrived. If we want to see economic growth in the future, we, as a nation, will have to start thinking and come up with innovations that really bring the desired improvement to our comfort.
What is our ’Smart About Investments’ series about?
„Although the transition from command economies to market economies took place more than 20 years ago, the know-how on storing personal wealth cannot be tradition-based in CEE. We still need to get familiar with what it means to distribute our savings between bonds, equities and foreign currencies over a life-cycle horizon,” said Péter Duronelly, investment director of Budapest Fund Management in the first peice of this series ’Gold is Shining Again’.
