National debt around the world has become the elephant in the room that no one wants to acknowledge

Dubai, 30th April 2012 - Politically manufactured economic growth and rising levels of sovereign debt point to a high probability of greater periods of crisis to come.

This was the informative if disquieting view that was aired by the eminent financial expert Guy Fraser-Sampson during a talk hosted by Capital Club Dubai, the region's premier private business club and a member of the ENSHAA group of companies, and Cass Business School, part of City University London.

Mr Fraser-Sampson started the evening's discussion by asking a simple yet worrying question,

"How is it possible that politicians can say that they are intending to reduce the national debt at the same time as they are actually increasing it? What is wrong with that picture?"

According to Mr Fraser-Sampson, what must be understood is that governments are not referring to reducing debt in terms of actually paying it down, but rather in terms of decreasing the national debt as a percentage of GDP, a practice which is both rather dangerous and misleading. He pointed out that debt as a percentage of GDP gives the impression of a gently sloping increase, but if that same debt should be viewed in actual currency terms a very different picture emerges, showing a sharp and alarming increase.

However, politicians seem to be conspicuously in denial, with governments already having borrowed far more money than they could ever repay, and adding to that debt on a yearly basis. When speculating about the cause for this situation as it is, he went on to remark that governments simply are gambling on the fact that GDP will increase by more than national debt. The question to ask is however, "Is GDP a good measure of economic health?"

Mr Fraser-Sampson clarified that GDP only measures expenditure, thus, using GDP as a measure for economic health would be effectively like analysing a company using only the figures for their sales turnover, ignoring such things as margin, profitability and indebtedness, an analysis that would be woefully lacking. 

It is also important to take into effect that GDP calculations include large amounts of government spending, both directly and indirectly, which means that government has the ability to markedly increase GDP by simply spending more money. So it should come as no surprise that, worldwide, there is a clear correlation between government spending and an increase in GDP. Yet governments everywhere use the increase in GDP as an indicator of growth to validate a possible return to the Keynesian principle that government both could, and should, intervene in the economy to boost economic growth by spending more money.

He warns, however, that this principle is being dangerously misinterpreted, as the principle only advocates government intervention through spending during tough periods if that same government operates with a budget surplus during times of economic health. And, ironically, many governments who would like to apply this principle are now incapable, as they are borrowed up to the hilt.

He went on to talk about growth in developed regions saying, "In developed countries the only viable ways to foster real economic growth is through innovation and education and it is currently very difficult to find a developed economy where you can tick even one of those boxes, let alone both."

"Controversially, might there not be some correlation in the fact that the developed economies are, largely, what can be considered to be welfare states while the rapidly growing emerging markets are not. In these regions individuals are forced to take responsibility for their own futures and welfare while in the west the original laudable aim of the welfare state seems to have become subverted until it has now given rise to a culture of dependency," he added.

In his view, many governments are now in the situation where they could quite probably never pay back what they have borrowed, and looking towards the BRIC economies offers no real escape route either. Brazil, Russia, India and China, although their long-term prospects may be good, are all facing issues of their own in the short to medium term.

Mr Fraser-Sampson also remarked that one of the key problems in the developed countries is that, although the political leadership is expected to make decisions based on long-term strategy, they are most often only judged on these decision's short-term results. And as most long thinking strategies do not yield short-term positive results, leadership most often will shy away from backing plans that cannot, and will not, increase their re-electability.

He posed the question, "When debt becomes obviously unsustainable - where do we go from there?"

On a cautionary note he conjectured about the relationship between debt and paper currency asking, "if debt is denominated in paper currency and, debt becomes worthless, taking if, will paper currency then follow suit?" And pointed out that paper currency at this point is supported by nothing more than the promises of politicians.

Mr Fraser-Sampson concluded his observation for the evening by inquiring if it was in fact it fair to expect the developed economies to grow any further, when they have no real reason to do so, and he went on to ask if these regions have not already grown too much. Citing J.K. Galbraith, he mused "have the developed regions created economies that overproduce and over consume, economies that not only produce what people need and then want, but what people must be made to want. And if this is truly the case then is it not clear that these manufactured economies must be by definition much more sensitive to economic boom or bust than they would otherwise be."

-Ends-

About Sir John Cass Business School:
Cass Business School delivers innovative, relevant and forward-looking education, training, consultancy and research. Located in the heart of one of the world's leading financial centres, Cass is the business school for the City of London. Cass MBA, specialist Masters and undergraduate degrees have a global reputation for excellence, and the School supports nearly 100 PhD students.  Cass offers the widest portfolio of specialist Masters programmes in Europe and has the largest faculties of Finance and Actuarial Science and Insurance in the region.  It is ranked in the top 10 UK business schools for business, management and finance research and 90% of the research output is internationally significant. Cass is a place where students, academics, industry experts, business leaders and policy makers can enrich each other's thinking. For further information visit: www.cass.city.ac.uk.

The Cass Dubai Centre was established in 2007 in collaboration with Dubai International Financial Centre. It is a regional centre of educational excellence for the Middle East and North Africa (MENA), and offers a number of courses, including an internationally renowned Executive MBA (EMBA) programme; tailor-made executive education programmes for companies and public institutions across the region; and MSc programmes in Aviation.

Cass's EMBA programme in Dubai currently offers over 250 executives and professionals an opportunity to combine demanding work schedules with an internationally acclaimed EMBA nearer to their home and work environments.  Cass EMBA in Dubai is tailored to the agendas of the region's managers and business leaders, and is notable for being the world's first programme to offer specialist Islamic Finance and Energy modules. The Dubai Centre also runs City University London's MSc programmes in Aviation. City University London, of which Cass is a part, has been running Masters courses in Air Transport Management, Air Safety Management and Aircraft Maintenance Management since 1997. The MSc programmes have over 400 students worldwide, including 90 current students from the Gulf region. In 2011, Cass Dubai Centre established an advisory board to provide advice and support in the region. For more information visit: www.cass.city.ac.uk/dubaicentre

© Press Release 2012