Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
Stock Market and Gold Stocks Trend Forecast Update - 25th Jul 17
Saving Illinois: Getting More Bang for Its Bucks - 24th Jul 17
3 Stocks Sectors That Will Win in The Fed’s Great Balance-Sheet Unwind - 24th Jul 17
Activist Investors Are Taking Over Wall Street, Procter and Gamble Might Never Remain the Same - 24th Jul 17
Stock Market Still on Track - 24th Jul 17
Last Chance For US Dollar To Rally - 24th Jul 17
UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - 22nd Jul 17
Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts - 22nd Jul 17
Warning: The Fed Is Preparing to Crash the Financial System Again - 21st Jul 17
Gold / Silver Shorts Extreme - 21st Jul 17
GBP/USD Bearish Factors - 21st Jul 17
Gold Hedges Against Currency Devaluation and Cost Of Fuel, Food, Beer and Housing - 21st Jul 17
Is It Worth Investing in Palladium? - 21st Jul 17
UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - 21st Jul 17
The Fed May Show Trump No Love - 20th Jul 17
The 3 Best Asset Classes To Brace Your Portfolio For The Next Financial Crisis - 20th Jul 17
Gold Stocks and Bonds - Preparing for THE Bottom - 20th Jul 17
Millennials Can Punt On Bitcoin, Own Safe Haven Gold For Long Term - 20th Jul 17
Trump Has Found A Loophole To Rewrite Trade Agreements Without Anyone’s Permission - 20th Jul 17
Basic Materials and Commodities Analysis and Trend Forecasts - 20th Jul 17
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17

Market Oracle FREE Newsletter

Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts

Why Government Debt Is Dragging on the U.S. Economy

Interest-Rates / US Debt Oct 25, 2012 - 02:36 AM GMT

By: Casey_Research

Interest-Rates

Best Financial Markets Analysis ArticleBy Dan Steinhart, Casey Research : The US has too much debt. This is no longer a controversial statement. Some may believe other problems are more urgent, or that we need to grow our way out rather than slash spending. But even the most spendthrift pundits acknowledge that the debt-to-GDP ratio of the US must decrease if we are to have a stable, prosperous economy.


The private sector has reacted to this over-indebted reality as you would expect: by deleveraging. Since 2008, households and businesses have extinguished of 67% of their debt when measured against GDP. Some paid debt down purposefully, and others defaulted. For our purposes, it doesn't matter how the debt went away. Only that it did.

Meanwhile, the government has done the exact opposite. It has upped its own borrowing by 52% of GDP since 2008.

As a result of these countervailing forces, the aggregate debt-to-GDP ratio has declined only slightly since 2008. Had the government not stepped in, the US economy would be well on its way to a sustainable debt path. Instead, it has shed a paltry 15% of GDP. In other words, government borrowing largely offset private deleveraging.

Why, in a country in that so desperately needs deleveraging, would the government do such a thing?

The typical response is that such a quick and drastic drop in debt would have flung the US into a depression. That's probably true, as far as it goes. There's no denying that debt growth correlates strongly with GDP.

But it's only half the story. And the other half is more important.

Filling the debt gap with just any borrowing doesn't cut it. In order for debt to aid in economic growth, it needs to be productive. Borrowing for the sake of borrowing is worse than ineffective – it's destructive. Debt itself is neither good nor bad. It depends on what the borrower uses the money for.

Consider a businessman who borrows money to invest in a new project. If his endeavor is successful, it generates enough income to service the debt and return a profit. His income rises more than his debt. Viewed from a macro perspective, GDP rises faster than debt, and so the debt-to-GDP ratio declines. Paradoxically, he actually reduced the debt-to-GDP ratio by taking on debt. This is good debt.

Then there's unproductive debt, which is bad. And in times of over-indebtedness, it's really bad. Think your neighbor buying a TV on credit. He now has more debt with no additional income. He has added to debt, but not productivity. This is bad debt.

The government is the undisputed champion of creating bad debt. Borrowing to spend on weapons, relics (the post office), and losers (Solyndra) does not produce wealth. Even if you argue that some of these expenditures are necessary, they are certainly not productive, in the sense that they add only to the debt side of the ledger without even the prospect of producing income.

That's the fatal flaw of the government stepping in to fill the borrowing gap. Government debt is dead weight. It is a detriment without a corresponding benefit. And even worse, it crowds out private investment, accomplishing the exact opposite of its alleged goal of spurring growth.

The borrowing gap should be filled either with productive debt or not at all. Private businesses are indeed beginning to grow credit, albeit very slowly. That's a good sign, especially for equities – a factor that is shifting the balance between stocks and bonds that investors should have in their portfolios, and just one of the factors covered in our recent free investor bulletin on striking the right balance in your portfolio. But glance up at the chart one more time. Government borrowing has metastasized to the point that it consumes a third of all debt in the US, leaving private borrowing precious little room to grow.

All debt is not created equal. If the debt doesn't produce growth, it's a waste at best, and a destruction of wealth at worst.

© 2012 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife