Best of the Week
Most Popular
1.Ukraine Preface, the Emerging Dynamics Of Petro-Yuan Standard - Jim_Willie_CB
2. Speculations Reversed - Gold Price Stealth Rally 2014 - Peter_Schiff
3.Bubbleberg News Drivel Masquerading as Financial Reporting - David A. Stockman
4.Nationwide UK House Prices 9.5% Inflation, Housing Market on Steroids, Help to Buy Anniversary - Nadeem_Walayat
5.How to Profit from Palladium Huge Price Surge… - Peter Krauth
6.UK Home Solar Panel Installations Good or Bad for House Buying and Selling? - Nadeem_Walayat
7.Global Gold Manipulation Update - MAP Wave Analysis - Marc_Horn
8.Ukraine Capital Controls and 200% Inflation But Still In Better Shape Than US! - Jeff_Berwick
9.The Rise of a Euro-Chino-Russian Superpower - Stephan Bogner
10.Across Europe Secession Movements Intensify - BATR
Last 72 Hrs
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14
Bitcoin Price Strong Appreciation to Be Followed by Declines? - 14th Apr 14
Greece, Turkey, We're Shuffling The Cards on Our Europe Investing Play - 14th Apr 14
Silver Price Ultimate Rally: When Paper Assets Collapse - 14th Apr 14
Get Your Share of an Extra Trillion Euros Money Printing - 14th Apr 14
Fourth Reversals in The Gold and Silver Charts - 14th Apr 14
Stock Market Nearing Rally in a Downtrend - 14th Apr 14
London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - 14th Apr 14
Four Horsemen - Top Economists Explain the Source of Our Economic Crisis - Video - 13th Apr 14
Peak Oil And Global Warming – A Question Of Culture - 13th Apr 14
The Global Banking Game Is Rigged, and the FDIC Is Suing - 13th Apr 14
College Degree Earnings Propaganda - 13th Apr 14 - Andrew Syrios
Stock Market Potential Diagonal Triangle Pattern Forming - 12th Apr 14
Ukraine Crisis – Military Flash Drive Thinking - 12th Apr 14
Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - 12th Apr 14
Gold Preparing to Launch as U.S. Dollar Drops to Key Support - 12th Apr 14
Manipulated Stocks Markets And The Empty Bag - 12th Apr 14
Stock Market - It’s Not Time to Panic… It’s Time to Buy - 12th Apr 14
Doctor Doom on the Fiat Money Empire Coming Financial Crisis - 12th Apr 14
Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - 11th Apr 14
This Bitcoin Price Rally Might Be a Fake One - 11th Apr 14
GDX Gold Stocks Benchmark - 11th Apr 14
Silver Price Finally Outperforms – How Bullish Is That? - 11th Apr 14
Limits to Employment Participation, and Societal Change - 11th Apr 14
US Moves To Restrict Travelers Taking International Flights - 11th Apr 14
Bill Gross to El-Erian: 'Come on, Mohamed, Tell Us Why' You Resigned PIMCO - 11th Apr 14
British Pound GBP/USD - Double Top or Further Rally? - 11th Apr 14
Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - 11th Apr 14
Russia Invaded Crimea and These US Energy Companies Made a Killing - 11th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

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.


© 2005-2014 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

Free Report - Financial Markets 2014