Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
BREAKING NEWS - United States Galloping Towards Nuclear War with China Proxy North Korea - 26th Sep 17
Here’s Why Turkey Can’t Stay Out Of Syria - 25th Sep 17
Hidden Gems Shows A Foreboding Stock Market Future - 25th Sep 17
10 Reason You Should Use Ridesharing To Save Money - 25th Sep 17
Commodities King Gartman Says Gold Soon Reach $1,400 As Drums of War Grow Louder - 25th Sep 17
Stock Market Mixed Expectations, Will Stocks Continue Higher? - 25th Sep 17
22 charts and 52 questions that will make you Buy Gold - 25th Sep 17
Speculation Favors Overall Higher Silver Prices - 25th Sep 17
The Advertising Breakthrough Revolutionizing Gaming - 25th Sep 17
Stock Market Forming a Reluctant Top - 25th Sep 17
Grid Forex Strategy - All You Need to Know - 25th Sep 17
Catalonia, Kurdistan, Patriotism, Flags and Referendums - 24th Sep 17
Two Key Indicators Show the S&P 500 Becoming the New ‘Cash’ - 24th Sep 17
The Felling of Sheffield's Big Street Trees 2017 - Dobcroft Road - 24th Sep 17
Advantages of Forex Trading - 24th Sep 17
Stocks, Gold, Dollar, Bitcoin Markets Analysis - 23rd Sep 17
How Will We Be Affected by a Series of Rate Hikes? - 23rd Sep 17
Fed Quantitative Tightening Impact on Stocks and Gold - 22nd Sep 17
Bitcoin & Blockchain: All Hype or Part of a Financial Revolution? - 22nd Sep 17
Pensions and Debt Time Bomb In UK: £1 Trillion Crisis Looms - 22nd Sep 17
Will North Korea Boost Gold Prices? Part I - 22nd Sep 17
USDJPY Leads the way for a Resurgent Greenback - 22nd Sep 17
Day Trading Guide for Dummies - 22nd Sep 17
Short-Term Uncertainty, As Stocks Fluctuate Along Record Highs - 21st Sep 17
4 Reasons Gold is Starting to Look Attractive as Cryptocurrencies Falter - 21st Sep 17
Should Liners Invest in Shipping Software Solutions and Benefits of Using Packaged Shipping Software - 21st Sep 17
The 5 Biggest Bubbles In Markets Today - 20th Sep 17
Infographic: The Everything Bubble Is Ready to Pop - 20th Sep 17
Americans Don’t Grasp The Magnitude Of The Looming Pension Tsunami That May Hit Us Within 10 Years - 20th Sep 17
Stock Market Waiting Game... - 20th Sep 17
Precious Metals Sector is on Major Buy Signal - 20th Sep 17
US Equities Destined For Negative Returns In The Next 7 Years - 3 Assets To Invest In Instead - 20th Sep 17
Looking For the Next Big Stock? Look at Design - 20th Sep 17
Self Employed? Understanding Business Insurance - 19th Sep 17
Stock Market Bubble Fortunes - 19th Sep 17
USD/CHF – Verification of Breakout or Further Declines? - 19th Sep 17
Blockchain Tech: Don't Say You Didn't Know - 19th Sep 17
The Fed’s 2% Inflation Target Is Pointless - 19th Sep 17
How To Resolve the Korean Conundrum  - 19th Sep 17
A World Doomed to a Never Ending War - 19th Sep 17
What is Backtesting? And Why You Need Backtesting System? - 19th Sep 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Forget 3% Growth with This Deficit, US Approaching 150% Debt-to-GDP Ratio

Interest-Rates / US Debt Mar 15, 2017 - 09:46 AM GMT

By: John_Mauldin

Interest-Rates

Studies have shown that when government debt rises above 90% it begins to have an effect on the growth of GDP. That conclusion is a bit controversial in economic circles, as some say the critical level is higher or lower.

Understand, those studies are not examining some theoretical proposition; they are looking at actual debt and growth levels in countries over a long period of history. And the data show that excess debt inhibits growth.


We can argue why that is true and how much debt takes effect, but the fact is that the US debt level is already way past that point.

The US Is Approaching a 150% Debt-to-GDP Ratio

When politicians talk about growing an economy 3% a year, they face very strong headwinds. That sort of growth is not impossible in our case. But it would be abnormal given historical data.

To grow the economy at 3% today will require tax reform beyond anything that’s on the table right now. It will require real tax reform, not some minor tweaks.

For the next 10 years, the CBO is projecting slightly under 2% growth per year; 2017 is the outlier year at 2.3%. They also project an unemployment rate below 5% for the next 10 years and inflation in the low 2% range. (You can find my 2017 forecast here.)

That gives us nominal GDP growth of around 4%. (You can see this data and scores of other spreadsheets here.)

That growth rate means a deficit topping $700 billion, and it means our debt will be growing faster than our economy can. In addition, there is the off-budget debt, which means that the debt will grow at about $1 trillion per year or more as long as we don’t have a recession.

The CBO basically projects total deficits to add up to more than $10 trillion over the next 10 years.

That is roughly in line with nominal growth projections, so theoretically our debt-to-GDP ratio wouldn’t rise all that much.

Except…

State and local debt will also rise, and then there are those pesky little off-budget numbers, which will add another $6–$10 trillion to the national debt. Again, give or take.

Now, we are beginning to talk debt-to-GDP in the 150% range (give or take 10%) if everything is roughly left in place the way it is today.

Reducing the Deficit Must Be a Priority

Debt is consumption brought forward. If you borrow money and spend it on something today, that’s money you can’t spend in the future. In theory, you have to pay the money back, too.

Debt can be a good thing if it is used to purchase a productive asset that contributes to growth or adds to your net worth over time. But the debt that the government incurs is used almost 100% for current consumption and not for productive assets like infrastructure.

Europe, in general, has more debt than the US does, and Japan has more debt than Europe—and both of those regions grow more slowly than the US. If your goal is 3% growth and more jobs, then adding debt at the level we have already reached—much less at European or Japanese levels—is wrong.

So one of the imperatives in this tax reform must be to reduce the deficit enough that the growth of nominal GDP will begin to reduce the negative effect of debt on growth.

Get a Bird’s-Eye View of the Economy with John Mauldin’s Thoughts from the Frontline

This wildly popular newsletter by celebrated economic commentator, John Mauldin, is a must-read for informed investors who want to go beyond the mainstream media hype and find out about the trends and traps to watch out for. Join hundreds of thousands of fans worldwide, as John uncovers macroeconomic truths in Thoughts from the Frontline. Get it free in your inbox every Monday.

John Mauldin Archive

© 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