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
Why Surging UK Household Debt Will Cause The Next Crisis - 27th Jul 17
Reconciling the US Dollar Outlook with the Super Bullish Gold and Silver COTs - 26th Jul 17
Last Week’s Rally in Gold Stocks Erased - 26th Jul 17
Dollar, Bitcoin, Markets - Is There A New Flight To Safety? - 26th Jul 17
Central Banks ARE The Crisis - 26th Jul 17
Iran: Public Image Versus Historical Reality - Part 1: An Abridged History to the 20th Century - 26th Jul 17
Trump Fails To Understand One Critical Thing—Our Trade Partners Have Options, Too - 26th Jul 17
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

Market Oracle FREE Newsletter

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

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