Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Stock Market More Correction Ahead? - 19th Nov 17
Universal Credits Christmas Scrooge Nightmare for Weekly Pay Recipients - 18th Nov 17
Perspective on the Gold/Oil Ratio, Macro Fundamentals and a Gold Sector Bottom - 18th Nov 17
Facebook Traders: Tech Giant + Technical Analysis = Thumbs Up - 18th Nov 17
Games Betting System For NCAA Basketball Sports Betting - Know Your Betting Limits - 18th Nov 17
Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do - 18th Nov 17
Gold Mining Stocks Fundamentals Q3 2017 - 17th Nov 17
The Social Security Inflation Lag Calendar - Partial Indexing - 17th Nov 17
Mystery of Inflation and Gold - 17th Nov 17
Stock Market Ready To Pull The Rug Out From Under You! - 17th Nov 17
Crude Oil – Gold Link in November 2017 - 17th Nov 17
Play Free Online Games and Save Money Free Virtual Online Games - 17th Nov 17
Stock Market Crash Omens & Predictions: Another Day Another Lie - 16th Nov 17
Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe - 16th Nov 17
Announcing Free Trader's Workshop: Battle-Tested Tools to Boost Your Trading Confidence - 16th Nov 17
Instructions to Stop a Dispossession Home Sale and How to Purchase Astutely at Abandonment Home - 16th Nov 17
Trump’s Asia Tour: From Old Conflicts to New Prospects - 16th Nov 17
Bonds And Stocks Will Crash Together In The Next Crisis (Meanwhile, Bond Yields Are Going Up) - 16th Nov 17
A Generational Reset That Will Redistribute Wealth to the Bottom 60% Is Near - 16th Nov 17
Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - 16th Nov 17
Gold’s Long-term Analogies - 16th Nov 17
Does Stripping Streets of ALL of their Trees Impact House Prices (Sheffield Example)? - 15th Nov 17
The Trump Administration’s IP Battle Against China - 15th Nov 17
5 Ways Bitcoin can Improve its Odds of Becoming the Future of Money - 15th Nov 17
These Headlines Say Gold is Building a Base for Something Big - 15th Nov 17
Protect Your Savings With Gold: ECB Propose End To Deposit Protection - 14th Nov 17
Gold on the Ledge, Trend Forecast - 14th Nov 17
The Unbearable Slowness Of Fourth Turnings - 14th Nov 17
Silver Sign’s Confirmation & More - 14th Nov 17
Could This Be The End for Tesla? - 14th Nov 17
Harry Dent’s Fourth Cycle: More Evidence of Stock Market Downturn - 14th Nov 17
Why Having Good Credit Is Important If You Want to Invest - 14th Nov 17
The Bitcoin Bubble Explained in 4 Charts - 13th Nov 17
How the US Has Secretly Subsidized China to Produce Eco-Unfriendly Solar Panels - 13th Nov 17
The Increasingly Unstable Middle East Must Be On Every Investor’s Radar - 13th Nov 17
Stock Market Critical Supports are Being Challenged - 13th Nov 17
The One Chart All Investors Should See Before 2018 - 13th Nov 17
Short-Term Stock Market Uncertainty Following Recent Rally, Will Stocks Continue Higher? - 13th Nov 17
Is Hillary Just the “Fall Guy” for the Intel Agencies and their Moneybags Bosses? - 12th Nov 17
Stock Market Correction Phase - 12th Nov 17
Finally, The Fall Of The House Of Saud - 12th Nov 17

Market Oracle FREE Newsletter

Traders Workshop

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