On this blog I have hit a number of times on the problem with having too much debt. On a national level people (Secretary of State Hillary Clinton for one) are even saying that our debt represents a national security threat. On an economic level, economists such as Steve Keen are making the argument that the deleveraging process following a borrowing and spending boom like the one we have witnessed from 1987 to 2009 will take years to play out.
Keen argues and illustrates that:
Debt reduction is now the real story of the American economy, just as a real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens.There are a number of charts and math involved that Steve uses to prove his point. And logically, it makes sense. When you borrow, you have to pay it back. If consumers have indeed increased borrowing over the last 22 years by $34 trillion and GDP has only grown by $9 trillion, then we are in for quite a period of economic staleness, especially if the deleveraging process continues. What happens when the consumer appetite for debt goes away? Surely the GDP growth cannot be sustained.
This is what part of last year's stimulus was intended to do; stimulate aggregate demand. Since consumers have clearly and demonstrably started to become net savers instead of net spenders, the government was looking for a way to increase GDP. Any kind of government spending will have a positive impact on GDP. As I have said many times before, the problem with debt is that it needs to be paid back at interest. This payment is a tax on future production and future spending.
When you max out the amount you can borrow, the consequences are long lasting and staggering. Other, normal expenses will come under stress while a less fool-hardy approach would have produced better long-term results.
Thanks for reading.
James
