I keep feeling my way around in the darkness, trying to find hopeful signs that our economy will recover, but invariably I bang into something like this:
Our colleague Rob Arnott, who always does terrific research, wrote in his recent report that “at all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company–only Japan, Lebanon and Zimbabwe are higher. That’s only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time.”
Add the unfunded portion of entitlement programs and we’re at 840% of GDP.
The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.
Karl Denninger posts a colorful graph which illustrates the dramatic expansion in all forms of debt (not just governmental) since 1980. The growth in just this decade is incredible.
Our debt addiction is worrying on two levels. First, high debt service will erode our economy’s ability to grow. Second, we’re getting a diminishing marginal return from what we still are borrowing.
Denninger notes:
During the same time period that we essentially doubled the debt of households, businesses, the federal government and financial institutions (2000-2009) we added just 40.8% to GDP ($10.129tn to $14.266tn)
If, during the past decade, we only grew our economy at 40%, despite doubling our debt, what is the outlook now, when our ability to borrow is approaching the breaking point? Indeed, some measures of credit have shrunk during the past year, as unemployment has surged.
With the mortgage refinance market dead, consumer credit tapped out, and business borrowing under stress, we’ve reached the boundary of debt-financed expansion. Our national credit card has reached its limit.
Now what will be the driver for growth? For industrial expansion? For new jobs?
It’s quite worrisome.