Thursday, February 1, 2018

USA Debt: Is It A Threat?

US federal government debt is now at 106% of GDP, the highest in decades.  It got there because it was forced to bail out the financial sector during the 2007-10 Great Meltdown, essentially having the Federal Reserve "print" money with its Quantitative Easing (a.k.a. Ben's helicopter).

 This debt load certainly looks formidable and perhaps threatening to the economy's health.  Is it so?  Well, yes.  And, no...

Yes, because a highly leveraged economy has, by definition, a lower capacity to overcome recessionary downturns without painful asset liquidations and capital losses, perhaps even social unrest.  Just ask the Germans and how scared they (still) are of the Weimar hyperinflation period which paved the way for Hitler.

And no, because it matters very much to WHOM the debt is owed.  Just ask the Japanese today, who owe their huge debt (250% of GDP) mostly to themselves (i.e. they are self-financed through a high saving rate).

 In the case of the US national debt, 25% is inter-government (mostly held by the Social Security Trust Fund), another 25% is held by American investors (e.g. pension funds, banks, individuals) and 12% by the Federal Reserve.  Thus, a total of 62% of the debt is owned directly by American holders. This leaves 32% owned by foreigners, but even there I expect that a chunk is owned by Americans through entities in tax havens such as the Virgin Islands, Channel Islands, Switzerland, etc.

 More important still, is how the government is managing its finances. It is doing quite well, as the following chart shows: government spending is back to 34% of GDP, very near a 50 year low.
 Bottom line - even though it may seem high, US debt is not a threat to the economy.

1 comment:

  1. Ref the final figure: US Gov Spend v GDP that cannot be a reliable estimate US Gov spending has never declined in recent fiscals - so is the GDP value unreliable? I'd guess it is. Relativities (apart from Albert's version) are always suspect until shown otherwise.

    Same caveate applies to the first figure. I'll accept that the plot line from late 1930s up to 1980s is probably a reliable relativity - but what happened after 1985 or so? Looks awfully dodgy.

    The US has to export as much physical stuff as it can - else it goes into economic decline. Did it give up on that during the 1990s? I know that by 2000 or so the massive increase in numbers of serf-style labour in Chindia really clobbered the US, UK and EU.

    As an example of the nature of productive activity in India and how they can cost-cut their outputs see "Machines", a BBC4 documentary. Zip Health and Safety; zip environmental protection. Workers sleep on piles of rags and defecate and urinate out the back. Sinclair Upton's 'The Jungle' is re-incarnate. Globalization is great! Long live Globalization!