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VIDEOHow Big a Deal Is America's Debt Problem?
By
James Kostohryz
Jan 27, 2010 3:10 pm
According to a recent report, perhaps it's not as bad as you think.
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According to the latest McKinsey report, perhaps it's not as big a deal as you may think.
The financial media is infused, to the point of ubiquity, with narratives that are obsessed with the level of debt in the US. One of the most popular narratives suggests that US debt levels are so high that the country has no other option than to either default, inflate, or both. Is it true? Or is it merely another urban legend?
Unfortunately, serious analysis of US and global debt dynamics doesn't lend itself to short non-technical articles, a fact that has left a gaping knowledge gap amongst the public. The void has been largely filled by simplistic journalistic analyses that tend to be driven more by ideology than by empirical data and sound economics. Furthermore, astute readers may have also noted that many of the pundits that promote the doom-and-gloom debt narrative actually make their living hawking gold and/or gold stock investing, or alternatively, currency speculation against the US dollar.
Readers that are interested in going beyond the simplistic and biased accounts that dominate the financial media and wish to be introduced to some serious, yet accessible, analysis regarding global debt dynamics, are invited to peruse the recently published and widely cited report by the McKinsey Global Institute entitled, “Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences."
This report strongly supports the positions that I've laid out in my various articles on the subject of US indebtedness. As regular readers are aware, I've consistently stated that, contrary to the ideologically charged rhetoric offered by the perennial prophets of doom, a catastrophic economic outcome for the US in the next few years isn't inevitable -- nor is it even particularly likely.
There are six main reasons that I've discussed in previous articles, all supported in various degrees by the recent McKinsey study, why US debt levels won't necessarily lead to the sort of crisis scenarios that are routinely promoted by the professional promoters of doom and gloom.To review my previously published positions:
1. US public debt levels are quite moderate compared to other developed nations. Japan and various European counties were able to grow, albeit relatively modestly, for several decades while sustaining much higher debt levels. There's no reason why the US can't do the same in the years to come. It's important to understand that because US public debt is at levels that have proven in the past to be easily manageable by other nations, there's little reason to think that deleveraging by the US government is an absolute necessity nor much less to think that such a process must necessarily become a drag on US economic growth. To the contrary, based on precedents from Japan and Europe, the US government still has substantial room on the public balance sheet to enable it stimulate economic growth if it chooses to do so.
2. US non-financial business sector debt is extraordinarily low by global standards. Thus, there's no real debt constraint for US businesses to invest and grow. And this means that there's no major endogenous constraint to productivity growth -- the main component of overall economic growth.
No positions in stocks mentioned.
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