Debt and deficits don't matter--until they do

$179,000 Each - In Debt

by Charles Hugh-Smith

Longtime contributor B.C. recently shared some eye-opening charts of debt in the U.S. The charts are self-explanatory, but I've added a few notes to highlight some of the key points.

Here is a chart of total government debt, local, state and Federal. For decades we've been assured by the delusional alliance of the Keynesian Cargo Cult and self-serving politicos that "deficits don't matter." Is adding debt while gross domestic product (GDP), wages, etc. are basically flatlined sustainable forever? Deficits don't matter until they do, and that will likely be a Supernova Model event of sudden crisis and implosion. When Escape from a Previously Successful Model Is Impossible (November 29, 2012)

Let's add household debt to the total government debt. This doesn't change the trajectory of rising debt much, but it neatly illustrates the era of financialization and "deficits don't matter" which began in the early 1980s of "financial innovations" such as securitizing the bedrock of middle class wealth, the family home.

Now let's look at this total government/household debt as a share of the nation's GDP. This chart shows when the GDP has grown faster than debt, and when debt has grown faster than GDP.

When debt is truly productive, the economy grows faster than the debt. The brief periods when this has been true are marked in green--the late 1960s-early 1970s, and the dot-com era of 1995-2000.

The eras when adding debt does little to boost GDP, i.e. eras of diminishing return on additional debt, are marked in red. This is known as debt saturation: we keep borrowing and squandering the money on malinvestments, but the spending doesn't boost GDP. Meanwhile the debt we're piling up must be serviced, i.e. interest on the fast-rising debt must be paid, essentially forever.

The last chart shows that government and household debt has reached $179,000 per person in the U.S. For the past several years, we've heard pundits blathering on about the "great deleveraging" that's reduced the household debt burden, freeing up American consumers to borrow more, more, more.

The Great Deleveraging is shown here--yes, it's that thin slice of debt write offs. Debt has since resumed its inexorable rise.

That which is unsustainable will go away. That includes debt, malinvestments, currencies, deficits and yes, entire empires.