A High Price to Pay for Prosperity

By Dr. Duru written for One-Twenty

February 8, 2006


The administration has bragged about how well it has resuscitated the U.S. economy from the brink of disaster in 2001. And at first blush, the numbers are indeed impressive. Despite much skepticism, from me as well, job growth has been sufficient to drive the unemployment rate back to levels not seen since the bubble days. GDP growth has been on a tear, running at a clip of 3 to 4%, excluding the sudden weakness of the fourth quarter in 2005. All this success is of little solace to the folks who continue to lose jobs to outsourcing or factory closings, or to the majority of folks who have seen little to no inflation-adjusted wage growth, but, on balance, the economy seems to be clicking pretty strong. I have even been forced to admit that the economy is strong over the past few years!

However, I saw a chart on last Friday's "Market Monitor" segment of Nightly Business report that brought the whole picture into light. John Hughes of Quantum Capital Management put up a chart from the Federal Reserve showing total debt as a percentage of GDP. The percentage of our economy that belongs to debt is back to historic levels. In 1929, at the time of the big stock market crash that ushered in the Great Depression, total debt spiked up to 303.1% of GDP. It quickly dropped to 100-120% and stayed near there from 1945-1980. But since 1980, this percentage has risen steadily and is now at a new highs at 312.1%! I do not believe anyone knows for sure how much higher this number can go without bringing dire consequences, but we can be sure that the general prosperity America has achieved in the last 25 years has been built on borrowed funds (and time?!?). The recent era of historically low interest rates, massive tax cuts, and a surge in federal spending have further reinforced the imbalance between debt and wealth in the United States. These numbers seemed so incredible that I searched and searched for confirmation. I could not track down the original source from the Federal Reserve, but I did find a similar chart, albeit with slightly different numbers, at financialsense.com. The title of their chart is "Total Credit Market Debt (All Sectors) As % of U.S. GDP" and the quoted source is different. I also found several references to the growth of the public debt that shows we are now reaching levels not seen since the years right after World War Two.

I have often stated that I marvel at how Americans, government included, are always able to find ways to spend and consume and to little apparent consequence. Well, these numbers show in stark relief the high price we are currently paying for all our economic growth and "propsperity." The United States has obviously survived previous debt bubbles and lived to tell about it, but we must actively wonder whether we understand the scope of the problem and whether we are prepared to either solve it or deal with the potential fall-out. The bears have long argued that the price to pay for delaying the correction of this debt bubble will be very high. We should not expect a depression - at least assuming we have learned some lessons from the past. But the task ahead for the new Fed Chair Ben Bernanke is huge indeed. Greenspan handed him one big bill, and I doubt there is enough ink and paper in the Treasury's printing presses to pay this one off.

Be careful out there!

DrDuru, 2006