![\"Domestic](\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2011\/201112_debt_gdp.png?w=525&ssl=1\")
<\/p>\nThe cause of current anemic GDP growth is evident from the recently-released Z1 Flow of Funds report. GDP recovery from 2008\/2009 is accompanied by only a modest rise in Domestic (Non-Financial) Debt — which is now constraining further growth.<\/p>\n
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Domestic (Non-Financial) Debt is made up of Government Debt and Private (Non-Financial) Debt — which can be further broken down into Household and Corporate debt. The Financial sector is excluded as it mainly acts as a conduit, channeling debt to other sectors of the economy. We can see below that Private (Non-Financial) Debt contraction was far greater than overall Domestic (Non-Financial) Debt. What saved the economy was a sharp spike in Government Debt in 2009, offsetting the fall. The massive fiscal deficit may have left a public debt hangover, but failure to offset the contraction in private borrowing would have had more serious consequences: a GDP collapse similar to the 1930s.<\/p>\n
![\"Index\"](\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2011\/201112_debt_house_priv_dom.png?w=525&ssl=1\")
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Resumption of corporate borrowing has dragged Private (Non-Financial) Debt growth into positive territory but growth remains anemic and households continue to de-leverage. Cessation of government borrowing would cause a fall in overall Domestic (Non-Financial) Debt growth to near zero and a sharp fall in GDP. The economy needs to be gradually weaned off stimulus spending in order to minimize disruption to growth. And not before Private sector borrowing recovers. We need a clear deficit-reduction plan, over 5 to 10 years, in order to restore corporate sector confidence and encourage new capital investment.<\/p>\n
The only alternative is further quantitative easing (QE3), where continuous deficits are funded by borrowing from the Fed. But that poses a whole new set of problems — and could lead us back to square #1.<\/p>\n","protected":false},"excerpt":{"rendered":"
The cause of current anemic GDP growth is evident from the recently-released Z1 Flow of Funds report. GDP recovery from 2008\/2009 is accompanied by only a modest rise in Domestic (Non-Financial) Debt — which is now constraining further growth. Domestic (Non-Financial) Debt is made up of Government Debt and Private (Non-Financial) Debt — which can … <\/p>\n