{"id":3188,"date":"2011-12-20T00:21:00","date_gmt":"2011-12-20T05:21:00","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=3188"},"modified":"2011-12-20T00:21:00","modified_gmt":"2011-12-20T05:21:00","slug":"the-path-to-recovery-how-to-bring-the-debt-binge-under-control","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2011\/12\/20\/the-path-to-recovery-how-to-bring-the-debt-binge-under-control\/","title":{"rendered":"The path to recovery: how to bring the debt binge under control"},"content":{"rendered":"

The debt binge since 1975, fueled by an easy-money policy from the Fed, has landed the US economy in serious difficulties. Wall Street no doubt lobbied hard for debt expansion, because of the boost to interest margins, with little thought as to their own vulnerability. There can be no justification for debt to expand at a faster rate than GDP — a rising Debt to GDP ratio — as this feeds through into the money supply, causing asset (real estate and stocks) and\/or consumer prices to balloon. What we see here is clear evidence of financial mismanagement of the US economy over several decades: the graph of debt to GDP should be a flat line.<\/p>\n

\"US<\/p>\n

The difference between domestic<\/em> and private<\/em> (non-financial) debt is public<\/em> debt, comprising federal, state and municipal borrowings. When we look at aggregate debt below, domestic (non-financial) debt is still rising, albeit at a slower pace than the 8.2 percent average of the previous 5 years (2004 to 2008). Public debt is ballooning in an attempt to mitigate the deflationary effect of a private debt contraction. Clearly this is an unsustainable path.<\/p>\n

\"US
\n<\/a>
\nThe economy has grown addicted to debt and any attempt to go “cold turkey” — cutting off further debt expansion — will cause pain. But there are steps that can be taken to alleviate this.<\/p>\n

\"Public<\/p>\n

If private debt contracts, you need to expand public debt — by running a deficit — in order to counteract the deflationary effect of the contraction. The present path expands public debt rapidly in an attempt to not only offset the shrinkage in private debt levels but also to continue the expansion of overall (domestic non-financial) debt levels. This is short-sighted. You can’t borrow your way out of trouble. And encouraging the private sector to take on more debt would be asking for a repeat of the GFC. The private sector needs to deleverage but how can this be done without causing a total economic collapse? The answer lies in government spending.<\/p>\n

Treasury cannot afford to borrow more money if this is used to meet normal government expenditure. Public debt as a percentage of GDP would sky-rocket, further destabilizing the economy. If the proceeds are invested in infrastructure projects, however, that earn a market-related return on investment — whether they be high-speed rail, toll roads or bridges, automated port facilities, airport upgrades, national broadband networks or oil pipelines — there are at least four benefits. First is the boost to employment during the construction phase, not only on the project itself but in related industries that supply equipment and materials. Second is the saving in unemployment benefits as employment is lifted. Third, the fiscal balance sheet is strengthened by addition of saleable, income-producing assets, reducing the net public debt. Lastly, and most importantly, GDP is boosted by revenues from the completed project — lowering the public debt to GDP ratio.<\/p>\n

Public debt would still rise, and bond market funding in the current climate may not be reliable. But this is the one time that Treasury purchases (QE) by the Fed would not cause inflation. Simply because the inflationary effect of asset purchases are offset by the deflationary effect of private debt contraction. Overall (domestic non-financial) debt levels do not rise, so there is no upward pressure on prices.<\/p>\n

Infrastructure investment should not be seen as the silver bullet, that will solve all our problems. Over-investment in infrastructure can produce diminishing marginal returns — as in bridges to nowhere — and government projects are prone to political interference, cost overruns, and mismanagement. But these negatives can be minimized through partnership with the private sector.<\/p>\n

Projects should also not be viewed as a short-term, band-aid solution. The private sector has to increase hiring and make substantial capital investment in order to support them. All the good work would be undone if the spigot is shut off prematurely. What is needed is a 10 to 20 year program to revamp the national infrastructure, restore competitiveness and lay the foundation for future growth.<\/p>\n

There are no quick fixes. But what the public needs is a clear path to recovery, rather than the current climate of indecision.<\/p>\n","protected":false},"excerpt":{"rendered":"

The debt binge since 1975, fueled by an easy-money policy from the Fed, has landed the US economy in serious difficulties. Wall Street no doubt lobbied hard for debt expansion, because of the boost to interest margins, with little thought as to their own vulnerability. There can be no justification for debt to expand at … <\/p>\n

Continue reading “The path to recovery: how to bring the debt binge under control”<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[45,49,34],"tags":[956,1082,1842,2771,2808],"class_list":["post-3188","post","type-post","status-publish","format-standard","hentry","category-debt-levels","category-economic-theory","category-us-canada-countries-regions","tag-debt","tag-domestic-non-financial-debt","tag-infrastructure-spending","tag-private-non-financial-debt","tag-public-debt"],"yoast_head":"\nThe path to recovery: how to bring the debt binge under control - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The path to recovery: how to bring the debt binge under control - the patient investor\" \/>\n<meta property=\"og:description\" content=\"The debt binge since 1975, fueled by an easy-money policy from the Fed, has landed the US economy in serious difficulties. 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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\u2026","rel":"","context":"In "Debt Levels"","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":3904,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/03\/21\/us-public-debt-growing-at-unsustainable-rate\/","url_meta":{"origin":3188,"position":1},"title":"US public debt growing at unsustainable rate","author":"Colin Twiggs","date":"March 21, 2012","format":false,"excerpt":"We often blame Fed monetary policy for the GFC, with interest rates at exceptionally low levels leading to \"Greenspan's bubble.\" Treasury was just as culpable, however, with the massive 2004-2005 surge in public debt flooding the market with liquidity. The repeat in 2008-2011 was more justifiable: the spike in public\u2026","rel":"","context":"In "Debt Levels"","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":5623,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/10\/01\/steve-keen-on-post-keynesian-macroeconomics\/","url_meta":{"origin":3188,"position":2},"title":"Steve Keen on Post-Keynesian Macroeconomics","author":"Colin Twiggs","date":"October 1, 2012","format":false,"excerpt":"Prof Steve Keen's presentation to the UMKC Post Keynesian conference in 2012. http:\/\/youtu.be\/UzxQcTOs4JA Paul Krugman would argue that Income = Aggregate Demand when the economy is in equilibrium. Steve Keen shows that the economy is not in equilibrium when aggregate debt is rising or falling: Income = Aggregate Demand +\u2026","rel":"","context":"In "Debt Levels"","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/img.youtube.com\/vi\/UzxQcTOs4JA\/0.jpg?resize=350%2C200","width":350,"height":200},"classes":[]},{"id":41226,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/03\/14\/volatility-how-does-australia-compare\/","url_meta":{"origin":3188,"position":3},"title":"Volatility: How Does Australia Compare?","author":"Colin Twiggs","date":"March 14, 2023","format":false,"excerpt":"Last week we covered suppression of volatility in complex systems and showed how Fed suppression of interest rate has destroyed productivity, causing debt to grow at a faster rate than GDP. Quick Recap The ratio of federal government debt increased to a precarious 121% of GDP at the end of\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"Federal Government Debt & Non-Financial Private Debt\/GDP","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-07-debt-gdp.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-07-debt-gdp.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-07-debt-gdp.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":9481,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/03\/12\/high-public-debt-leads-to-prolonged-recessions\/","url_meta":{"origin":3188,"position":4},"title":"High public debt impedes recovery","author":"ColinTwiggs","date":"March 12, 2014","format":false,"excerpt":"This graph from a FRBSF paper Private Credit and Public Debt in Financial Crises, by \u00d2scar Jord\u00e0, Moritz Schularick, and Alan M. Taylor, perfectly illustrates how high public debt levels impede the ability of an economy to recover from a financial crisis: Figure 3....... shows that high levels of public\u2026","rel":"","context":"In "Debt Levels"","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"Recessions and Public Debt Levels","src":"https:\/\/i0.wp.com\/www.frbsf.org\/economic-research\/files\/2014-07-3.png?resize=350%2C200","width":350,"height":200},"classes":[]},{"id":3345,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/01\/25\/whats-going-on-with-debt-in-u-s-real-time-economics-wsj\/","url_meta":{"origin":3188,"position":5},"title":"What\u2019s Going on With Debt in U.S.? – Real Time Economics – WSJ","author":"ColinTwiggs","date":"January 25, 2012","format":false,"excerpt":"The chart shows clearly the build up of debt heading into the bust, and the subsequent deleveraging. Overall public and private debt, by this measure, peaked at 302% of GDP in the first quarter of 2009. Since then, it has fallen to 279% as the economy has grown and some\u2026","rel":"","context":"In "Debt Levels"","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/3188","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=3188"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/3188\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=3188"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=3188"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=3188"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}