August 3, 2011

U.S. Debt: Are we maxed out?

The answer is no per Nobel Prize winner Paul Krugman

This is what the Democrats better be ready to talk about when they start asking for an increase in spending as part of a stimulus package.

Click Image To Enlarge
In 1933 the total debt-to-GDP ratio peaked at 300% and started to decline. In the 3rd quarter of 2009 the ratio was 370%. The question is can we raise it any higher without destroying the economy before the stimulus has a chance to stimulate. I don't have the answer; however, it would be interesting to hear from Paul Krugman and Robert Reich on the subject. (Please read Paul Krugman's response to worries about our debt.)

This is what happened to the consumer before the housing bubble burst. He maxed out his borrowing power as his net worth decreased because of the drop in value of his home and then his income dropped. He had no place to turn. Is that where the country is today?

Addendum August 6, 2011

Paul Krugman makes a good argument in the New York Times that in the short and medium term we do not need to over react to our high level of debt.
Books On Topic
Parties, Rules, and the Evolution of Congressional Budgeting   The Conscience of a Liberal  The Accidental Theorist and Other Dispatches from the Dismal Science

2 comments:

  1. This is a chart of total debt - household, government, corporate. Government debt alone is less than 1/3 of the total.

    Households are trying to delever, so is the corporate sector, and it is mathematically impossible for all three sectors to delever simultaneously absent 1) inflation in the form of the govt printing money and giving it to people or 2) a massive increase in exports.

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  2. This graph is VERY misleading. Keep in mind that households owe money to businesses, businesses owe money to each other, and the government owes money to many people and businesses within the US. Here is simplification of what this blog is saying:

    If Jane owes Joe $1,000 and Joe owes Bill $1,000 the total debt in this three person economy is $1,000; not $2,000 as this blog would suggest!!!!!

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