Still in Debt but Looking Better
The Cornerstone June 2012
We have a lot to look forward to this summer and fall. Inflation is staying low by the fall of the euro and the rise of the U.S. dollar. This lowers commodity prices (including gas at the pump), putting more money in consumers’ pockets and when you put more money in consumer’s pockets, they tend to spend it. With consumer confidence now closing in on its highest level since late 2007, I remain optimistic.
Everyone knows America has too much debt. What they don’t know is that things are getting better, not worse. Little by little, our economy is reducing its debt burden, slowly repairing the damage caused by 10, 20 or 30 years of excess. Total domestic debt as a share of the economy has declined for 12 quarters in a row after surging over the previous decade. When you hear the pundits and politicians screaming about debt every afternoon, keep in mind that it was excessive private debt, here and currently in Europe that led to our financial crises in 2008, and in *Europe today – not public debt. In fact, because the private sector has paid off, written off or dumped their debts on Washington, public debt has increased far more than it would have otherwise.
*Greece is unique in having a public sector that ran up spending while its private sector is rather conservative.
Economists who have studied the impact of indebtedness have found that low levels of debt are essential to growth, but that high levels of total outstanding debt can hurt an economy. Beyond that tipping point, adding on more debt will reduce growth over the long run, even if it inflates a bubble in the short run, according to Mohanty and Fabrizio Zampolli, economists for the Bank of International Settlements.
According to a study by McKinsey published earlier this year, U.S. households may have two more years of deleveraging left before their debts are sustainable again. If McKinsey is right, the U.S. economy may have to endure a couple more years of slow growth.
There are some summer news items we need to pay attention to:
The Supreme Court’s decision on the individual mandate portion of Obamacare will likely be announced within the next few weeks.
The July 1st European Oil Embargo on Iran.
Congress will have its fingers in the Debt Ceiling debate again.
Elections, elections, elections are going to be the theme.