Gold News

How We Got into this Mess

A look at how the US has run up such a colossal debt burden...

WAY BACK in the 18th century, part of the world began an epic growth spurt – made possible largely by harnessing stored up energy in coal, and more importantly, in oil, writes Bill Bonner, founder of the Daily Reckoning.

By the late 20th century, the developed economies were far ahead of the rest of the world. But it was also at the point where they could no longer deliver high rates of growth. First, the marginal utility of further energy inputs – increasingly expensive ones – declined. 

Then, after the crises of the 1970s, in order to continue making material progress, households and governments leveraged their balance sheets. That is, they switched to debt financing, effectively consuming goods and services that should have been left to future generations. 

In 1949, when debt expansion in the US began, the private sector held only about 30 cents of debt per Dollar of GDP. By 2007, it had risen to $2.60 to every Dollar of GDP. And for every Dollar of extra GDP in the 1950s, it took only about $1.40 in credit. By the end of the cycle it took more than $5 in credit to do the same job. In other words, the marginal utility of further inputs of debt had the point where more debt was unwelcome as well as ineffective.

As demonstrated by Reinhart and Rogoff, when government debt hits 90% of GDP, growth rates tend to fall by 1%. This is just what has happened in the US and elsewhere. The US used to run at about 3% GDP growth per year. Now it is at 2%.

Meanwhile, the un-developed countries, those that have not fully taken up the energy-guzzling ways of their more advanced brethren, are able to grow at rates the US and Europe haven't seen in years. China, India and Brazil are all growing at more than 5% per year.

And while the middle class in the US is threatened with extinction, in other places it is booming. The Financial Times:

In the past 10 years, the income of the poorest 50% of the [Brazilian] population grew 68% in real per capita terms, while the income of the richest 10% grew 10%.

The trouble with America's 2% is that it isn't enough. Especially when much of it is phony, government-driven 'growth'. 

Today, one in six Americans is on Medicaid. One in four children is on food stamps. A record 44 million all together get food stamps. And 59% of Americans now get some of their money – one way or another – from the government.

Two percent GDP growth is not enough to absorb population growth and bring idle workers back into the active labor force. And it isn't enough to keep the US economy from dipping into recession from time to time; it is too near 'stall speed.'

More important, it is too low to allow the feds to 'grow their way' out of debt. Au contraire, the debt gets worse and worse...until the system blows up. The US deficit is about 10% of GDP. At 2% GDP growth, the debt is growing – net – by about 8% per year. Not getting this debt under control is 'suicide,' wrote Glenn Hubbard, former chairman of the Council of Economic Advisors to George W. Bush.

He's right. But so what? The present version of the US economy is going to die anyway. With growth depressed, the only thing that can be done is cut spending and raise taxes. Those things – if you could do them politically – would further depress growth rates...making the situation worse, and probably tipping the US into a Second Great Depression.

There. Is that clear? Hope so.

Get the safest gold at the lowest prices with BullionVault...

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals