Our problems today stem from too much debt, both personal and governmental. When enough of the populace is overindebted, they become conservative in spending. When corporations see that, they become conservative as well, and cut back on production. The same is true with governments. As governments get more indebted, people begin to think they won’t spend as much in the future, which is a reasonable assumption.
But what do the pundits suggest? Borrow more. If you only would borrow more, and allocate the money to our favored projects, things would improve. But that is more of the “hair of the dog that bit you” reasoning. More debt does not solve the problem of too much debt.
In general, the more of the economy that we hand off to the government, economic growth will be less. The government rarely grows anything, except itself.
I realize in the short-run that reductions in the growth of debt, much less reductions in debt will be viewed negatively by many. The question becomes whether you want a solution, or you want to continue the disease, and hope for a miracle.
This problem is not limited to the US. It extends to the Eurozone and China, and indirectly to the rest of the developed and semi-developed world. In the Eurozone, the ECB and EFSF buy the debts of the weakest nations in order to back the Euro. Imagine the Fed buying Puerto Rican and Californian bonds. Ugly, and I hope the Fed does not become more imaginative. It is too speculative already.
The Eurozone is transforming what was a fringe problem into a core problem and CDS spreads of Germany and France are greater than those of the UK, which has its own currency. If the Eurozone were a nation, it would be in roughly the same shape as the US, which means not good.
As for China, the government forces loans that are not economic on the banks. There are many projects that seem to have no economic purpose, but might have political purpose. Why build ghost cities? Why build a highway to Xingjang, and plan a model city there?Â For the latter it is to control the Uighurs; for the former, I am not sure, aside from distorting GDP statistics.
China also has its issues with owning US debt. They have to own US debt to keep their currency cheap for exporting. This is just another way that China discriminates against their consumers in favor of exporters who are political cronies.
Coming back to the US, the Fed encouraged more debt todayby saying that financing rates would remain low for two years. That may push up asset prices, and allow the highest quality borrowers to borrow more, but is useless in stimulating the economy, because credit spreads do not respond to the Fed when the economy as a whole is overlevered.
The world is led by debt junkies who think that debt doesn’t matter. They are leading us to a greater crisis where the only thing that does matter is debt, and for political reasons, some governments will not be willing to pay in full.