Total domestic, nonfinancial debt is 248% of GDP - 41,431.9 B in debt to 16,695.7 B in GDP (a). This is the highest or one of the highest debt/GDP ratios in our recorded history. We cannot service such indebtedness. Continued debt forgiveness with concomitant losses to creditors is unavoidable. This annual ratio has stayed above 247% since 2009 in spite of a growing GDP and a trillion dollar reduction in household mortgages with over four million foreclosures (b). Federal debt has seen the most growth, growing from 5.1 trillion in 2007 to 12 trillion at the end of September. Yet, all areas but household mortgages have increased debt. Note - this discussion is of nonfinancial debt and excludes financial debt such as debt the federal government owes itself in the Social Security trust funds.
Source: http://www.federalreserve.gov/releases/z1/ See the 12/09/2013 release pages 5 and 12.
Corporate debt increased 1,910.1 B from the end of 2009 to 9/2013. During the same period American corporations purchased 1,880 B in treasury stock per Birinyi and Bloomberg data (c). From a macro perspective, our corporations replaced 1.9 trillion in MV equity with 1.9 trillion in debt. It is true this increased current earnings per share and selling shareholders did well given rising, high stock values, but remaining shareholders received overvalued treasury stock and are stuck with excessive debt which will reduce future earnings when interest rates rise -- more proof their treasury stock was overvalued.
Our debt will continue to be a drag on our economic growth. In the past we have inflated GDP to reduce our debt/GDP ratio and paid back our debt with inflated dollars. This may not be as acceptable to creditors as it was in the past.
Inflation -- has been 1.2% over the last year well below the Fed's latest general goal of 2.0%. The Fed is normally concerned with keeping inflation low but is currently, allegedly more concerned with the possibility of deflation.
Source: http://www.bls.gov/news.release/pdf/cpi.pdf
We're not going to get cost push inflation from higher costs in our resource/factor markets until interest rates rise and, of more importance, labor costs rise. Though labor costs are shrinking as a percentage of national income, labor costs at 64% remain a much higher percent of national income than the cost of financial capital (d).
GDP gap -- is the gap between a full employment GDP and the current GDP with current unemployment. Full employment is defined as an unavoidable 4% unemployment. November unemployment was reported at 7.0% and is in line with the Fed's QE target, but this measure only counts people still looking for work and does not measure underemployment. We have been in an extended downturn. Labor market participation is near a 35 year low at 63.0%. I submit the current GDP gap is much more than the difference between 4% and 7% unemployment, and we need a full employment GDP to maximize our ability to pay our debts.
Source: http://www.bls.gov/news.release/empsit.nr0.htm 12/06/2013 report
Economics theory 1A/1B
Free market -- is a lie. We are a corrupt monopoly/ oligopoly capitalist system not a free competition capitalist system which would allow competitive effects to self regulate markets. The government regulation we most need is anti-trust regulation to reestablish free competition by breaking up our monopolies/oligopolies and the too big to fail. Competition is the only way markets can self regulate. Such self-regulation would preempt the need for other more onerous, micro-managing regulations.
Liquidity trap -- In classical theory savings and investments always moved toward equilibrium. Given the correct interest rate, savings would equal investments. Keynes made the case that there was no such natural equilibrium. Savers and investors were different people with differing motivators. During down times savings would increase to cover future uncertainties. The trap was that increased savings/liquidity was funded by decreased consumption spending which led to reduced economic activity with concomitant uncertainties leading to increased savings in a continuing, viscous circle.
Keynes reasoned that savings would lead to lower interest rates but not necessarily increased investment. Business investors must consider all costs and benefits in a business investment, not just interest rates, and during down times potential profits are low. Regardless of how much or how long the Fed lowers interest rates, low rates will not necessarily increase job-creating, business investment.
Keynes theorized a solution in which government could replace private business investment with public investment. Deficit spending could lead to increased economic activity in a beneficial circle which would eventually create increased taxes to pay off the deficit debt. It worked. Deficit spending helped make the bad times better. It also made the good times better leading to unending deficits and high debt. This outcome is not what Keynes intended. Keynes is not responsible for our fiscal irresponsibility.
Public investment, in spite of high debt, could still be
used to stimulate our economy and meet long neglected public needs like our
crumbling infrastructure.
Wealth effect -- is the increase in consumption spending attributable to the perception that one is wealthier. It is a double-edged sword in that consumption spending will decrease from the perception one is poorer. There was a positive wealth effect from the increase in home prices before their peak in July 2006. There was a negative wealth effect from the drop in home prices after their peak. We now appear to have regained the net worth we lost in the great recession. (Source: 12/09 Z-1 release pages 113-115.) I submit this is bubble wealth. Our wealth was bubblicious before the Great Recessions GRs I, and it is bubblicious now before the Great Recessions GRs II. Just like our plutocrats, in order to recognize this bubble wealth, you will have to sell your bubble assets well before the GRs II.
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