I’ve said the U.S. is caught in a debt death trap. Monetary policy won’t get us out because the velocity of money, the rate at which money changes hands, is dropping.
Printing more money alone will not change that.
Fiscal policy won’t work either because of high debt ratios. At current debt-to-GDP ratios, each additional dollar spent yields less than a dollar of growth. But because it must be borrowed, it does add a dollar to the debt. Debt becomes an actual drag on growth.
The ratio gets higher, and the situation grows more desperate. The economy barely grows at all while the debt mounts. You basically become Japan.
The national debt is $27.8 trillion. A $27.8 trillion debt would not be an issue if we had a $50 trillion economy.
But we don’t have a $50 trillion economy. We have about a $21 trillion economy, which means our debt is bigger than our economy.
The debt-to-GDP ratio is about 130%. Before the pandemic, it was about 105% (the policy response to the pandemic caused the spike).
Already in the Danger Zone
But even a ratio of 105% is in the danger zone.
Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.
They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, debt becomes a drag on growth.
Meanwhile, we’re looking at deficits of $1 trillion or more, long after the pandemic subsides.
In basic terms, the United States is going broke. We’re heading for a sovereign debt crisis.
I don’t say that for effect. I’m not looking to scare people or to make a splash. That’s just an honest assessment based on the numbers.
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