by Erik McCurdy, Prometheus Market Insight
The negative economic impact of excessive debt on the US economy has been carefully researched and studied for many years.
In 2009, economists Carmen Reinhart and Kenneth Rogoff published their seminal analysis of the excessive debt phenomenon, This Time is Different: Eight Centuries of Financial Folly, demonstrating clearly that, once the excessive threshold is exceeded, additional debt hinders economic recovery rather than aiding it. Unfortunately, the US government continues to ignore this important lesson from history as it seeks to do just that, resolve an excessive debt problem with yet more debt. Predictably, the results of this strategy have been extremely poor as the economy continues to struggle. Until we address the debt problem directly, rather than ignore it, economic growth will continue to be restrained significantly. In theirlatest quarterly report, displayed below, economists Van Hoisington and Lacy Hunt review the excessive debt problem along with their accompanying outlook for the US economy.
Characteristics of Extremely Over-Indebted Economies
Over the more than two thousand years of economic history, a clear record emerges regarding the relationship between the level of indebtedness of a nation and its resultant pace of economic activity. The once flourishing and powerful Mesopotamian, Roman and Bourbon dynasties, as well as the British empire, ultimately lost their great economic vigor due to the inability to prosper under crushing debt levels. In his famous paper “Of Public Finance” (1752) David Hume, the man some consider to have been the intellectual leader of the Enlightenment, wrote about the debt problems of Mesopotamia and Rome. The contemporary scholar Niall Ferguson of Harvard University also described the over-indebted conditions in all four countries mentioned above. Through the centuries there are also numerous cases of less prominent countries that suffered a similar fate of economic decline resulting from too much debt as a percent of total output.
The United States has experienced four bouts of great indebtedness: the 1830-40s, the 1860- 70s, the 1920-30s and the past two decades. Japan has been suffering the consequences of a massive debt over-hang for the past three decades. In its first of three thorough studies of debt, the McKinsey Global Institute (MGI) identified 32 cases of extreme indebtedness from 1920 to 2010. Of this group, 24 were advanced economies of their day.
The countries identified in the study, as well as those previously cited, exhibited many idiosyncratic differences. Some were monarchies or various forms of dictatorships. Others were democracies, both nascent and mature. Some countries were on the Gold Standard, while others had paper money. Some had central banks and some did not. In spite of these technical and structural differentiations, the effect of high debt levels produced the clear result of diminished economic growth. Indeed, the fact that the debt impact shows through in these diverse circumstances is a clear indication of the powerful deleterious impact of too much debt. Six characteristics seem to be uniform in all circumstances of over-indebtedness in historical studies, and these factors are evident in contemporary times in the U.S., Japanese and European economies.
Six Characteristics
