Borrowing ‘Til We Drop: The Government Debt Bomb

U.S. consumers have finally stopped borrowing more money each quarter.  In fact, they’re actually starting to reduce their debts. 

If this process continues–if consumers get their debts down to reasonable levels–it will eventually make the country’s primary economic engine, shoppers, stronger and more sustainable.

Meanwhile, however, the economy is being sustained by one huge borrower that is taking on debt faster than it has anytime since World War 2: The government.  Government spending and government lending is REPLACING private spending and lending.  And if it wasn’t, the economy would have collapsed.

The government can’t keep borrowing like this forever, though, or we’ll become Argentina.  So the hope is that consumers and businesses will start borrowing BEFORE the government has to get itself under control.  The history of financial crises suggests that this transition is unlikely to be smooth.

This is why Peter Schiff, Marc Faber, and a host of other folks who stop short of predicting the end of the world are REALLY worried about the next several years. 

The happy possibility is that consumer and business spending will ratchet up enough that the government can cut back spending and borrowing with no one noticing.  The unhappy possibilities are that other countries will stop lending us money at dirt-cheap prices (interest rates skyrocket) or we will have to print so much money that the dollar collapses.

Here are some good points on debt from Floyd Norris in the NYT >

• "THE United States government is borrowing money like never before. The national debt rose by more than a third over a one-year period, far more than it ever did at any time since World War II."

• This money is being used to REPLACE consumer spending and private lending.   "Much of the government borrowing went to investments in financial institutions needed to keep them alive. Other hundreds of billions went to a variety of programs aimed at stimulating the private economy, including programs that effectively had the government pick up part of the cost for some home buyers and some auto buyers."

• "Total domestic debt — the amounts owed by individuals, governments and businesses — climbed just 3.7 percent from the second quarter of 2008 through the second quarter of this year. That is the smallest increase since the Fed started these calculations in the early 1950s."

• domestic debt declined in the second quarter, falling 0.3 percent to $50.8 trillion.

• Nonfinancial businesses increased their debt by just 1.3 percent.

• "Total household debt fell by 1.7 percent, and mortgage debt — the largest component of household debt — fell a bit more, at a 1.8 percent pace." This is the first recession on record in which mortgage debt has fallen.

Read Floyd’s whole article here >