Total United States Debt to GDP - Government, Business, and Household
June 9, 2021 - Debt
FAQ
1. Why does the total debt in an economy matter?
The more debt, the more fragile the economy. Government debt makes it harder for the government to support the economy during recessions. Household debt makes it harder for consumers to keep up spending during recessions. Business debt makes it harder for companies to withstand revenue declines during recessions. The result is that recessions can become more severe as there is less support for the economy.
2. What is the impact of adding debt to the economy?
The more debt that is added stimulates the economy, but then later is a drag on the economy as debt payments have to be made. It can be a further drag if the debt is then paid off.
3. Why not just keep adding debt?
Eventually, the economy will be in such a fragile state that lenders may only lend at very high-interest rates. High rates can make the debt unsupportable and lead to a financial crisis with forced deleveraging.
4. Could a forced deleveraging happen to the US?
With Greece, the money was borrowed in a currency not in control by the government, the Euro. So they had a deflationary forced deleveraging. The US government is borrowing in dollars. So rather than suffer a 1930s style deleveraging, the government has the option of allowing inflation to make the debt smaller by producing more dollars.
5. What do you think will happen?
In the run-up to the housing crisis in 2008, households substantially increased mortgage debt. Since then, the government has stepped in to support the economy. Businesses have also been taking advantage of the low-interest rates by adding debt. This process could probably go on a lot longer. Japan has a government debt to GDP of 255%. The longer it goes on, the more fragile the economy becomes. Once the deflationary pressure of China subsides, and this could still be decades away, interest rates may rise as China buys less US debt to depress its currency. Higher rates could create a deleveraging process that the US government and the Federal Reserve may try to cushion. This cushioning then could lead to sustained high inflation.