US and UK on Brink of Debt Disaster
From: Bill Totten <shimog...@xxxxxxxxxxxxxx>
by John Kemp
Reuters (January 20 2009)
The United States and the United Kingdom stand on the brink of the
largest debt crisis in history. While both governments experiment with
quantitative easing, bad banks to absorb non-performing loans, and state
guarantees to restart bank lending, the only real way out is some
combination of widespread corporate default, debt write-downs and
inflation to reduce the burden of debt to more manageable levels.
Everything else is window-dressing.
To understand the scale of the problem, and why it leaves so few options
for policymakers, take a look at Chart 1, which shows the growth in the
real economy (measured by nominal GDP) and the financial sector
(measured by total credit market instruments outstanding) since 1952
{1}. In 1952, the United States was emerging from the Second World War
and the conflict in Korea with a strong economy, and fairly low debt,
split between a relatively large government debt (amounting to 68
percent of GDP) and a relatively small private sector one (just sixty
percent of GDP). Over the next 23 years, the volume of debt increased,
but the rise was broadly in line with growth in the rest of the economy,
so the overall ratio of total debts to GDP changed little, from 128
percent in 1952 to 155 percent in 1975. The only real change was in the
composition. Private debts increased (7.8 times) more rapidly than
public ones (1.5 times). As a result, there was a marked shift in the
debt stock from public debt (just 37 percent of GDP in 1975) towards
private sector obligations (117 percent). But this was not unusual. It
should be seen as a return to more normal patterns of debt issuance
after the wartime period in which the government commandeered resources
for the war effort and rationed borrowing by the private sector.^^^CB: The
post on the myth of the NewDeal's failure points to the fadfor saying the New
Deal failed.Part of the story is that it wasWar spending that ended the Great
Depression But much of the war measures 'were ,as here "Government
commendeeringof the private sector" . It worked.We need some commandeering of
theprivate sector like we did duringWWII when it worked. We like thatpart of
the New Deal especially. From
the 1970s onward, however, the economy has undergone two profound
structural shifts. First, the economy as a whole has become much more
indebted. Output rose eight times between 1975 and 2007. But the total
volume of debt rose a staggering 20 times, more than twice as fast. The
total debt-to-GDP ratio surged from 155 percent to 355 percent.
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