Has the Thief Been Caught?


Since we originally penned this post, the premise we put forward – that was a novel idea to us – seems to be increasingly validated by others. This is likely a case of focused attention. Once one becomes aware of something novel to one’s experience, one begins to see it everywhere. So here’s the post which we will probably update as supportive material becomes known.

Stealing (Growth) from the Future

Recall in “Understanding Debt“, we described how debt steals income from the future to be spent now. Another way of saying this is economic growth, GDP, is moved from the future into the present. Zero Hedge reported today: “ECRI’s Achuthan Sticks To His Guns: The US Recession Still Is Happening“. The comment that got our attention was:

He ends on a less than optimistic note pointing out that the pace of each economic recovery since the 1970s has been getting lower and lower and cycle volatility has increased helping to confirm his recession-is-happening call.

In other words economic recovery after each recession has been getting slower. So what has been happening since the 1972 recession?

Consider this chart from Ed Hall at brillig.com:

Beginning in the mid to late 1970s, the growth of US debt has clearly been in an exponential phase. Debt servicing costs have been rising, a trend that reflects in lower private sector consumption and growth.

We would also note that under Greenspan in the early 2000s, interest rates have been actively suppressed by the Fed. This creates a short term reduction in interest payments. Once this reduction is priced in, the expansion of interest payments can continue , but without the possibility of future relief of further reduction in interest rates. There are undoubtedly other factors affecting the shape of this chart and they may be dominant factors. Smoothing out the blip of the 2000s, the chart remains exponential.

We simply suggest that debt growth is the thief of economic growth from the future, argued by a correlation with this chart.


A friend, JR, sent us the following graphic which we have copied from Calculated RISK:

jobless recovery

If we look at the last four recessions beginning with 1981, we see that the duration of the period of job recovery has increased with each successive recession. A linear projection of the recovery phase suggests we have at least another 2.5 years before we get to the per-recession employment levels. Also, this period from 1981 corresponds to the steepest part of the debt graph shown above.

As a note, we have pointed to a correlation among debt, economic recovery and job market recovery. We also note correlation does not imply causation. Both need to be confirmed by a proper statistical analysis of the data.

Supporting our notion that excessive debt is reducing growth rates is the article Quarterly Review and Outlook, Fourth Quarter 2011 by Van Hoisington and Lacy Hunt. They note:

deficit spending actually retards GDP growth … [resulting in] an economy saddled with a higher level of debt, with more of its productive resources diverted to paying the non-productive elevated level of interest payments.

We also find support in the article from McKinsey & Company titled “Working out of debt“. The authors note that Historical experience suggests that excessive debt is a drag on growth and that GDP rebounds in the later years of deleveraging.

Addendum: 20120504

We add this link to part of an excellent series on US debt by the Heritage Foundation: The Unabridged And Illustrated Federal Budget For Dummies – Part 3: Debt & Deficits. We leave it to the reader seeker more in-depth insight to peruse this document.

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