Are U.S. Debt Levels Sustainable?

In his book, Conquer the Crash, Elliott Wave International President Robert Prechter noted that two things are required to produce an expansionary trend in credit (or its flip side, the assumption of debt):

The first is expansionary psychology, and the second is the ability to pay interest.

But, a shared mental state of confidence does not go on ad infinitum. And, a deceleration in the U.S. economy could cripple the ability of many borrowers to pay interest.

Thus, the setup would be in place for deflation.

As EWI sees it, an expansionary psychology may be nearing its limit.

Just read this excerpt from a Sept. 9 CNBC article titled, "Real US debt levels could be 2,000% of economy, a Wall Street report suggests":

The warnings about potential debt hazards come as the total federal debt outstanding has surged to $22.5 trillion, or about 106% of GDP. Excluding intragovernmental obligations, debt held by the public is $16.7 trillion, or 78% of GDP.

That latter total, considered to be more relevant as an economic burden, is likely to rise to 105% by 2028, according to Congressional Budget Office projections. However, the CBO notes that the numbers are subject to revision depending on how government policies play out.

Advocates for fiscal reform argue that the debt impact has indeed reached the point where action is necessary.

"Globally, we have become over-reliant on borrowing as a solution for everything. Political excuses abound for why it doesn't matter, which just clearly isn't the case," said [the] president of the Committee for a Responsible Federal Budget, a bipartisan committee of legislators, business leaders and economists that counts former Federal Reserve Chairs Paul Volcker and Janet Yellen among its members. ...

In its calculations, AB Bernstein pulls in debt from a variety of sources and compares it to GDP as follows:

  • 100% of GDP using federal, state and local government debt combined.
  • 150% for households and firms
  • 450% for financial debt, which carries "conceptual issues and risks," namely that debt held by financial firms often represents potential in a worst-case scenario involving various derivative instruments that can carry high notional levels that are unlikely ever to be realized.
  • 27% in trusts for social insurance programs.
  • 484%, which values all the promises from current social insurance programs.
  • 633%, which tallies up an "infinite horizon" of obligations for social programs, rather than just the traditional 75 years used in computations.

That total gets the debt load around the 2,000% mark ... .

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