Ten years on, the debt bubble is bigger than ever

US Capitol building © iStockphotos
US government debt is out of control

Debt, debt and more debt, says Jack Hough in Barron’s. In the fiscal year that ended in September 2017, the US government spent $655bn more than it gathered in revenues. A new fiscal year begins for the US government in October and its debt is ballooning. This year’s deficit could amount to $1trn.

The public-debt mountain will swell from $15.7trn at the end of September, or 78% of gross domestic product (GDP), to $28.7trn in a decade, or 96% of GDP.

There is “no clear milestone” to mark the moment “a country loses control of its finances”, says Hough. But debt should be contained at a manageable percentage of GDP, and “the opportunity for that is slipping”. To hold the line at 78% of GDP over the next three decades would require finding immediate savings in the budget of $400bn over the coming year, rising gradually to $690bn by 2048. In contrast, last year the US spent $590bn on defence, and $610bn on all other discretionary items, such as health and transport.

The US public debt build-up is just one major element of a global problem: ten years after a financial crisis caused by too much debt, the world has an even higher debt load. The International Monetary Fund calculates that global borrowings (public and private) are worth 225% of GDP, up by 12% in the past ten years. China’s credit bubble alone is responsible for 43% of the rise in worldwide borrowings since 2007.

The problem is we have already exhausted all the tools to fight the fall-out from a debt-bubble bursting, as Ambrose Evans-Pritchard points out in The Daily Telegraph. There is no more room for major fiscal stimuli on either side of the Atlantic, while we have already gone down the money-printing route. The big economies “are skating on dangerously thin ice”.