This notion of incremental debt engendering a smaller and smaller amount of incremental GDP growth has been around for over a decade.
We have a debt problem. That’s clear. And it’s going to be a significant drag on GDP going forward for many years. However…
There are some subtle issues – I don’t want to use the word “problems” – with the analysis presented in the article.
First, you have to distinguish between causation and correlation. Did increasing debt CAUSE GDP to grow over the last few decades or did GDP grow IN SPITE OF the increasing debt load? My belief is that the growth in debt DID contribute to GDP growth – but to what extent is impossible to measure. Part of the relationship is certainly correlation. For example, there are plenty of examples throughout history (both from the US and other countries) where debt has declined dramatically (from very high levels) and GDP has grown strongly over the period in question. So, my point is that I think we can safely say that (1) We have way too much debt, and (2) Paying down that debt will be a drag on GDP for some time to come. What we cannot say with any certainty is that deleveraging will bring on another deep recession or a depression (although anything’s possible).
Second, deleveraging is going to come from several sources: (1) defaults (charge offs), (2) quantitative easing (money printing – another form of default, you could argue), (3) businesses and households substituting debt with equity, and (4) retained earnings. We are seeing ALL of these happening every day.
Again, the debt load is a big problem. (And the main graph in the article does tell an important story.) But it isn’t necessarily a problem that leads to us all living in cardboard boxes in a few years.
