Yawning Debt Trap Proves the Great Recession is Still On

by David Haggith, The Great Recession:

While David Stockman stated early this year with resolute certainty that the debt ceiling debate would blow congress up and send the nation reeling over the financial precipice, I avoided jumping on the debt-ceiling bandwagon. While I was convinced major rifts in the economy would start to show up in the summer, I was not convinced they would have anything to do with the debt ceiling debate. If there is anything you can be certain of this in endless recovery-mode economy, it is that the US will just keep pushing its bags of bonds up a hill until it can finally push no more. So, I figured another punt down the road was more likely.

The Debt Ceiling Debate that Didn’t Happen

The reason I didn’t think that debate would blow apart is that Republicans have more than once experienced the political reality that comes from taking the nation to the brink of default or of shutting down government. Each time that kind of thing has happened, it has hurt Republicans far more than it has hurt Democrats. I doubted establishment Repubs (the majority) had the stomach to take us through another credit downgrade, though I’ve noted such an event was possible.

Unsurprisingly to me, then, Congress did the only thing it seems to be capable of any more and just kicked that can a little further down the road with hardly a kerfuffle about it. Hurricane Harvey made things a lot easier for congress to kick the can again by providing a good excuse to dodge that unwanted debate on the basis of massive human suffering that truly did need tending to. Much-talked-about government shutdown put off for a better time

The debate was entirely avoided even as the national debt broke over the $20 trillion mark this summer, keeping US debt at more than 100% of GDP, which is the stratosphere we’ve been in since 2011.

A group of progressive economists affiliated with the University of Massachusetts predicted in 2013 that a debt burden [that reaches 90% of GDP for five years] would result in an annual growth rate of just 2.2 percent, which means economic stagnation. (Reason.com)

We’re already well past that five-year marker. Not surprisiing, then, that the Congressional Budgeting Office expects economic growth to stay at 1.8% through 2027.

George Will observed that the difference between 2 percent annual growth and 3 percent annual growth is the difference between a positive, forward-looking country in which politics recede from everyday life and a Hobbesian nightmare in which interest groups slug it out over a barely growing pie. Note that he was talking about 2 percent annual growth, which seems positively aspirational in the 21st century. (Reason.com)

Nation caught in a debt trap

The biggest (or most likely threat) from the national debt is what economists refer to as a debt trap. The nation can be considered caught in a debt trap if the Federal Reserve loses the ability to raise interest because the rise in interest would immediately drown the economy or cause the nation to default on its debt. So long as interest rates are low, the US government can afford its huge debt; however, we are now at a point where, if interest rates rise to historically normal levels, we’re in big trouble. That means we are in, at least, enough of a debt trap that interest rates can never be allowed to normalize.

Several debt traps are shaping up besides the one formed from government debt. One is the corporate debt trap, where corporations have kept earnings per share high by taking out huge piles of debt year after year to buy back shares. If businesses have to refinance all this debt at a higher interest rate, they could be in big trouble. We hear over and over that today’s high stock valuations are justified by the fact that earnings keep growing; but it is not top-line revenue that is growing, it is earnings per share, and most of that “growth” is due to corporations taking out debt in order to buy back shares and thus reduce the number of shares over which those earnings are divided. If interest rises, corporations will no longer be able to afford to buy back shares on debt, and that support for the market will crash. They might not even be able to afford to pay off the debt they have already taken on. So, there is another reason the Fed can never allow interest to normalize by historic standards.

Yet another debt trap now exists in personal credit where many households have reached peak debt. Household debt maxed out this summer above the level it had hit at the peak of the 2007 credit bubble — one more of those big signs of trouble in the economy that I said we could anticipate seeing by the time summer rolled around.

Income, in the meantime, has not improved in order to support this higher level of debt, now at a level that already proved unsupportable in the past. That puts the US back in the unstable position where households that already carry all the debt they can afford can be suddenly sunk if they have any variable-interest credit cards or an adjustable-rate mortgage. That is yet another reason the Fed can never allow interest rates to normalize.

Harvard economist Kenneth Rogoff warns that a sudden spike in interest rates is the biggest threat to the global economy…. People have got used to ultra-low interest rates….  “If something was to happen that pushes interest rates up, we could see a lot of soft spots — places where there is high debt — start to unravel,”Rogoff said. (NewsMax)

It should be no surprise, then, that the number of credit-card accounts moving into delinquency swung upward for the third consecutive quarter this summer, a nine-month trend not seen since the bottom of the 2009 crisis. Yet another summertime crack in the economy — one that is not large yet but will become large quickly if the Fed allows interest to move upward any more than it already has.

In short, the national economy is riddled with high debt everywhere, which leaves every area of the economy with little wiggle room. So, the one certain thing about the huge piles of debt that have built up in the last few years is that we have reached the point where they are actually starting to box the Fed in to where raising interest to combat inflation will not be possible because it will cause damage throughout the economy. The tide has already closed in around the Fed to where it can no longer move to normalize interest in any direction without going deeper into rising waters.

S&P’s chief economist, Beth Ann Bovino, wrote recently that “failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase any of the gains of the subsequent recovery.”

The Great Recession is still with us

If you want to get a sense of how the debt trap affects the nation’s real net worth, consider what the total gross domestic product of the United States looks like if you subtract all that debt that we’ve added each year in order to create that product:

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