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US Can Grow Without Higher Debt

The amount of debt held on the world’s balance sheets, whether they are governments, individuals, businesses or banks, has people worried.

Simon Willms | Stone | Getty Images

Ian Shepherdson, the chief US economist at High Frequency Economics says his clients and readers keep putting forward the following view of the world and its debt pile: Fueled by debt, the US economy has become increasingly bad at producing actual goods and services and without debt will fail to hit growth rates that will drive employment and prosperity.

Shepherdson is not buying this scary scenario.

“We think the picture is much less scary than it appears at first sight, and that you have to look beyond the headline numbers to understand what really happened, and what it might mean for the future” said Shepherdson in a research note on Monday.

“Gross household debt has risen by a factor of 3.7 since 1952, while non-financial non-farm corporate debt has risen by a factor of 2.5. Financial businesses have increased their gross debt by an eye-popping 36 times, but remember that the vast bulk of these liabilities have arisen as counterparts to types of financial assets which did not exist in 1952.”

It should not be taken for granted that all this debt being taken on has been the key driver of growth though, according to Shepherdson.

Property Debt the Problem

“The popular idea of a smooth, endless road to debt purgatory is just not borne out by the data,” said Shepherdson, who says debt surged in the 1980s following two decades of stability before growth eased in the 90s before surging again in the 21st century.

What really matters for Shepherdson is the nature of debt growth, and he says debt taken against property is the key indicator of trouble.

“Nothing breeds debt faster than the idea that you can borrow some money, dig a hole in the ground and then persuade someone else to buy it from you at a higher price, using more borrowed money,” he said.

“It is so much easier than working for a living, building a real business or inventing something new, which is why it is so appealing when money is cheap and why it goes so spectacularly wrong when the money dries up,” he added.

Pointing to the tech bubble, when there was no significant credit multiplier, Shepherdson makes the point that the subsequent recession of 2001 was relatively mild, something that could not be said when the credit crisis hit.

Since the 2009 lows US consumers and businesses have been deleveraging and the health of both domestic and corporate balance sheets is supported by the 2-year recovery in stocks following the March lows.

“The lesson of all this, then, is that the US economy can grow without accumulating incremental net debt as long as it avoids another property boom. Given the state of banks we think it is a safe bet for the current cycle, and we remain optimistic that the US is set to surprise just about everyone with its vigor over the next few years,” said Shepherdson.

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