Is There a Government Debt Problem?

Federal debt in most industrialized countries has increased quite a bit since 2008. Is this a problem going forward? Lets dig into this a bit…

Lets start with the US debt-to-GDP ratio 1960–2019:

Obviously, it exploded due to the last financial crisis, which decreased tax income and increased government spending. Throw in the general detaxation of the Trump Administration plus increases in spending, and indeed you get a lot of debt due to repeated deficits (deficits are the annual shortfall, while debt is the accumulation of deficits over the years).

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No Inflation No Problem

When you read market commentators and “analysts”, they keep talking about “the debt” and “credit”: government debt, corporate debt, household debt, etc. They then say that “if interest rates increase, it will trigger defaults and rollover problems and more fiscal pressure”… and that would be the “Crisis of All Crises”… and they’re right. Except that in their logic, they have an important hypothesis: that interest rates will indeed increase! It’s not that simple!

The issue is that their fears of rising interest rates rest on the cause of rising interest rates, which is rising inflation… yet, here is the catch: there is NO inflation!

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Technology, Globalization, and Social Tension

There has been a quiet jobs revolution in the USA, which has become more acute since year 2000. Recessions are having a bigger and bigger impact on jobs, and income inequality has risen to levels unseen since the 1920s. Roughly 50% of total market income goes to 10% of the population, which was also the case in the 1920s.

Half the population brings home about 30 000$ or less, while costs for education, health, and housing have risen constantly and significantly more than wages. Note that is a normal market mechanism: demand increased more than supply for these “goods and services”, so the price increased. We may fully acknowledge that this decentralized market mechanism works well to avoid allocative problems, but these markets are special, as they provide an edge for the ones who access them and cause self-reinforcing feedback loops that perpetuate and accentuate inequality of income and of opportunity (which is more serious).

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