For those on the left or right, Tea Party or Coffee Party, these are economic facts. They are trivially reducible to third grade arithmetic. The fundamental equation of GDP is taught in your first formal economics exposure, no matter where you have it (in High School, College, or right here on The Ticker.)
The turn-down in the economy occurred because private debt accumulation reached its limit of service. On this there is no debate - the American public was unable to pay its mortgages and credit cards. The GDP "increase" over the years from the early 1990s on forward was not purchased with output - the effort of people - but rather with ever-increasing amounts of debt. That debt increase, net-on-net, reached one of three dollars spent in the economy in 2007 before it collapsed.
There has been no net increase in consumer borrowing capacity as household incomes adjusted for inflation have in fact been stagnant or declining since 2000. The only category of personal consumer debt (e.g. ex-housing) that has increased since the decline in credit growth began in 2008 has been student loans.
Government has attempted to prevent recognition of the GDP contraction that must take place to restore balance to the economy. That balance can be restored either by paying down or defaulting (restructuring) that excess debt, and there's a lot of it. Either will result in a serious contraction in GDP.
In 2000 I argued that the net contraction required was about 10% of GDP. In 2007, if you go back to my earlier writing, I argued that this amount was about 20% of GDP. Today, a quick back-of-the-envelope look at the distortions created since 2007 by the Federal Government and their infantile attempt to prevent the inevitable has added at least 25% to the total damage net-net, and likely more.
Withdrawal of the government's taking over of private debt addition will result in a contraction of GDP, no matter whether it is done by raising taxes, cutting spending, or some combination of the two.
This is a serious time for serious people. Those who wish to play political "gotcha" and games, along with making demonstrably false statements about how "I was sent to Washington to quit spending more than we make", but who will not stand before the camera and tell the truth on this matter are not serious people.
Join us on our
Share this page with your friends
on your favorite social network: