Good news on American debt

united states currency seal - IMG_7366_web
U.S. Currency Seal. Image by kevindean via Flickr

I would hate to be guilty of always looking at the clouds instead of the silver lining, so when I saw the report “U.S. Deleveraging, Unlike Some” on the Powerline blog that had some good news about American debt, I thought I would pass it along. Well, “good” is a relative term, of course!

To “leverage” yourself, in this case, is to use your borrowing power, and to “deleverage” is to reduce your debt. And the good news is that the United States, unlike, say, the UK and Europe, has, on the whole, been getting rid of debt as a percentage of Gross Domestic Product (GDP). By the standards in the report, the United States has reduced its total debt as a percentage of GDP by 16% since the second quarter of 2008, when much of this mess accelerated.

Actually, to be more specific, the American government has not, but the citizens and private companies of America have. The report claims that the American government has continued overextending itself and increased debt, but that the private households, banks, firms, etc. of the United States have personally cut back to the point that the net result for the country is a reduction of overall debt.

Of course, some of you out there reading this might be a part of that change, and good for you if you have been! The Bible tells us that the borrower is servant or slave to the lender (Proverbs 22:7), and if you’ve ever been in severe debt, you’ve tasted the sentiment expressed in that proverb. It is encouraging that at least our citizenry may have some financial sense when little-to-none seems to be visible in our leadership.

Same for our private businesses, and the report points out that our financial institutions are not nearly as debt-leveraged as their counterparts elsewhere in the world [note: “pc” means “percent (of GDP)”]:

One is tempted to ask what all the fuss was about in the US. The debt of financial institutions is just 40pc, compared to the UK (219pc), Japan (120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to $6.1 trillion — accelerated by the Lehman collapse — as lenders rely more on old-fashioned deposits.

So, good news for America on this front. (Read the report, though: Abysmal news for the UK.)

But to say we are out of the woods would be delusional. For one thing, we’ve created the sort of economic environment that is, sadly, dependent on stupidity: Where Bubba’s willingness to let Visa loan him money to by an 80″ flat screen TV may be dumb for Bubba but is good for Uncle Sam — short term, of course, not long term. (My apologies to those actually named Bubba who are too smart to do such a thing.) When a nation’s economic standing is hampered when its people begin to behave rationally, it’s in trouble.

And, ultimately, our problems are not policy problems but spiritual problems. While Habakkuk 2 is not a direct prophecy about the United States (which the Bible makes clear and which I feel responsible for clearing up), there are many prophecies in Scripture which point out that crushing debt is our destiny if we do not get our spiritual house in order — which involves so much more and runs so much deeper than monetary policy.

Still, it’s nice to hear some good news for a change, with whatever caveats it may bring with it. With clouds as dark as these, any silver lining is a welcome sight.

10 thoughts on “Good news on American debt

  1. obeirne

    I can understand why people seize at any kinds of good news in these days
    of constant bad news and your are right to draw attention to what you have
    written about. However you second last paragraph sums up where the US is at
    and to which it will fall. I am of the opinion that this is a temporary and
    brief respite and that things can change very quickly. Nevertheless we must
    all be prepared for what is coming and the time is short.

  2. John Wheeler (Johanan Rakkav)

    Any crash you can walk away from is a good crash. I suppose that applies to financial trends too.

  3. obeirne

    Just in case you are wondering – obeirne is Irish/Gaelic and is a play on my
    surname in English which is O’Byrne and is O’Beirne in Irish/Gaelic.

    Michael O’Byrne.

  4. I think it is far, far too early to judge that this is a crash we will walk away from, and the signs are still rather bleak. Yet if God is interested in giving us all more time, I hope we’re gearing ourselves up to take advantage of it.

  5. Steve

    We had a bull named Bubba. He didn’t especially care what anybody thought, so he probably wouldn’t take offense at your remark. A little bull-headed, you might say.

    I don’t know. A lot of economists worry that the Fed and the government – in their effort to “fix” the economy – are simply creating artificial bubbles that will cause trouble down the road. It’s good to hear about individuals reducing their personal debt, however. At least there’s some good news.

  6. Fire trucks ring bells for alarm of fires, trains blow whistles for crossing warnings, and God’s church has been sending out warnings. I think this is something we need to take to heart. Put that oil in your lamp before the bridegroom comes.

  7. John from Australia

    Hi Mr. Smith,

    You write

    “Habakkuk 2 is not a direct prophecy about the United States (which the Bible makes clear and which I feel responsible for clearing up)”.

    Are you referring to Bob Theil’s contention that 2:7 refers to the United States? The traditional understanding has Babylon’s foes “that shall bite thee”. Bob can come up with some imaginative interpretation of Scripture.

    Below is a couple of observations on the Federal Reserve’s latest “Flow of Funds” by Doug Noland:

    “It is only appropriate that the release of the Fed’s latest Credit data directs our analytical focus back to the U.S. Credit system and economy. For the quarter, total system Credit market debt increased to a record $53.825 TN. While some analysts continue to refer to “deleveraging,” it is worth noting that total system debt remains at a staggering 355% of Gross Domestic Product (GDP). This is not meaningfully below the peak ratio of 375% in Q2 2009 (ended the nineties at 264%)…

    “Importantly, the vast majority of system debt growth continues to emanate from Washington. For the quarter, federal government borrowings jumped to SAAR $1.383 TN (up from Q2’s SAAR $826bn and Q1’s SAAR $742bn) to the strongest federal debt expansion since Q4 2010. In percentage terms, federal debt expanded at a 14.1% annualized rate in Q3, up from Q2’s 8.6% and Q2’s 7.9%. I would not expect the U.S. economy to falter significantly so long as the current trajectory of federal debt growth is maintained and the other funding markets do not badly malfunction.

    “Outstanding Treasury debt surpassed $10 TN during Q3 after exceeding $5 TN for the first time in 2007. In just 13 quarters, Treasury debt has increased $4.852 TN, or 92%, to $10.103 TN. After doubling mortgage debt in just about six years during the spectacular Mortgage/Wall Street Finance Bubble, the fateful Government Finance Bubble now ensures our system will double federal debt in less than four years” (Q3 2011 “Flow of Funds” prudentbear.com, December 9, 2011).

    To put into perspective TCM debt in 1929 was 187% of GDP and in 1933, after the Hoover recession of the Great Depression, is was 287%. So in Q2 2009 TCMD was twice that of 1929.

    It took until January 1953 to bring TCMD down to the manageable level of 128% of GDP – which started the next debt cycle.

    From the late Peter Martin of the Financial Times:

    “… The original biblical text stresses the operating appropriateness of a seven-year cycle as a means of ensuring continued fertility for the land. But the scripture also makes clear that contractual relationships need to be reset. These presumably include the primitive financial relationships that provided leverage for the operating cycle.

    “A super-cycle of seven times seven years was also described in Leviticus. How this larger jubilee differed from the seven-year cycle is unclear. But there was more sophistication at work than simply cancellation of debts or other contracts. In particular, there seems to be evidence of a resetting of contracts around some normalised terms, based on fair returns for time expired.

    “The implication is that the passage of time and the distortions of the capital market cycle was likely to have caused all obligations to drift upwards towards unrealistic onerous levels. Resetting them to a lower, standardised level was therefore appropriate. A protective clause also requires equitable treatment in the immediate per-jubilee phase, so that the benefits of contractual release are not pre-empted by harsh treatment.

    “… whether they were practical guidelines or merely a theological aspiration they offer a glimpse of an underlying truth. This casts light not merely on the relationship between operations and financial structure that governs stable economic activity, but on a third, invisible element: dream, vision, animal spirits…” (Peter Martin, Remember the Sabbath day, ft.com, April 8, 2002).

    A secular publication makes the connection between debt crises and the ‘Sabbath’ Year and the Jubilee; it would be good that more religious publications would do the same.

    It was ten years after the Dow Jones peaked in 1929 that WW2 started. If the Dow peaks in 2013 then 2023 would a year to look out for – give or take some.

  8. It’s an election year so I am going to guess that the media will fill us with all sorts of “good” news, which most will judge by just it’s cover. As in this article for instance, it’s the american people who have done the “better” job; our government not so good. It’s amazing how many people will only look at the headline and not read the entire story or at the very least skim over each paragraph to get to the meat.

  9. Good comments, all. Thanks! As for my Habakkuk comment, John from Australia, I’m motivated by the fact that I, myself, made the mistake once, and I try to mention it from time to time to make sure it is corrected.

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