Friday, March 18, 2011

More Debt: Good News

The Lehmann Letter (SM)

There is great concern about debt, both public and private. Most of us have borrowed at some time in our life, and most of us instinctively know that too much debt is dangerous. So it is no surprise when analysts point to high debt levels as a cause of the recent recession and anemic recovery.

Ironically and paradoxically it is also true that we must borrow more to finance the growth in spending needed to speed economic expansion. We may dislike debt, but right now we need more of it.

That's why a recent report by the Federal Reserve brings good news:

http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf

The report states that household and business debt grew $319.3 billion in 2010's fourth quarter.

Private Borrowing
(Click on chart to enlarge.)



Recessions shaded

The chart shows the massive drop in borrowing (i.e. new debt) that accompanied the recession's decline in spending. You can see that borrowing has been negative for over a year: Households and businesses have been repaying their debts rather than incurring new debt. When debt slumps, so does spending and the economy.

Now we have the first report that borrowing is positive and debt is growing once again. If you place $319.3 billion on the chart, you will see that this expansion remains in its early stages. Borrowing must increase at a good pace for several years before it returns to a robust level.

We may distrust debt, but right now we could use more of it.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

1 comment:

zhonglin said...

Debt is an accumulation of budget deficits, year after year. The real problem is that debt is not only a huge economic burden, but also a big engine of the economy. The key is keep the debt in the certain level which could not make the debtor overwhelmed and drives the economy to go better. The moderate debt, especially the government debt is good for the economy, because too much government debt will make the foreign holders of U.S. treasury securities invest more in their own economies. Additionally, diminished demand for U.S. Treasuries will increase interest rates, thus slowing the economy. Furthermore, this decreasing of demand will give downward pressure on the dollar.