Why US Debt Must Continue to Rise

The comments below are an edited and abridged synopsis of an article by Michael Pettis

Many Americans are worried about the seemingly unstoppable rise in US debt, whether government, household, or business. They are right to be concerned. Rapidly rising debt is a problem not just in the US but in many other countries too, including China, parts of Europe, and most of the developing world. Today, it seems, reasonable levels of economic growth cannot be achieved unless boosted by even faster growth in debt.

Why US Debt Must Continue to Rise | BullionBuzz

With so much debt in the world, and with debt levels rising so quickly, people think that economists have studied this issue and fully understand it. But there continues to be a great deal of confusion about debt and about whether and why excessive debt levels can harm growth prospects. To address these issues, this article is divided into two parts. The first discusses debt and some of the conditions under which it affects the prospects for economic growth.

The second argues that at least two of the reasons that debt has been rising in the US for several years are the country’s rising income inequality and its persistent trade deficit. These two conditions operate the same way: They distort the level and structure of American savings. As long as income inequality remains high and the US runs large deficits, the resulting savings distortions will continue to mean that US debt levels have to rise to prevent the economy from slowing and unemployment from rising.

Pettis explores why debt matters (productive and nonproductive debt; is excessive debt bad for the economy; what are the actual costs of excessive debt; does debt affect demand) and how US savings are distorted (two reasons for rising US debt; why trade deficits actually matter; why income inequality matters; what drives down savings; where this argument might be wrong; and what can be done).

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