Chicago Young Republicans Weigh In

Debt saturation

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Posted by DHuffman on July 19, 2010 - 9:01 am

"The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

   - Paul Krugman, 8/2/2002 New York Times Op-Ed. 

While it appears that our dear friend Paul Krugman is well-informed, it should be obvious that he is not the voice that we should be listening to when trying to get out of this economic crisis.  We are in the midst of a debt crisis that cannot be solved by adding more debt.  This is a lesson that the free-spending Democrats in power will have to learn at the ballot box come November, because there is no indication that I have seen that they are taking the foot off the gas of this debt binge we have been on for the past 18-months.  The following chart (from economicedge.blogspot.com ) will show the marginal productivity of an additional dollar of debt getting infused into our economy over the past 44-years.

 

 
This is a very simple chart that illustrates a very simple concept.  When you have a low aggregate amount of debt as a percentage of GDP, as in the 1960's, each additional dollar of debt actually gets infused into the economy.  Lately, our relationship with debt has changed dramatically due to the fact that our total income can no longer support the total amount of debt that we are issuing.  We have hit the wall, and additional debt is just no longer effective at jump-starting the economy.  So what is to be done?  Well I hate to be a Debbie Downer, but we'll just have to muddle through it for a decade or two until a real macroeconomic wind picks up in the form of strong consumer demand from Asia, a revolution in nanotechnology, or another as of yet undetermined development.  Don't get down about the economy, as young republicans, we all will have careers that last four to five decades.  We will see better days.  And if you really think about it, though things could be better, we still have an amazing standard of living even compared to the "good" times!