Unlimited Debt Forever

When the media “discuss” the amount that the US Treasury is allowed to borrow, at least under the current law, they refer to the, “Debt Ceiling”, or the,” Debt Limit,” albeit that there is a subtle difference between the two meanings.

As at the end of November 2012, the US Statutory Debt Limit, the cap on borrowing that is set by Congress, was $16.394 Trillion, or $16,394,000,000,000.

A peak at its history over the past half a century throws up some interesting observations.

weekly_blog_121205_1

 

  • The upper part of the chart shows annualised US CPI, the “official” measure of inflation, whereas the lower part plots the debt limit, shown in red, against US economic growth, or GDP, shown as a histogram.
  • Observation 1: is that debt started its long climb from the early 1970s, coincidentally (or otherwise) when the fiscal anchor of the gold standard was removed.
  • Observation 2: as debt rose, official inflation fell but financial assets, such as stocks, bonds and property soared (not shown.)
  • Despite the ever growing debt, GDP has fallen, which is very worrying indeed, and makes a myth of the policymakers’ attempts to “re-flate the economy by ever more debt.”

The US Treasury Secretary, Tim Geithner, has called for the statutory debt limit to be abolished, as has the President, so no doubt this will be put into the negotiating mix in respect of the fiscal cliff.

 

weekly_blog_121205_2

 

We offer no apologies for including the chart above, the 30 year US treasury yield, for a second consecutive week, as it also offers related observations.

  • As the cost of debt has fallen, the more of it has been issued.
  • If the final arbiter of the cost of debt is the market, then risk/reward would suggest that the reward required for the risk has now reversed and logically the amount in circulation will fall (or de-flate.)
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