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Growing debt and low Gross Domestic Product(GDP) growth is where our developed economies are heading. Govenment is trying to stimulate economic growth through fiscal stimulus as consumption spending,investment and exports have grounded to a halt. Now the question is, where are the Governments getting their spending money from?
The US public debt currently exceeds 101% of GDP and it is continuing to grow. Reserach condusted by Reinhart's and Rogoff showed that economies with no public debt overhang had 3.5%, whereas economies with public debt at 120% only had 1.2% GDP growth. Isn't the purpose of spending to stimulate growth? It is becoming more like a double edge sword-as debt reaches a certain high level, spending begins to do more damage than good. It leaves the economies very vulnerable to unexpected challenges.
Can you imagine the world's largest economy (US) being in stagnation for decades? Japan's economy has been stagnant since the 90's, averaging GDP growth rate of 0.52% and Debt to GDP of 112% from 1980 to 2012(the gap has increased this year). During this period the Japanese debt more than doubled from Government spending and yet it failed to stimulate economic growth. The ultimate problem is evident in the spending behavior of consumers. The Japanese are forward looking which has encouraged savings.
As mentioned in last week's article we have interest rates at an all-time low with some economies at zero. You'd think people will take advantage of this and borrow. However we see a very common habit building consumers preferring to save.
Who do you think is going to bear the cost of the growing debt? you ,the taxpayer.
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