Wednesday, October 10, 2012

Debt as the "crystal meth" of the US


Bill Gross has now stated that US debt is the "crystal meth" of the US. Again, the underlying theme of slow economic growth is tied to the debt problem and the "This time is different" meme of Reinhart and Rogoff. The drug analogy is a version of the classical economist of the 1930's who stated that the debt must be purged from the system.

If you want to use the drug addict analogy, the answer may not be cold turkey but a slow glide to reduced dependency. This analogy should apply to the US. Debt levels have to come down but in a manner consistent with structural change and cyclical stabilizers. We should run deficits during a recession and build a surplus during good times. The government deficit should be close to zero over the long-term. Consumer and corporate debt should be consistent with long-term growth which suggest that its growth should not be multiple highers than the growth rate of the economy.

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