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Private debt is not a problem

May 1, 2019 | Commentary

  • Despite increasing GDP, decent corporate earnings and low unemployment, “experts” have been predicting that U.S. and perhaps global recessions are just around the corner.  One of their red flags is the large size of household and corporate debt outstanding.
  • More important than the absolute amount of debt is the ability to service it.  On that score U.S. households and corporations are in the best shape they have been in decades.  Only government debt, both here and abroad, is growing dramatically as a percentage of GDP.
  • Modern Monetary Theory (MMT) is a relatively new school of macroeconomics that, in part, argues government debt issued in local currency is simply not a problem.  Default won’t happen because new money can always be printed to pay it off.  Inflation won’t occur if there is slack in an economy, and if it starts to appear, steps can then be taken to contain it.
  • The past decade’s data from Western Europe, Japan and the United States seem to give empirical support to MMT.  But additional decades of experience across scores of countries suggest it is lacking in many aspects.  If the MMT theorists are wrong, the U.S. running trillion dollar deficits when the peacetime economy is at full employment is a recipe for serious problems when the next cyclical downturn inevitably arrives (which we do not believe is just around the corner). 

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