From One Type of Debt to Another

A very good write up in the Financial Times by Edward Chancellor of the GMO Asset Allocation Team. It touches on several of my thoughts. The United States is fixing nothing but moving the problem from the consumer to the government. The end result will end in tears. Thanks goes to Charles.

As the stock market revival survives its third month, talk is turning from “green shoots” to a “sustainable recovery”. Yet this economic pick-up, like the one which followed the technology bust, has a potentially fatal weakness – it is fuelled by the rapid expansion of non- productive credit. America has not yet been cured of its addiction to debt. All that has happened is that excessive growth of household credit has been replaced by an even more extravagant expansion of government borrowing.

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Public policy today serves to delay the day of reckoning rather than promote a return to economic equilibrium. We have been through this process before. During the technology boom of the late 1990s, US corporations were expanding net debt at an annual rate equivalent to 6 per cent of GDP.

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Yet the US government cannot support both the economy and the financial system indefinitely without ruining its own balance sheet. The alternative is for Washington to retrench. Only when that happens will we discover whether the current recovery is any more soundly based than the one which preceded it.