This chart created by Barry Bannister (Stifel) offers an intriguing perspective on debt and growth.
The question examined here is, how much more GDP do you get for each additional unit of debt? Note that Barry has used a debt aggregate-to-GDP ratio, which is expressing the composition of debt issue discussed in Part 2 by the TLR report. Also notice that this is a nominal chart and that there were two unusual spikes downward, the Great Financial Crisis and COVID. I thank Barry for permission to share the chart.
Barry also suggested a caution: “There is no way to know if those waves of lower contribution continue, but that is the question.”
Barry and I exchanged emails. With his permission, let me add this quote.
As I said, keeping nominal GDP (NGDP) up relative to the pace of non-financial debt (NFD) accumulation is an open question. That can only occur if
– Inflation boosts NGDP without a matching rise in NFD,
– Real GDP grows much faster (Productivity + Labor Force) than NFD.
I left out a mass default on private NFD — that is not met by guarantees because that is deflationary.
So, if you want to use a version that doesn’t have a simple linear downtrend and leave that question open to discussion, that would be my preference.
Kotok view
Barry’s second condition is being defeated by Trump 2.0 policy. We are deporting some of our labor force while we are scaring off other would-be immigrants that might help us to grow that labor force. We now see evidence of this every day and everywhere in the country. So, the condition of labor force growth is being replaced with labor force stagnation and even a risk of labor force shrinkage. Can there be enormous gains in multi-factor productivity such that they will offset the labor force problem? History says it is not likely, but it is possible. We will find out soon enough.
Barry’s first condition is the inflation question. This is difficult to forecast now. Will tariffs bring about a one-time adjustment to the price level and then will inflation return to a low level that the Fed will find acceptable (2%)? Maybe. In my opinion, if the Fed keeps the “real” interest rate at a single digit low number, the pressure on inflation will continue. Notwithstanding the presidential name calling aimed at the Fed chair, I believe that the Powell Fed is doing the right thing and proceeding slowly makes the most sense.
Please note that the issue of federal debt is in the hands of the Congress and the president, not the Fed. The congressional track record has been discussed again and again. The United States hasn’t had a balanced federal budget in a quarter century. There is no reason for us to expect one soon. What was once a balanced federal budget approach morphed into acceptance of a federal deficit of 3% of GDP. That acceptance was based on the US dollar’s having a full reserve currency status and on estimates of US GDP growth and inflation. We have now left that federal deficit of 3% of GDP for higher debt-to-GDP ratios
Is the higher federal debt “crowding out” the other types of debt issuers? That is a debate.
