Debt Is Failing as a Driver of Economic Growth

The US is heading towards a debt crisis.

Today, the US’s Debt to GDP ratio stands at over 105% (debt of $16.7 trillion on a GDP of $15.68 trillion). The only other time we’ve had more debt relative to our GDP was during WWII when the Debt to GDP ratio hit 112%:

Debt is not inherently evil. Debt that doesn’t create growth is.

In the 1960s every new $1 in debt bought nearly $1 in GDP growth. In the 70s it began to fall as the debt climbed. By the time we hit the ‘80s and ‘90s, each new $1 in debt bought only $0.30-$0.50 in GDP growth.

And today, each new $1 in debt buys only $0.10 in GDP growth at best.

Put another way, the growth of the last three decades, but especially of the last 5-10 years, has been driven by a greater and greater amount of debt. As you can see, after the Crisis began in 2007, the US moved into the point of debt saturation at which each new $1 in debt generates no additional growth.

This is why the Fed has been so concerned about interest rates. With a debt load of this size, every 1% rise in the US’s debt payments means another $100 billion in debt payments.

Unfortunately for the Fed, rates will eventually rise. It is guaranteed. As you can see in the below chart, rates have fallen almost nonstop since the early ‘80s. This is not sustainable. At some point rates will rise again. I cannot state expressly when, but that point is coming sooner rather than later.