Substantial attention is paid the U.S. government’s growth in debt these days, yet far less is paid to America’s total debt picture as a whole.
More should be, because a quick look at the chart below will make you realise that much of America’s perceived debt ‘binge’ these days is the result of hype rather than fact.
Yes, the American government has increased its borrowing at a record rate. In 2008 and 2009 U.S. state & local governments plus the federal government net-borrowed a combined $1.3 trillion and $1.6 trillion respectively. That’s a huge step-up from their combined net borrowing of $428 billion in 2007. In isolation, this data is terrifying.
Yet if one is concerned about the entire nation’s solvency, and wants to understand why proponents of current stimulus aren’t necessarily irresponsible, then one has to step back and take into account the private side of the U.S. debt equation. This is especially important since America is a nation driven mostly by its private economy. The private economy is far larger than the government’s. Thus to ignore what the private sector does is to see less than half of the picture.
On this measure, if you look at ‘total net U.S. borrowing’, which takes into account borrowing by everyone — the government, private U.S. households, financial companies, and non-financial companies — then it turns out that 2009 was indeed a monumental year for U.S. borrowing… in that total U.S. borrowing fell by $438.4 billion. (shown in red below)
This historic reduction in U.S. borrowing is due to the fact that in 2009, U.S households, financial companies, and non-financial companies all de-levered as a group. In fact, they reduced their borrowing by so much in 2009 that it completely eclipsed growth in borrowing by the government. In 2009, U.S. households reduced their borrowing by $237 billion, financial companies reduced it by a whopping $1.8 trillion, and non-financial companies reduced borrowing by $200 billion. The data on this can be found at the Federal Reserve.
Thus whether you are for or against various stimulus policies, one should at least try to understand the thought process behind the U.S. government’s debt growth. Many proponents of stimulus were worried by the massive de-leveraging (reduction in net borrowing) by the private sector and the effects it would have on the U.S. economy during a downturn. If the government hadn’t increased its borrowing, the red negative bar in the chart would be far larger, at nearly -$2,000 trillion. Less debt can be a good thing, but if everyone de-levers at the same time in a sharp fashion then it can destroy a substantial amount of economic activity in a flash, which would be extremely painful for many Americans. Proponents of stimulus were worried that this would make for an extremely ugly recession, far worse than we saw.
Hence, cognisant of private sector de-leveraging, they realised that the government could increase borrowing without creating a dangerous increase in total U.S. borrowing. Thus the government was used to step in and fill the gap, due fears of that private de-leveraging, which had to happen due to past excesses, could create a lot of suffering for Americans if left without a counterbalance of stimulus from the government.
So even with seemingly ridiculous borrowing from the U.S. government, America as a whole actually ended up paring back its debt in an unprecedented fashion. Let’s just hope that the government’s debt growth is reigned in, now that the U.S. economy has recovered to some degree. Yet the key take-away regardless of your political view on stimulus is that America isn’t binging on debt right now: