Tuesday, July 17, 2012

Debt Inequality Remains Major Headwind To Growth

Three months ago I discussed the potential of a forthcoming profit recession, in part, due to a declining govt deficit. Then a few weeks back I noted:
A significantly stronger dollar combined with weakening growth in Europe and China may have brought about a US profit recession even earlier than growth pessimists expected.
Lastly, following revised Q1 data, I showed that a US corporate profit recession had already begun.

Yesterday Charles Hugh Smith offered a great post highlighting many of the same headwinds to corporate profits. The following chart, in particular, caught my attention:
While I often discuss the importance of aggregate levels of debt in the economy, the distribution of that debt also has ramifications for economic growth. Since 2007, fiscal and monetary policy has largely attempted to spur growth by encouraging the private sector to once again embrace debt as a means of consumption and investment. Unfortunately, large government deficits and monetary stimulus have helped raise the income and wealth of the top 5% much more than the bottom 95%. As incomes continue to stagnate for the bottom 95%, interest costs on outstanding debt practically ensure that the above ratio will continue rising unless households actively deleverage.

Since many economists fail to include private debt in their models, policy recommendations continue to ignore the above problem that provides one of the major headwinds to greater  economic growth and wealth equality. Resolving this issue, potentially through credit writedowns or a debt jubilee, should be the focus of policy going forward.

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