• 527 days Will The ECB Continue To Hike Rates?
  • 528 days Forbes: Aramco Remains Largest Company In The Middle East
  • 529 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 929 days Could Crypto Overtake Traditional Investment?
  • 934 days Americans Still Quitting Jobs At Record Pace
  • 936 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 939 days Is The Dollar Too Strong?
  • 939 days Big Tech Disappoints Investors on Earnings Calls
  • 940 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 942 days China Is Quietly Trying To Distance Itself From Russia
  • 942 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 946 days Crypto Investors Won Big In 2021
  • 946 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 947 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 949 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 950 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 953 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 954 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 954 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 956 days Are NFTs About To Take Over Gaming?
Daniel Aaronson

Daniel Aaronson

Continental Capital Advisors

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental…

Contact Author

Lee Markowitz

Lee Markowitz

Continental Capital Advisors

 

Contact Author

  1. Home
  2. Markets
  3. Other

U.S. Credit Metrics Will Continue To Weaken

The fiscal situation in Greece has brought new attention to the fiscal situations of countries around the world, including the United States. We have written several times that the U.S. budget deficit and overall debt load have passed the point of no return, whereby further borrowing to stimulate growth or cutting the budget deficit through austerity measures could threaten the U.S. credit standing in global markets. Recently, two noteworthy events have transpired which support our thesis. First, Alan Greenspan's op-ed in the Wall Street Journal, titled "U.S. Debt and the Greece Analogy," reflects a growing concern that the United States' borrowing needs will lead to a dramatic rise in long-term interest rates. Second, the Senate voted against extended unemployment benefits, once considered a rubber-stamp process, which exemplifies voters' increasingly negative sentiment towards Government deficit spending.

Figure 1 shows an arrow pointing to debt/GDP of approximately 170% in 1929. Although, a record high at the time, debt/GDP skyrocketed to approximately 260% during the Great Depression as GDP imploded and the government borrowed money to stimulate the economy. Today's situation is even graver.

Figure 1. Total Credit Market Debt As A Percent Of U.S. Annual GDP
Total Credit Market Debt
Source: Comstock Funds, Ned Davis Research

The ECRI Weekly Leading Index (Figure 2) shows an increasing chance for economic retrenchment, which taken alone would lead to a coming spike in Debt/GDP similar to that of the 1930s.

Figure 2. Leading Indicator Continues To Fall Further In To Negative Terrain

In the 1930s, U.S. Government debt levels were much lower so the Government could stimulate growth through deficit spending. Yet today, additional Government spending, even if markets were to allow it, would lead to unsustainably high debt/GDP and ultimately to market scrutiny. On the other hand, growing public concern over the budget deficit is making it difficult for Congress to pass additional stimulus measures, which will negatively impact consumer sentiment and GDP. Therefore, with either more spending or spending cuts, credit metrics will deteriorate and the Government will have few options to support the economy.

While it is commonly accepted that increased borrowing helps an economy grow during an expansion and stabilize during a recession, the U.S. debt/GDP has become so high that citizens, investors and politicians around the globe are becoming resistant to its potential expansion. Furthermore, with the economy facing the threat of a retrenchment, the Government's debt predicament will become more severe than even Alan Greenspan is projecting.

 

Back to homepage

Leave a comment

Leave a comment