Economic growth implies lower chances of an impending debt crisis

When the debt level of a country is high enough, this is typically associated with sluggish economic growth as compared to the period during which the debt of the country is lower. This is what has been shown by studies throughout the last few years and it still holds even after a new study that was released, that draws the relationship between economic growth and debt. The new working paper, concluded that when the gross debt of a country exceeds 90% of the Gross Domestic Product, the median growth rate is supposed to fall by 1% and average growth rate falls even more. Chairman of House Budget Committee, Representative Paul Ryan, declared in the month of May 2013 that the US debt is hurting the economy today and this idea has been embraced by almost all Democrats and Republicans.

However, the representative did not check that the economic reports on housing, investment and jobs didn’t support that claim. A gang of economists throughout the political spectrum dispute this study that stated that the nations with debt load of above 90% of the GDP of the nation grow slowly. 3 years after government spending surge after the corresponding recession drove the US off that red line. The total debt of the nation, $16.7 trillion debt is 106% of the $15.8 trillion economy and this is what are the key indicators that reflect the gathering strength. The businesses have increased their expenses by 28% since the end of 2009 and the annual rate of new home construction surged to about 60%. Employers have also successfully created 6 million jobs. As the borrowing costs are also at their record low levels, the cost of repaying debt is also lower.

Does high debt levels chill economic growth?

Ryan of Wisconsin, a Republican joined the Democrats and embraced as the financial gospel the idea of a tipping point for debt, even though this was a hot debate among the economists. There are some studies that have found out that there’s no such relation between high debt and sluggish economic growth, especially for the countries like the US that print their own currency. According to a 2012 paper, 2 French economists concluded that the economic growth rates as the debt-to-GDP ratio passed 115%.

Sluggish economic growth

Across the emerging markets and the advanced countries, higher Debt-to-GDP levels are noticeably associated with lower growth effects. To be sure, you should ensure that the US economy is expanding slowly and the economic growth over the past 3 years has averaged around 3.2% compared to 3.6% till 2010. As there is no other way to know whether the US economy would be growing faster of the debt level in the nation would be lower, the traditional way in which the government debt hurts growth is by raising the cost of money throughout the public sector.

The investors are remaining unbothered

Even as the US economy keeps borrowing in order to meet the projected deficit of $845 billion, the bond markets and the stock markets remain unbothered. The financial markets are begging the US government to borrow at negative real rates for all those 10 year maturities. In spite of this, the warnings about the budget deficits say that debt loads can hinder the growth by shrinking the expectations. The prospect of higher taxes and lower government spending should always reduce borrowing.

So, as of now, there won’t be any kind of debt crisis according to the reports of the US economic growth. If consumers owe credit card and student loan debt, they should take steps to repay them in order to remain flexible with their finances and avoid contributing to the already crippled economy.

This article has been put forward by Stacy. She is a web enthusiast who mainly deals with financial articles. She contributes her articles to different websites and communities.

Leave a Reply


Switch to our mobile site