Is debt in the U.S. rising or falling?
If you have been following the fight in Washington about the debt ceiling and whether the US should be allowed to borrow more money, the answer probably seems obvious. But the obvious answer, as usual, is wrong. The U.S., when you look at our overall debt, is in a much better position that the wranglings in Washington suggest. What’s more, it appears that the U.S. is the only country with a so-called developed economy that’s overall debt picture has actually improved since the financial crisis. Here’s why:
The research arm of the consulting firm McKinsey recently took a look at the data on debt levels in a number of countries with so-called developed economies. What they found would probably surprise most Tea Partiers. The U.S.’s overall debt – which is government debt plus individual household debt plus corporate debt and bank debt – when compared to our GDP, which is how most economists look at these things, is actually much lower than many other developed nations. Overall, the U.S. and its citizens owe a little over $41 trillion. That, of course, is a lot of money. But when compared to the U.S. GDP, it’s not a shockingly bad number. In fact, it’s pretty good, when compared to other nations. The U.S.’s debt is equal to 275% of our GDP. That percentage for the United Kingdom is over 450%. Japan’s overall debt-to-GDP is about the same as the U.K. Spain comes in at nearly 350%, and France’s debt is above 300%. Our debt level is about the same as Germany, which everyone think is pulling off economic miracles these days. But more importantly than that, the U.S. appears to be the only developed country where the overall debt level is falling. Says Steven Dunaway, a senior fellow at the Council on Foreign Relations, ” The U.S. doesn’t have a debt problem, but we are doing a good job of creating one with the debt ceiling debate.”
Of course, the reason our overall level of debt has been falling is because of individuals and not government. Government debt is continuing to rise. Private household debt has been falling, in large part because people have been losing those households, and the debt that goes with them. Consumers have also reigned in spending and are now saving at the highest level in years. And that is one of the reasons that the economic recovery has been slower than expected.
But Charles Roxburgh, who did the study for McKinsey, says his point, at a time when there has been a lot of focus on government debt, is that overall debt matters. Private debt – what individuals, banks and companies owe – can become public debt, as we have seen from the bailouts. So the fact that our private debt is falling is a positive in the government debt debate.
Also, falling consumer debt may make the U.S. an attractive market for foreign companies to invest. Ted Chung, who heads up Hyundai Capital/Hyundai Card, which is the financing arm of the South Korean car company, says he sees America as a more compelling market for investment than say China because, and this was Chung’s assessment, the U.S. has dealt with our household debt problems. We have put it behind us. (I said I didn’t think it was behind us. Perhaps to the side at best.) He says there may still be a debt bomb coming for China and Korea because consumer borrowing in those countries is still rapidly expanding.
For me, the main conclusion of McKinsey’s research is that it’s not all about the debt. The U.S. and Germany have very similar overall debt levels and yet we have had very different recoveries. The U.S.’s continues to be long and painful, especially for the unemployed. Germany has snapped back quickly. Be it exports or wages or productivity gains, something else is going on. In that light, the U.S.’s focus on debt, particularly recently, seems very misguided.