Feb 04 2012
The recent good news of a “January jobs thaw” (Wall Street Journal, 2/4/12) is dampened somewhat by U.S. national debt reaching ~100% of GDP — a definite signal of trouble ahead according the recent studies.
In the recent Hoisington Quarterly Review and Outlook, Van Hoisington and Lacy Hunt indicate that the high U.S. debt will lead to recession in 2012. They quote an authoritative NBER study (“Growth in the Time of Debt”; January, 2010) that demonstrates
that when a country’s gross government debt rises above 90% of GDP, the median growth rates fall by one percent, and average growth falls considerably more.
Hoisington and Hunt conclude:
This study sheds considerable light on recent developments in the United States. After suffering the most serious recession since the 1930s, the U.S. has recorded an economic growth rate of only 2.4%. Subtracting 1% from this meager expansion suggests that the economy should expand no faster than 1.4% in real terms on a trend basis going forward, which is virtually identical with the economy’s expansion in the past twelve months.
They expect that this slow, debt-ridden recovery will lead to a recession in 2012.
Concerns about US debt have risen in recent years, including from Mike Mullen, former Chairman of the Joint Chiefs of Staff, who observed in 2011:
Debt is the most significant threat to national security.
Likewise, in 2010 the National Academy of Sciences linked concerns about US competitiveness, education, and basic research to the debt:
The latitude to fix the problems being confronted has been severely diminished by the economic recession and the growth of the national debt over this period from $8 trillion to $13 trillion.
Unfortunately, current trends are consistent with a 200-year pattern of sluggish recoveries from financial panics and great recessions in the decade prior to Maslow Windows, leading to double-dip recessions like Hoisington and others are forecasting for 2012. However, the outlook brightens considerably toward mid-decade.
Hoisington’s and others’ warnings of a recession in 2012 were underlined by the head of the International Monetary Fund last week who warned that Europe could tumble into a “1930s moment” or depression, which would likely trigger a recession in the U.S..
Indeed, the Congressional Budget Office recently forecasted another trillion+ dollar US budget deficit for 2012. And unless something is done, trillion dollar deficits could continue for years to come.