0

The US Debt Is Their Problem, Not Ours

The US can take a temporary sigh of relief with a deal struck to raise the debt ceiling, but debt is still an issue. Here in Australia, debt is the least of our worries, but we still keep talking about it. 

The agreement to cut US$1 trillion from the US $14.3 trillion debt is hardly a cause for celebration. It’ll hurt and it will take time. But, many would argue, it’s necessary to get the debt to GDP ratio down to a level that can produce reasonable growth. Last year on BTalk I spoke to Carmen Reinhart, co-author of Growth in a Time of Debt, which concluded that growth continues irrespective of the level of debt until debt reached about 90 percent of GDP. Beyond that, growth is severely inhibited. If she’s right the US has a rocky road ahead.

As it is, the US is struggling to maintain its real gross domestic product at 2006 levels, with flat consumption levels.

Anyone listening to our politicians would think we face the same issue in Australia, but it’s far from the case. Our public debt is around 20 percent of GDP. By Reinhart’s reckoning, if debt quadruples, then we should worry.

So, with low debt and sizeable fossil reserves, the economy is doing well, no matter what you read. There has been a massive increase in capital investment in Australia, versus a slide in the States, and faster growth here in private consumption. The surprise is the difference in the extent of the growth; our capital investment isn’t providing the same degree of consumption growth. In effect, we’re investing to produce more, but we’re not buying more.

Why? Consumer confidence has to be part of the reason; rising fuel prices and the catastrophic impact of a (yet to be introduced) carbon tax seem to be excuses by politicians and journalists to talk the economy down. In truth, we’ve got one of the healthiest economies in the world and it’s gearing up for further growth; as opposed to the US, which is struggling with debt and future investment going backwards.

Is it our cultural cringe that assumes we have to have the same problems as everyone else? Or should we simply shift our attitude and have a healthy national debate about how we can benefit from our fortuitous circumstance with a plan for sustainable growth –— one that might even incur a little extra debt along the way.

The worst reaction from a likely further wave of the global financial crisis would be for us to cut back spending and investment. Remember how you play monopoly — when the other side is losing, buy up the streets, put hotels on them and the game is yours.

Data source: ABS: Australian Economic Indicators, Aug 2011

First published on CBS News

Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll to top