Today there is a great sense of relief
that has swept the nation as news flowed through the media that the
government shutdown had come to an end. After all, during the 16 days
of the shutdown, there was great hardship inflicted on the average
American as the stock market rose by 2.4%, government workers that were furloughed received a 2+ week paid vacation and interest rates fell
from a peak of 2.65% on October 1st to 2.59% on October 17th. Outside
of the financial markets, which were never concerned of a "default," the
reality is that the government shutdown did likely clip up to 0.5% off
of 4th quarter's GDP. While that clip to economic growth created by the
government standoff is temporary - the ongoing persistant weakness of
economic growth is another issue entirely. This is the focus of this
discussion.
The most disturbing sentence uttered
during the debt ceiling debate/government shut down, that should raise
some concerns by both political parties, is:
"We must increase our debt limit so that we can pay our bills."
Think about that for a moment. The
U.S. has become the single largest debtor nation on the planet as
welfare dependency rises, government spending continues to increase and
economic growth slows. However, what is ironic about this situation, is
that it is the continuing increases in debt which is directly
responsible for the decreases in economic growth. The chart below shows
government debt as a percentage of GDP as compared to annualized rate
of change in economic growth.
Since the beginning of 2009 very little
of the increases in government debt, which was used to fill the gap
created by excess expenditures, returned very little in terms of
economic growth. In fact, as of the second quarter of 2013, it required
$5.61 of debt to create just $1 of economic growth.
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