As the political rhetoric about the federal deficit has heated up,we ve lost sight of the progress that s been made in bringingtotal debt back under control. The U.S. is actually doing muchbetter than you d think if you just listened to the conventionalfears about how we re rushing headlong into a debt Armageddon. In fact, since the recession ended in June 2009, total U.S. debthas risen at the slowest pace since they began keeping records inthe early 1950s. While Washington has taken on a lot of debt sincethen, the private sector has paid off, written off or dumped on thegovernment almost as much. As a share of the economy, debt has plunged as a consequence ofrapid deleveraging by families, banks, nonfinancial businesses, andstate and local governments. The ratio of total debt to grossdomestic product has fallen from 3.73 times GDP to 3.36 times. In the 11 quarters since the recession officially ended, totaldomestic debt has risen by just $702 billion, or 1.4%. By contrast,in the 11 quarters before the recession began, in those bubbleyears of 2005, 2006 and 2007, total debt increased by $10.7trillion, or 28%. And it wasn t just the U.S., other advanced economies were addingon to their debt loads as well, with most of the debt taken out bythe private sector. Debt was growing at an unsustainable pace, but it was fueling theU.S. and global economies. Economists who have studied the impact of indebtedness have foundthat low levels of debt are essential to growth, but that highlevels of total outstanding debt can hurt an economy. Beyond atipping point, adding on more debt will reduce growth over the longrun, even if it inflates a bubble in the short run. At low levels, debt is good. It is a source of economic growthand stability, concluded Stephen Cecchetti, M.S. Mohanty andFabrizio Zampolli, economists for the Bank of InternationalSettlements, in a paper presented at the Federal Reserve s JacksonHole conference last August. Beyond a certain point, debt becomesdangerous and excessive, and can lead to increased volatility,financial fragility and slower growth. It can even bring down thereal economy with it, as we have seen. Read the BIS paper, The Real Effects of Debt. Cecchetti and his co-authors found that growth can be impaired oncenonfinancial corporate debt hits about 90% of GDP, or whenhousehold debts hit 85% of GDP, or when public debts hit about 85%. In the U.S., household debt has now fallen to 84% of GDP from apeak of 98%. Nonfinancial corporate debt has fallen to 77% from apeak of 83%. Financial sector debt has plunged from 123% of GDP to89%. Public debt has risen to 89% from 56%. The deleveraging process in the private sector still has a ways torun, not based on some economists rule of thumb, but based onwhat real people are actually doing. Banks and households are stillslashing their debt, while nonfinancial companies are beginning toborrow again, but only a little, according to the latest data fromthe Federal Reserve s flow of funds report. Take a look at the flow of funds. According to a study by McKinsey published earlier this year, U.S.households may have two more years of deleveraging left beforetheir debts are sustainable again. If McKinsey is right, the U.S. economy may have to endure a couplemore years of slow growth. Rex Nutting is a columnist and MarketWatch's internationalcommentary editor, based in Washington. The e-commerce company in China offers quality products such as Powder Coating Machines , China Powder Coating Line, and more. For more , please visit Automatic Powder Coating Systems today!
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