America’s slowdown is not about Europe, it’s about the debt

I have a video from my appearance on the BBC last Friday for you below but I wanted to make a few points before you look at it.

For almost a year now, the Obama Administration has been extremely concerned about the goings on in Europe. The official line from the White House is that the US is in a moderate but sustainable recovery which risks being derailed because of the European sovereign debt crisis. Last year, I noted eerie parallels between Obama’s view and the view of Herbert Hoover in 1930 before the bank runs began after the failure of Credit Anstalt in 1931.

Recently, the Obama Administration has been pushing forcefully both to get Europe to change tack toward growth and in getting out the message that the slowdown in the US is due to what’s happening in Europe. And while I agree that Europe’s policy responses have made things considerably worse, I don’t believe what is happening in Europe actually is the reason the US recovery has stalled. Michael Hudson makes some good points as to why, pointing to the continuing overindebtedness of US households due to the Obama Administration’s prioritisation of bank bailouts over the real economy in 2009 and 2010. I’d probably be a little less critical of Obama rhetorically on this score than Hudson, but only a little.

And let’s be clear, it’s not just the US and Europe that are seeing a deceleration in growth. It is global. I call it a global or synchronised global growth slowdown. In December I warned:

We are in a second synchronised global growth slowdown. Moreover, the policy response must be more muted this go round as the public sector is more indebted and has less policy space than in 2008 or 2009. Expect policy inaction followed by fits of volatility due to inaction, followed by vigorous policy responses to keep the muddle through from collapsing into Depression. Overall, all of the risk is to the downside, not just in the euro zone but globally.

And just today, Economist Nouriel Roubini echoed these sentiments in a post at Project Syndicate, writing:

Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats). Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.

I would submit then that the problem is the debt. This is true right across the developed economies. Until the debt is reduced, global growth will be slow and that makes economies susceptible to recession. As much as the President wants to deflect attention toward the disaster building in Europe, he should admit to himself that more needs to be done on household debts, incomes and jobs. A banking-centric policy response has caught up with us and we’ll just have to see if we can ride this one out.

Video below

P.S. – As always I should remind you that I am mostly concerned with private debt because it is high levels of private debt that cause the secular deleveraging waves that lead to major financial crises.

I have one more video to post from this week’s Alyona Show on RT. My next media appearance is at 1230 ET on BNN’s Headline with Howard Greene. Tune in.


  1. Yes, private debt levels are the source of the problem, in particular, debts taken on for the
    purpose of asset speculation. Unfortunately I’m not sure the powers that be get this or that this “banking centric” approach is really more can kicking than solution providing.

    But it seems that out of the nebular where conventional economics meets modern politics this “banking centric” policy response still has legs. Although I’m left asking myself how exotic can QE get? I suspect a lot more exotic..

    • David_Lazarus

      The problem is that because of low capital gains taxes which shift the burden of taxation to lower income groups means that it became a massive avoidance scheme. So an increase in Capital Gains Taxes will be needed to deter any resumption of such business models.

  2. “It’s the debt, stupid”. Consumer debt. And we need to address this debt directly. The answer is for the treasury to print and send a special $5,000 bill to every man, woman and child in the country. These $5,000 bills will be “special” in that they can be used only to pay off debt which existed as of 6/1/2012. And each bank or other entity which receives these bills can only use them to pay off their debts, and so on. Anyone who ends up with these notes who has no qualified debts left to pay can exchange them for a 10-year treasury bill worth $5,000.

    These $1.5 trillion of notes will reduce the total credit market debt by up to $5 trillion, safely shrinking the current national debt soufflĂ© which threatens to collapse. They will help to get consumers out of debt limbo and back in business. They will reduce the number of underwater house loans dramatically. They will recapitalize the banks by shrinking their leverage, but in a “Main Street” bailout rather than a “Wall Street” bailout. They will start to rebuild the net worth of the 99%, which has taken a terrible hit in the past 4 years.

    The Euro zone needs to do exactly the same thing, only much more urgently. Think of what this approach would do for the Greek, Spanish, and Italian people, economies, and banks. It would solve their problems, and do so in a very politically attractive way.

    This is much better than a “helicopter drop” because it addresses the real problem of debt much more effectively without creating nearly so much inflation. We will get to this sort of a drastic solution sooner or later. Sooner would be better.

    • That’s essentially like a debt jubilee. The basic premise is what we may eventually get but the details in terms of fairness will be important. Questions like what to do for those without debt and indexing relief based on income will surely arise.

      Right now this is a non starter. Only when things are considerably worse will we see these ideas being considered seriously.

      • David_Lazarus

        If you noticed he did allow those without debts to have it added to savings in the form of Treasuries. The problem with that is that it will not be spent. If however you allow the banks to pay the surplus, after any debts have been paid, in the form of prepaid credit cards with an expiry then they will be used.

        Though allow the surplus to be transferrable to family members as well and that will help. By giving everyone a voucher for debt then those with kids could use all the family vouchers to reduce the family mortgage or credit cards. Though I would suggest that reductions in credit lines be part of the plan. If people paid off the credit card debt only to spend and max the cards again the economy might be boosted but will still have that massive debt hangover to hold it back.

        • Thanks, gentlemen. A few follow-up comments:-I agree that there are a lot of details to be sorted out, and that things will probably get much worse in America before such proposals are considered. But we’re rapidly approaching that time in the Eurozone, so let’s at least start talking about it!
          -In keeping my post brief, I omitted many details, but clearly these bills should be freely transferrable among family members. Since eliminating $5K of debt now is more valuable to most people than getting $5K in ten years, people will naturally be inclined to pass these bills to their most indebted family members.
          -Those who want to start borrowing again and can do so are welcome to. But as these bills pay off the old debts, it gives lenders an opportunity to review credit limits and only offer new debt to qualified lenders. So the economy will be boosted and bad debts will decrease.-In terms of fairness, giving the same amount to every citizen seems like the definition of fair. Roughly 99% of these bills will go to “the 99%”. The benefit of helping a huge number of poor families go from a net worth of $5K to a net worth of $25K outweighs the waste of helping a few families go from a net worth of $1,000,000 to a net worth of $1,020,000. The arguments which would ensue from trying to means-test the bills are not worth the 1% savings.
          -We don’t need to do this all in one fell swoop. Maybe we try it initially with $2K per person, and if the response is favorable, we issue another $2K, and so on until personal debt is under control and the economy is healthier. This approach would also allow the Federal Reserve, Treasury, and policymakers to assess the effects of these bills on inflation, debts of different entities, economic activity, etc.
          -This is indeed a modern, high-tech Debt Jubilee. I don’t see any real alternatives at the end of this path we’re on, other than massive money-printing to inflate away our debts. Arguments about “austerity” versus “growth” are disingenuous and irrelevant- Greece isn’t going to “grow” its way out of anything in the short term unless the ECB stimulates raging inflation. I believe that in our modern electronic society, a properly designed jubilee could address our fundamental debt problems with much less disruption and collateral damage.

          • Nice discussion, fellas.

          • David_Lazarus

            Issuing the vouchers in stages would have other benefits. It could be used in conjunction with a normalisation of interest rates. Low interest rates are crippling the normal pricing of everything. So raising interest rates at the same time will discourage speculative borrowing again. By raising interest rates at 0.5% each time would encourage repayment of mortgage debt. Though $2000 at a time might be too little. There also needs to be a revaluation of real estate downwards and substantially, combined with new simple rules on mortgages would eliminate the reconstruction of a similar bubble. So doing it in stages would create work for those to revalue mortgages and still keep people in their homes. There should also be a rewriting of bankruptcy laws especially in the US which is so biased against debtors that it slows debt clearance.

            One other advantage is that it would clear private debts so that the economy will be more responsive to stimulus. At the moment any stimulus is being simply drained towards banks in repayments. By eliminating those debts any future stimulus will flow through and actually work. Another problem could be solved at the same time and that is the excess liquidity at banks could be unwound at the same time. Forcing banks to take back any toxic debt, and return the
            Fed’s excess liquidity to the Fed for elimination.

            It will not be done until the crisis is a lot worse. It also needs to be done at the same time, to stop new problems being created.

    • How does that help retirees like me? I don’t owe a cent to anyone but my net worth has been cut in half since 2007 and at 64 I’m now worried that I will run out of money before I die. And what litttle money I have is also going to help my adult children who are struggling in this economy to find work and pay their bills. Meanwhile, the austerians want to cut SS and Medicare and throw more of the cost of any healthcare I need back onto me and my dwindling nest egg.

      • David_Lazarus

        A voucher system would mean that if you had no debt you could save it or spend it. Give it to your kids to help them. I am sure that they would have a cash value to some.

        While I do see the merits of austerity when the economy is booming it is stupid when the economy is exceptionally fragile. All the great economists from the thirties mentioned counter cyclical policy during the boom years, yet they stay silent then and only crow you so when things get bad. Keynes also mentioned counter cyclical policy but most politicians ignore that lesson fearing that they will end the party and get booted out at the next election.

  3. The way to reduce debt is to increase the incomes of the 99%. Unfortunately, the trend is in the opposite direction: