How the national debt could lead to another economic collapse

Much ink has been spilled by researchers, journalists, and analysts arguing over the factors that led to the Great Recession of 2008, but just about everyone agrees on at least one of the contributing problems: A significant economic “bubble” developed in the 2000s in the housing market because of risky lending practices, which led to home prices being artificially high.

ADVERTISEMENT
While much has been done by regulatory agencies and financial institutions since the 2008 crash to prevent the problem from occurring again, data suggest a new and potentially more dangerous economic bubble is developing that could cause another recession, only this time, the stage is set for an even larger economic disaster.

 

Since 2009, to help alleviate the fears of investors, financial institutions, and consumers, the Federal Reserve System has lowered interest rates to near-zero levels to encourage lending and has pumped trillions of dollars into the economy, making money more available with the hope economic development would follow.

As part of a similar strategy, when President Obama took office amidst the economic chaos of 2009, he and Democrats in Congress, like the Fed, injected more money into the economy through a variety of programs, the largest of which were established by the American Recovery and Reinvestment Act, which cost more than $830 billion and funded numerous government infrastructure projects.

As a result of these programs and policies, as well as other, similar efforts, the U.S. economy eventually stabilized, slow-but-steady job growth ensued, and investors returned to the stock market. But despite all the progress that appears to have been made over the past eight years, many of the underlying problems that led to the 2008 crash remain today, and some key economic indicators suggest that unless the United States experiences substantial economic growth soon, it could be on the verge of experiencing another major financial collapse.

In the run up to the Great Recession, several significant problems developed, one of the most important of which was the rise of personal debt held by Americans. Under President George W. Bush, from 2001 to 2009, outstanding mortgage debt climbed from $6.8 trillion to $14.7 trillion, spurred in part by a large growth in the monetary supply (M2), which increased by about $2.5 trillion, from around $5 trillion in 2001 to just under $7.5 trillion in 2008. All this occurred while annual GDP—the monetary value of all goods and services produced and one of the most widely used metrics for measuring economic growth—fell from 4 percent growth in 2000 to less than 2 percent prior to the crash.

By comparison, from 1990 to 2000, a time of great economic growth, the monetary supply only grew by about $1.4 trillion and mortgage debt by $3.1 trillion, topping out at $6.7 trillion at the end of 2000.

During Bush’s term, mediocre economic growth mixed with an increasing monetary supply and a significant accumulation of debt created a perfect storm that eventually led to the 2008 destabilization. In short, there were too many market distortions that made the economy appear as though it was stronger than it actually was. Once the distortions were made evident by rising foreclosure rates and collapsing Wall Street financial giants, the entire system came crumbling down.

In recent years, conditions appear to have grown even worse.

Since January 2009, more than $4 trillion has been pumped into the money supply, the most ever added in an eight year period, and after a brief dip, the outstanding mortgage debt has returned to the $14 trillion mark, which means the inflated housing market of the 2000s never fully corrected. Also, student loan debt is now at an all-time high, with outstanding debt totaling $1.4 trillion, more than credit card debt or debt from auto loans.

Government debt also increased under Obama as he has attempted to stimulate the economy with government spending. The $8 trillion added to the national debt under the Obama administration is the most debt ever accumulated under a single president (and it doesn’t include figures for 2017).

Further, just as in the latter-half of Bush’s presidency, GDP growth has been very low, averaging less than 2 percent since 2009.

The current economic picture looks eerily similar to the one in 2008: Economic growth is sluggish, personal debt is extremely high, the government is running massive annual deficits, and riskier investments are being encouraged by the current market conditions, although this time it’s being caused by excess cash in the monetary supply.

President-elect Trump enters the White House at a crucial moment in U.S. history. If the economy does not grow rapidly in the coming years, allowing market distortions to correct and the Fed to safely increase interest rates to bring the monetary supply back to its historical norm, there could be another large-scale economic collapse in the not-so-distant future.

Justin Haskins (jhaskins@heartland.org) is executive editor of The Heartland Institute.


The views expressed by contributors are their own and are not the views of The Hill.