Growing Government Debt:
What It Means for Economic Growth and Inflation
The current expansion of government debt levels is not unique to any single political party. It’s as if both left- and right-leaning persuasions have determined that government deficits and debt no longer matter.
The chart below comes from our partners at Ned Davis Research. One of the reasons we like working with NDR is their analysis relies on data instead of human judgment or behavior. A review of the data reveals that deficits and debt do matter when it comes to economic growth. Current government debt is running at 175% relative to GDP levels. The chart indicates that when debt relative to GDP is this high, there is a negative impact on growth. Historically, at these levels, nominal GDP has risen at less than half the rate than when debt-to-GDP is low. The overall impact of high debt is stunted growth and subdued inflation. The data suggests there is an inverse relationship between high debt levels and economic growth.
Equity markets have largely shrugged off the explosion in government debt over the last decade mainly due to central bank easing around the globe. In this low-growth, low-inflation environment, what can be done to fuel growth beyond the Federal Reserve’s rate-cutting tools and balance-sheet management? Modern Monetary Theory (MMT) continues growing in popularity as a solution among some economists. We will examine the mechanics of MMT in a subsequent post.
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