This Is Not Investment

Brad Setser's outstanding Follow the Money blog has another terrific post today, this time discussing how US borrowing hasn't changed in total, it's just changed in composition. Here's the chart he created from Federal Reserve Bank data.


What it shows is that total US borrowing has not risen. However, the borrowing is now entirely done by the government. Why does this matter? Isn't it a good thing that we're not increasing our borrowing?

Here's the issue. Simplified, people borrow to finance either lifestyle or homes. Businesses borrow to finance growth. Governments borrow to finance benefits. The chart suggests that we can expect lower growth while the population learns to expect higher benefits. Borrowing increases debt servicing obligations. Lower growth decreases the ability to pay those. Someone, somewhere is going to have to increase their profits substantially to pay the interest on this debt. This chart shows pretty conclusively that such mundane matters are of little interest to us right now.

Example: Proctor and Gamble borrows so that they can make more money in the future. The Department of Health and Human Services borrows so it can hand out checks to people. One leads to the ability to pay back the debt, the other leads to the expectation that these checks will coninue ad infinitum.

Not to worry, though. This won't go on forever.