Will Spiraling Debt Produce Another Financial Meltdown?

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Link to original source: Malcolm Mitchell |

Debt is back in the news. Last month, with the US close to exhausting the $19.8 trillion limit on what it could borrow, Congress voted to raise the debt ceiling. But that was just a short-term fix. Lawmakers will have to tackle debt and federal spending again in December.

Government debt isn’t our only problem. The Federal Reserve Bank of New York reported that the nation’s total household debt has reached a new peak, at $12.8 trillion. And German finance minister Wolfgang Schaeuble recently warned that escalating worldwide debt levels could trigger a global financial crisis.

Such news naturally conjures memories of the financial meltdown a decade ago, when a similarly debt-laden economy collapsed. So are we doomed to reprise the Great Recession of 2007-8?

The answer is certainly Yes, if we have to rely on reining in government debt in order to avert a new meltdown. Federal government debt — mostly in the form of Treasury bonds sold to individuals, institutions, and other nations — has been growing out of control for 30 years.

In 1985, the debt ceiling was less than $3 trillion. Although our population increased by only a third since then, from about 240 million to 325 million, government debt in the same period rose more than six times.

As Mr. Micawber advised David Copperfield in the Dickens novel: “Annual income twenty pounds, annual expenditure nineteen and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

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