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The Massive U.S. Debt Problem

The massive U.S. debt problem that we have been discussing so often for many years has now become widely known both to investors and the general public. It has been a major topic of discussion in the media as well as a key issue in last November’s elections. To take just one recent example, Gregg Fleming, the head of Morgan Stanley, Smith Barney, stated on CNBC that the total debt ( including government, individual, corporate, and financial institutions) in the U.S. has increased by over $40 trillion since 1984 ($11 tn to $52.4 tn). He stated that, in his opinion, the unusually sluggish recovery we are now experiencing is a result of the deleveraging of this debt. Furthermore, he did not even mention the “impossible to keep” promises that have been made by our federal government for entitlements, and by state and local governments’ for health care and pensions. If these were included it would increase this country’s total obligations to over $150 trillion.

What Mr. Fleming implied, but didn’t say is that the private side of this debt has to be liquidated or defaulted on before a sustained organic recovery is possible. It is fortunate that the topic of excess debt has come to the forefront and that the situation has come to the attention of the general public. What is lacking, however, is any agreement on what to do, as there is no satisfactory solution in sight. So far, massive stimulation through fiscal and monetary policy has substituted in part for the lack of consumer spending, but this cannot continue for long without putting the federal government’s financial status at risk. Yet if government spending is substantially cut back while the economy is still so fragile another serious recession can ensue. This dilemma has created serious divisions between the two major political parties and the public in general.

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