With politicians debating the lifting of the debt limit, few are paying attention to the “Japanification” of the U.S. economy. This means that the federal government’s spending spree is pushing the United States toward a slow-growth economy like Japan’s. According to the Congressional Budget Office, the federal debt load is expected to climb from $31 trillion to around $140 trillion by 2050. Simultaneously, the Federal Reserve’s balance sheet must swell to more than $40 trillion if it continues to monetize 30 percent of debt issuance.
The increase in debt does not create economic growth. In fact, since 1977, the 10-year average growth rate of gross domestic product (GDP) has steadily declined as debt has increased. This suggests that future outcomes will be no different. The chart below shows the debt-growth trajectory since the financial crisis of 2008–09 compared to the economy’s growth. It is evident that it takes almost $4.50 of debt to create $1 of economic growth, which is not sustainable long term.
A study by the Mercatus Center at George Mason University by economists Garrett Jones and Veronique de Rugy found that government spending has a zero to a negative multiplier effect. This means that it reduces the size of the private sector and incomes shrink. Furthermore, the study concluded that there are no realistic scenarios where the short-term benefit of stimulus is so large that the government spending pays for itself.
Japan is a prime example of what the United States will face in the future. Since 2008, Japan has implemented a massive quantitative-easing program. Despite this, economic prosperity is no higher than before the turn of the century. Japan has been plagued by rolling recessions, low inflation, and low interest rates. Japan’s 10-year Treasury rate even fell into negative territory for the second time in recent years.
Financial engineering does not create prosperity and, over the medium to longer term, it has negative consequences. This is a crucial point to consider as debt, deflation, and the inevitability of demographics continue to widen the wealth gap. Japan has shown us that debt cannot solve a debt problem. At some point, we must stop digging.