Your analysis starts off in the right direction and then gets off course when you conflate public debt with private debt. Private debt levels are a reflection of a lack of public spending injections of currency into the private sector. As the budget deficit shrinks, especially when so much of it has little velocity in the private sector, people must take on higher private debt levels to maintain their lifestyles. This works as long as GDP growth is sufficient to “roll over” debt without sufficient high power money to net retire it, but the first hiccup in growth brings defaults and cascading job losses in the supply chain.
The 2001 recession was triggered by a combination of “dot-com” bubble bursting and the 9/11 attacks.
While both were factors, they were not the primary cause of the recession. Clinton’s surplus budgets were the biggest factor in destabilizing the economy to make it vulnerable to other influences. While the Fed was projecting surplusses “as far as the eye can see”, many economists were shouting the alarm that this is simply not possible. It wasn’t.
Simple dual entry spreadsheet accounting and logic should have shown them that sectoral balances would quickly catch up with their predictions, especially as the foreign sector gained ground with high value-added imports. Given the fact that all sectors must balance to zero and both the government and foreign sectors were in surplus, the only possible condition for the private sector was a deficit.
Consumers can leverage their private debt only so far before the lack of high power money needed to retire that debt becomes critical. Banks create reserves via lending, but those can never net retire the debt that created them. They only serve to enable interbank transfers of the loan proceeds and are diminished by principal payments. This also makes it impossible for private debt creation to serve as a store of value to net save, so wealth accumulation becomes an additional drain of net money with velocity.
One simply can’t come to any conclusion based in reality by knee-jerking to words like deficit or debt. A more accurate analysis is available by acknowledging that the different sectors of the total economy serve different functions in relation to the currency. The federal government is the monopoly “SOURCE” of the currency and all other sectors/entities are “USERS” of the currency and simply shuffle it around. Looking at a graph of the money supply divided by the government and private sectors makes it appear as if a mirror was held up to either one at the zero line as government spending is a direct transfer to the private sector.
This view of our economy is supported by the “fact” that the last seven times our government has balanced its budget or obtained surpluses for any length of time have resulted in deep recessions or depressions. Some economists make the valid point that Clinton’s surplus budgets eventually culminated in the ‘o8 crash as so many leveraged their homes as ATM cards that Bush’s deficits didn’t totally stabilize the economy again. Once we move past “deficit bad” thinking we can begin to deal with distribution which is our current problem.
Interest payments with a fiat currency are nothing more than injections of money from the government sector and are no more problematic than any other spending. If we have a problem with interest paid to bondholders we should consider eliminating the unnecessary function of bonds or set a permanent zero rate, not destroy the economy with austerity. Treasury bonds are nothing more than temporary taxation to remove reserves. They simply swap one form of money (reserves0 for another (bonds) that offer interest. Their actual utility ended when we left the gold standard and no longer have a gold reserve to defend.
