Debt Restricts Consumption
People don’t often think of debt, in this way. The loss of potential gain from other alternatives when one alternative is chosen is known as opportunity costs. When one borrows money to buy things that don’t provide a real return, debt and interest represents consumption brought forward.
Debt consists of a contractual relationship. If you buy on credit, you have a responsibility to devote future income until the debt is paid. What this means is that what you purchased in the past therefore denies present and future consumption until the principal and interest are paid in full. Future income for years to come has already been spent in the past.
At one time, one dollar of government borrowing resulted in more than one dollar of GDP growth. Not any more; debt saturation—whether it is of a family, a business or a country—results in the failure to borrow. The Federal Government is quickly reaching this point of saturdation as are other levels of government.
This can be seen in the first quarter GDP growth projected by the Atlanta Fed’s GDP. This model is now forecasting a measly .9% growth. This reflected “a slowdown in consumer spending, a decline in government spending” and therefore, “results in a bigger drag from net exports. A small change in private inventories has driven the downward revision for the first quarter forecast,” according to Patrick O’Hare.
This forecast was based on facts.
The Dow Jones Transportation Average has underperformed with a decline of 0.8%. The industrials sector is trailing the market with a 3.6% year-to-date gain. The counter-cyclical utilities and consumer staples sectors are both outperforming the market with year-to-date gains of 6.3% and 6.2%, respective (said O’Hare, as he offered many other forward looking data points).
You get the picture; debt has consequences and they are coming mighty fast. Americans are in for a bumpy ride after a vast credit expansion over 30 years. “The Chickens are coming home to roosts.” You must prepare yourself to protect your family from the hard, dangerous times ahead.