Michael Pettis on "Why US Debt Must Continue"

Each week I do economic and financial research that results in over ten pages of links, which is available to those who contact me and subscribe.

One notable link from this past week is a new post by Michael Pettis entitled "Why U.S. Debt Must Continue" in which he tackles the issue of rapidly rising household, government, and business debt in the United States and many other countries around the world including China and some European countries.

In the first part, he discusses debt and some of the conditions under which it effects economic growth

and, in the second part, discusses why increasing income inequality and rising trade deficit are two reasons debt has been rising in the United States.

Higher savings can lead to less investment.  Companies invest not because capital is available at low interest rates but because expected profitability is desirable and are less likely to invest if profitability is low.

To reduce income inequality and trade deficits (capital account surpluses), Pettis suggests directly taxing foreign capital inflows (not tariffs), a more progressive tax code, infrastructure spending, raising minimum wages, and strengthening the country's social safety net.  Without more investment on infrastructure, U.S. debt must continue to rise to prevent savings in the form of higher unemployment.

The Pettis article can be found here.

Michael Pettis also writes a monthly private newsletter and a subscription is available by writing to him at chinfinpettis@yahoo.com and stating affiliation.
 

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