The United States is not Greece…

Public Debt US vs Greece

The Keynesian “growth” model as we know it over the last four decades consist of debt funded consumption backed by the ever increasing balance sheet of the central bank. Right wing nutcases believe households should be the ultimate bearer of that debt, while spendthrift statist on the left prefer government to be the main conduit for debt based growth. In other words, the modern day equivalent of the great socialist calculation debate that raged in the 1930s is reduced to two allegedly diametrically opposites with unbridgeable differences haggling over who’s balance sheet should be loaded with unpayable debt in order to cause “growth”. As the political debate swings from one side to another the end result is obviously that total debt climbs to ever new highs.

However, in 2008 the private balance sheet reached its debt saturation level, a point where debt to disposable household income had grown so large that even ZIRP could not maintain a reasonable debt servicing ratio. Households and businesses had to scale back their ways, causing “growth” to stall. The left did not let the perceived crisis go to waste and they loaded up on public debt at an unprecedented pace which resulted in several states, such as Greece, Spain, Portugal, Ireland, Iceland and Italy, reaching debt saturation just as the private sector had done few years prior.

The ensuing phase in the global debt implosion saga will be much worse than what we have seen so far because next in line is large economies such as Japan, France and even the US and China.

As our first chart shows, admittedly on relatively optimistic assumptions, the US public debt will reach the same level of debt to GDP that pushed Greece over the edge in less than 15 years from now.Public Debt US vs Greece

Source: Congressional Budget Office, Historical Statistics of the United States; Colonial Times to 1970, Federal Reserve, Reinhart & Rogoff “This Time is Different”, International Monetary Fund, Bawerk.netNotes to US not Greece

When the US crisis happens we do not know, it could be tomorrow or in 20 years from now, but what we do know is that on current trajectory it will happen. Unless something material changes from here the great reset will be something my generation will have to live through.

And no, Greek total debt to GDP is not high compared to its peers.Total debt to GDP

Source: McKinsey,

If we look through the lens of history we know that the industrial revolution could only come after the agricultural sector became efficient enough to support a class of manufacturing labourers and the so-called post-industrial society, based on people doing services for each other, could only grow in line with productivity growth in the manufacturing sector. As efficiency in primary and secondary sectors of the economy improved, living standards, through higher use of services, was sustainable.

From the 1970s on the other hand, large parts of the West went for a new growth model, were ever increasing production in the manufacturing sector was no longer seen as a prerequisite for increased use of services. It was believed the West could trade favours for each other while low-cost countries in Asia would provide the manufactured goods to support such a lifestyle.

And it seemed to work due to the level of capital-stock and credit these nations had built up over almost two centuries of prudent wealth accumulation. The Koreans, Taiwanese and Chinese were more than happy to receive dollars or euros as receipts for future claims on the US and European manufacturing sector.

Paradoxically, the very act of accepting the receipts will eventually lead the receipts to lose most of their value. The reason is simply because issuing dollar and euros receipts hollows out the very manufacturing base they indirectly are backed by as it consume capital in the issuing country, misallocate capital in the recipient country and ultimately create a system where the manufacturing sector cannot sustainably support an ever growing service sector.

As society reaches its total debt saturation level this underlying process will come to light for all to see. If our proposition is right we should start to see labour productivity fall short of its historical pattern.

The first thing we note when studying productivity is that countries that are usually considered laggards has done quite well if we adjust GDP growth for the sluggish growth in their working age population. For example, countries such as Japan and Germany has been the best performers over the last 15 years on a working age adjusted GDP measure, while the best-in-class US is reduced to fourth place among comparable nations. In other words, if the US had seen their working age population develop as in Japan they too would have a “lost decade” behind them and their debt dynamics would quickly run out of control – just as it is in Japan today.GDP adj for working age

Source: International Monetary Fund, United Nations,

The problem for the US is that its working age population will actually track that of Japan in the next ten years. While Japan’s age cohorts between 25 and 65 as share of the total population plateaued in the early 2000s and then started declining rapidly in 2005 the US plateaued first in 2009 – 2011 and has just recently started to fall.Working age as share of tot pop

Source: United Nations,

What this means is that the US must reach Japanese labour productivity levels just to achieve mediocre growth over the next decade. Anything short of that and US growth will resemble that of Italy which certainly will trigger dire debt dynamics.

And if it is one thing that has been really disappointing in the US during the “recovery phase” it is its labour productivity. From our calculated trend the US worker has never performed worse.Prod trend diff

Source: Bureau of Labor Statistics,

And this is not some temporary misfortune bestowed upon the US economy from business cycle dynamics, on the contrary, US labour productivity used to spurt upwards as part of the recovery process.Lab productivity over cycle

Source: Bureau of Labor Statistics, National Bureau of Economic Research,

To sum up, the US economy has benefitted from issuing claims to its future production of manufactured goods in return for goods today. This has enabled the domestic workforce to increasingly turn to the service sector which is plagued by low productivity growth. However, salaries paid in dollars, id est. future claims on US production, has kept up reasonably well as the manufacturing sector did not need to be maintained through saving and capital accumulation as these goods could increasingly be supplied by foreign producers.

When we say kept up relatively well, we do not necessarily mean in terms of salaries, but in terms of access to dollars (debt and through two incomes per household) which can be used in international trade for goods.

As a matter of fact, the lacklustre productivity growth has actually been impressive compared to a non-supervisory salary  Prod vs compensation

Source: Bureau of Labor Statistics,

To get an assessment of the transition in the US labour market we have calculated an alternative way to count jobs. We adjust total employment in the following sectors; Mining and logging, Construction, Durable goods, Nondurable goods, Wholesale trade, Retail trade, Transportation and warehousing, Utilities, Information, Financial activities, Professional and business services, Education and health services, Leisure and hospitality and Other services, with their average hours worked and average hourly pay.

If the sector have higher pay and hours than the average it will get a higher score which we use to adjust total employment.

For example, in 2015 mining and logging had both higher pay and hours compared to the average so we count one job as 1.35 while one job in leisure and hospitality only count for 0.38 due to its low level of hours and pay.

We then sum these up and compare to the overall employment index. The ratio between the two can be thought of as a job quality index. And as so many of our time series show, a break occur in the 1970s when the Federal Reserve was finally relieved of the shackles imposed on it by a barbarous relic.

Our quality index actually increased up to the mid-1970s, plateaued under Volker’s inflation crushing policies, and then fell precipitously during Greenspan’s destructive policies. In the so called Bernanke/Yellen recovery the quality index has been falling off a cliff.Quality adjusted employment

Source: Bureau of Labor Statistics,

In conclusion, the structural shift in the US economy (and we suspect in Europe and Japan too) seem to be caused by a loose monetary policy which hollow out the manufacturing base in the belief that it is not a necessary condition for a thriving service based economy. At one point debt saturation is reached and dollar holders will want to exchange their claims for actually goods, but for which no manufacturing base exist to make good on promises made in the past.

This will be time for the big reset and as soon as dollar holders realise that the manufacturing base is inadequate to meet its obligations panic will ensue.



  1. As I was reading this post I kept coming back to the point “claims on future manufacturing base”. I suppose the dollars held overseas could demand goods, but they could also demand real estate or services (tourism mainly). But in any event, as I kept reading the idea occurred that the only way these dollars can be redeemed on somewhat acceptable terms is if productivity increases. Which then immediately became the next point in the article. (so.. good writing!)

    But before I continued to read, I wondered about US productivity, especially in an environment of increasing regulation/restriction – at some point the regulation works at cross purposes to the amount of dollars held since regulation cannot increase productivity. Even regulation aimed solely at “efficiency” (disregarding regulations aimed at “fairness”) cannot guarantee increased productivity – regulation is an added cost and the efficiency increase will come at the expense of labor which is the only variable cost that can be substituted with any hope of maintaining quality in manufacturing. So now the increased regulation works at 2 cross purposes: either costs are increased thus reducing productivity, or labor is substituted to maintain existing productivity but with a reduced standard of living.

    And then we get to the chart of productivity to compensation. While the immediate post-war years may be an anomaly, the expected slopes of productivity and compensation should both be increasing, productivity likely more steeply than compensation but both rising nonetheless. This was the trend from roughly 1963-1973 (the prior years the slopes were roughly equal). I would love to see the slopes during the war years and prior as I suspect during the depression the slopes look similar to the trend of the last few years. In any event, any regulatory initiative to increase the compensation slope will almost assuredly cause a decrease in the productivity slope which could be the trigger of the great reset.

    I would assume that a sharp reduction in regulation would cause an increase in the slope of productivity as this would be a reduction of costs – naturally the first reduction in costs would be in regulatory-compliance labor so the compensation slope would fall initially until the productivity growth was sustained long enough to allow economically-relevant compensation growth. I believe this is what Thatcher tried in Britain and the decline in compensation growth was politically disastrous. It probably isn’t a coincidence that the few fits of deregulation during the latter half of the Carter administration resulted in a drop in the compensation slope and sealed his political fate (despite the fact that his successor followed the same prescription for his first term; and even his successor capitulated in his second term).

  2. “Right wing nutcases believe households should be the ultimate bearer of that debt”… ??? vs. left-wing Big-Government Spenders?

    Great article… but the straw man above is too easy to knock down! Look to America’s Founding Fathers and you will find a “Tragic-Liberty” worldview. Many are re-attaining this worldview, and speak (or write) to this level, and you will do your readers continued good service!

    To explain: In 3rd world and poor situations, you have a) Tribal Control worldview. In Europe and American Education.. you have its evil twin Doppelgänger Monster: b) Progressive-Retardnation worldview. This is where Keynesian dogma is barfed up and re-eaten over and over.

    But there is a superior worldview: c) Tragic-Liberty worldview, where it is well known there are no angels to organize us, just potential leaders who must deal with the devils on their shoulders. All who are led by such leaders, therefore, make precautions against their leaders-who-may-become-tyrants. That’s all.

    Worldviews a) and b) despise Gold Standards, because it reigns above them. Worldview c) loves a Gold Standard, because it reigns above them. (It keeps the devils in check on the shoulders of would-be-tyrants.)

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