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Recovery based on more debt: is it worth it?
Government authorities in the United States (US) have been given an indirect go-ahead for American consumers to splash out their borrowed dollars in an attempt to push the demand for manufacturing goods produced in the US.
The result couldn’t have been more predictable. Americans consumers promptly responded in a very positive fashion. The total volume of their outstanding debt reached $13tn in the first quarter of 2014.
As we learned from the recent crisis, this pile of debt could potentially drag the entire economic system to a standby for years with thousands declaring personal insolvency. But there are reasons to celebrate if the pile of debt does not turn into dust in years to come.
The manufacturing sector in the United States, dependent on consumer and business credit, has been showing unprecedented signs of recovery. This recovery is significantly related to the production of durable goods and has now outpaced its pre-crisis production levels.
A preliminary statistical analysis, undertaken by Marketline analysts, indicates that a 1.0 percent expansion in consumer credit increases the manufacturing output by 0.28 percent. Although the relationship will be investigated further, this preliminary analysis reveals a positive and statistically significant link between consumer credit and manufacturing output in the US.
Yet as none of us have the skills of soothsayers (from fairy tales), nor a magic crystal ball to foresee the future, it has become difficult to predict the fate of this pile of debt in years to come. Consequently, it would be more prudent for US authorities to start to put some measures in place to reduce the total levels of consumer outstanding debt in the country. Following more than three decades of financial deregulation, the outstanding credit to households increased more than 900%, in nominal values, from $1.2tn in the first quarter of 1980 to more than $13tn by the end of the 2000s. How much more would it need to grow before someone in the government realizes that there is something wrong with it?
For more information, take a look at our Case Study: Made in the USA: Manufacturing’s resurgence anchored by macro policies