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Marilyn Davies College of Business

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WHERE IS THE ECONOMY HEADED?

September 1, 2018

Noted columnist George Will posed an interesting question recently. Since the U.S. stock market has recently officially enjoyed its longest ever bull run, do economic expansions die of old age (our current one began over 9 years ago in June 2009) or do they fall by the wayside because of significant events and/or bad/poor policies? No one really knows the answer but a simple fact has never changed – all expansions do eventually come to an end.

Let’s examine a couple of things. First, the expected deficit for fiscal 2019 is projected to be $1.085 trillion. Second, since quarterly gross domestic product (GDP) began being tabulated over 70 years ago (1947), there have been 101 quarters (roughly 36%) with growth at least equal to the 4.1% experienced in 2018’s second quarter.

One of the ongoing debates in economic circles is at what point does the ratio of debt to GDP suppress growth? Mr. Will suggests that we are highly likely to understand where that point is since the national debt will probably approach or exceed GDP within the next decade. Additionally, most consider it troublesome that among advanced economies in the world, only the U.S. expects an increase in the debt-to-GDP ratio over the next 5 years. All of this causes rhetoric like recently from the chairman of the Federal Reserve who stated that our fiscal policy is on an “unsustainable path”.

Will’s message is quite clear. Even though the Democratic and Republican parties seem sharply divided by ideology, the incentive for both parties is to run enormous deficits so that current voters get charged far less than the cost of the goods and services they consume. Voters can’t help but feel like they’re getting a good deal. However, the result – future voters are saddled are servicing an enormous debt after the current politicians who ran it up are long gone from office.

It’s good to remember that we are not far away from the 10th anniversary of the collapse of Lehman Brothers, one of the largest U.S. investment banks in its prime. And yes, Lehman’s bankruptcy was the precursor to the evaporation of $10 trillion in global market capitalization. But nothing good or bad lasts forever. Those who don’t see a “Lehman incident” on the horizon, also didn’t see one in 2008.

Stay tuned….

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Last updated 8/31/2018 11:56 AM