The dangerous mirage of America’s continued prosperity

The signs of US prosperity are brisk job creation and confident spending. But many of the new jobs are insecure and poorly paid and the colossal household debt is sustainable only at current record low interest rates

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Household debt has reached significantly higher levels in the US than in the euro area, Japan or even globally. Photo: Bloomberg

Published: 1:00am, 16 Dec 2019Updated: 1:00am, 16 Dec 2019

Has Donald Trump made America great again? Some (not least the United States president) like to think so, as the world’s biggest economy continues to add jobs at a brisk pace and grow at a fair clip. But this is really a case of fake news. US consumers are borrowing and spending their way to an artificial and unsustainable state of prosperity.

This seems to go largely unnoticed by many economic commentators, and by stock investors who also embrace the fiction that even a limited US-China trade deal will soon set the world to rights again. There are none so blind as those who bury their heads in the sand.

More than just accommodative monetary policy is needed to get (responsible) people to spend, as leading central banks including Bank of Japan and European Central Bank have discovered to their cost, even where interest rates have sunk below zero. You can lead the proverbial horse to water but you cannot easily make him drink.

For that, you need people to have an exaggerated propensity to consume. Such a tendency exists among US households while in much of Europe, there is a more cautious propensity to save. The data on borrowing and spending tell a more accurate story in this regard than Trump’s claims of an economic renaissance in the US.

Even a cursory glance at trends among the different sectors of advanced and emerging economies reveals the dirty little secret behind the continued “strength” of US economic and employment data. Household debt has reached significantly higher levels in the US than in the euro area, Japan or even globally.

US household debt was just over 74 per cent of gross domestic product in mid-2019, according to figures compiled by the Institute of International Finance in Washington and other sources, including the Bank for International Settlements.