How we got here- Debt/GDP

Interst rates have been falling since Paul Volker “broke the back” of inflation from the late 70’s to the late 80’s. This lead to more favorable corporate financing rates and hence, more debt vs. equity financing. Companies weren’t the only adroit operators of the liability side; the government felt it was increasingly a good time to pile it on. While wars have been the main drivers of debt increases in the past, we find a mix in the past half-century.

debt to gdp.png

As you can see above, the Reagan tax bill was the start of it all. When a government relies on taxes as income and they continue to spend the same as before, a deficit, and therefore borrowing, must ensue. This is what may occur if the current tax bill gets passed. The Republicans in Washington claim that the growth that will come of all of this will cancel out and even become a net positive. This remains to be seen.

 

Sources: WSJ, CBO

 

 

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