The Dollar's Doomsday Cycle

At this juncture, America's public and private debt burdens and associated problems appear to be one of those things that "don't matter until they matter."

Optimists from President Bush on down are betting the economy will recover before that time arrives.

Good Debt vs. Bad Debt, Continued

Monday's column looked at the ongoing argument over the significance of the nation's corporate and public debt. It generated considerable response, some of it good fodder for the debate, so it bears repeating here.

In late 2002, total U.S. debt (all sectors) relative to GDP was at levels last seen in 1933, "in the depths of the Great Depression and just before one of the greatest reflations in U.S. history," according to a report from Barry Bannister, a managing director at Legg Mason Wood Walker. "In the current era, we see a mandate to stimulate the economy and service debt. When the rate of national economic growth is insufficient to service legacy debt, our view is that the appropriate policy response is over-stimulation, similar to the 1960s and 1970s."

Based on expected inflationary monetary and fiscal policies in the coming years, Legg Mason forecast the PPI Commodities Index will outpace the annual average return of the S&P 500 by 6.9% to 1.8% from 2002 to 2015. (The commodities index rose about 11% in 2002 while the S&P 500 fell about 23%, so commodities have a head start on Legg Mason's rather bearish long-term forecast.)

A more bullish view comes from Dessauer, who observed that while the household debt burden is about the same today as it was in 1985 -- at about 14% of disposable income -- the cost of that debt is down considerably, as interest rates have fallen dramatically. Also, mortgage debt (a.k.a. "good debt") is now 23% of total household debt while high-cost credit card debt (a.k.a. "bad debt") has fallen to 25.8% of total household debt from 48.4% in 1995, Dessauer wrote.

The newsletter writer further observed the national statistics on America's savings rate don't include "alternative forms of savings," such as stocks, bonds, 401(k) retirement plans, real estate and other hard assets.

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