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The Consequences of the U.S. Government’s “Unprecedented Spending Spree”

Deflation involves the contraction of unsustainable levels of debt.

With that in mind, an August 6 Forbes article points out that if the U.S. government spends and borrows as currently planned, the likely result would be a debt-to-GDP ratio which exceeds the levels following World War II.

Here's an excerpt from that article:

America is engaging in an unprecedented spending spree. The Committee for a Responsible Federal Budget estimates that the infrastructure proposal and the proposed $3.5 trillion reconciliation spending plan will result in $2.9 trillion (about $8,900 per person) of additional government borrowing over the next decade. This debt will not solve our problems. America needs more private sector innovation to solve our biggest challenges--uplifting the poor, healing the sick, and protecting the planet--not more government spending and top-down regulation.

If all this proposed spending occurs, the federal debt is likely to hit 109% of GDP by 2031 but could get as high as 125%. This would surpass the debt-to-GDP ratio in the years immediately following World War II.

Debt125

The prospects of a debt-to-GDP ratio of 125% is a cause for concern. Yet, keep in mind that this forecast is a linear extrapolation from the present, and history shows that such extrapolations often do not unfold as expected.

In Elliott Wave International's view, an analysis of the Elliott wave pattern of debt-to-GDP ratios is a superior basis for making a forecast. And, right now, it appears that the debt-to-GDP ratios of many nations will soon be dramatically declining, not climbing.

Remember, as you look at the chart below from Elliott Wave International's August Global Market Perspective, when a five-wave trend is complete, a trend in the opposite is set to start.

Commentary from the August Global Market Perspective is just below the chart:

PublicDebt

According to the graph above, debt-to-GDP ratios across 20 advanced economies are testing the high-water mark that dates back to the 1940s, when global economies were borrowing massive amounts of money to fund the World War II effort. Incidentally, the ratio has also traced out five waves up since 1975, implying a nearby reversal.