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The Relationship Between Public Debt And Economic Growth

May 10, 2021 7:30 AM ET25 Comments
Larry Swedroe profile picture
Larry Swedroe


  • Beyond a certain level, government debt is a drag on growth.
  • Research shows the estimated threshold is in the area of 85-115%.
  • We are nearing the top of that range with potentially negative implications for future economic growth.
  • Financial plans should at least consider that there might be a negative impact on economic growth caused by the rising debt and that it would likely lead to lower equity returns. Lower potential economic growth when combined with elevated valuations should at least raise concerns.

Covid-19 coronavirus newspaper headlines and 100 dollar bills. Stimulus aid relief bill, unemployment and recession concept
Photo by JJ Gouin/iStock via Getty Images

The Relationship Between Public Debt and Economic Growth

The massive fiscal stimulus, producing the largest deficits as a percentage of GDP the U.S. has ever experienced during peacetime, has pushed the U.S. debt-to-GDP ratio

This article was written by

Larry Swedroe profile picture
Larry Swedroe is head of financial and economic research office for Buckingham Wealth Partners,  a Registered Investment Advisor firm in St. Louis, Mo.. Previously, Larry was vice chairman of Prudential Home Mortgage. Larry holds an MBA in finance and investment from NYU, and a bachelor’s degree in finance from Baruch College. To help inform investors about the passive investment approach, he was among the first authors to publish a book that explained passive investing in layman’s terms — The Only Guide to a Winning Investment Strategy You'll Ever Need (1998 and 2005). He has authored seven more books: What Wall Street Doesn't Want You to Know (2001), Rational Investing in Irrational Times (2002), The Successful Investor Today (2003), Wise Investing Made Simple (2007), Wise Investing Made Simpler (2010), The Quest for Alpha (2011), and Think, Act, and Invest Like Warren Buffett (2012). He also co-authored eight books: The Only Guide to a Winning Bond Strategy You’ll Ever Need (2006, with Joe Hempen), The Only Guide to Alternative Investments You’ll Ever Need (2008, with Jared Kizer) and The Only Guide You’ll Ever Need for the Right Financial Plan (2010, with Tiya Lim and Kevin Grogan), Investment Mistakes Even Smart Investors Make (2011, with RC Balaban), The Incredible Shrinking Alpha (2015 and 2020 with Andrew Berkin) Reducing the Risk of Black Swans (2013 and 2018 with Kevin Grogan), Your Complete Guide to a Successful and Secure Retirement (2018 and 2020 with Kevin Grogan), and Your Essential Guide to Sustainable Investing (2022 with Sam Adams). He writes for AdvisorPerspectives.com, AlphaArchitect.com, and TheEvidenceBasedInvestor.com. You can follow him on Twitter  (http://twitter.com/larryswedroe).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (25)

Would be nice to see a reply or comment from an MMTer on this post,
Larry Swedroe profile picture
@Diego Montalbon, raconteur
FWIW, IMO there is really no such thing as MMT, it's just economic hogwash created to justify political objectives.
There are few examples of countries having had high public debt with their central bank owning most of it. It seems that if all interest is credited back to treasury, the cost to growth shouldn’t be much.
Larry Swedroe profile picture
Japan is good example and see what the cost of that debt has been in terms of economic growth!
Lake OZ boater profile picture
@Larry Swedroe @dougkitchen

Perhaps of interest, see overview of Wharton's work that in highly indebted economies, bonds have been competitive with stocks.

"How Fixed-income Portfolios Match or Beat Stocks in the Long Run"

Larry Swedroe profile picture
@LakeOZ boater
thanks for sharing
Hi Larry. So how do "Prudent investors plan for this [lower growth high valuation] possibility"? Most bonds are at the zero bound and therefore won't provide the protection they have historically provided. A large cash allocation is a possibility, but currently earning below [rising] inflation. Timing the market by increasing the cash allocation at the peak in the hope of calling the top (reasonably closely), and then buying is a let easier said then done for many reasons. Alternatives might constitute a small part of an overall portfolio [direct real estate, commodity miners, precious metals?]. But where should, what is probably most people's largest allocation i.e. public equities, be invested? Not in growth stocks with valuations (P/E, P/CF, P/S) greater than the S&P? But the FAAMG have made the S&P pricey. How much below the S&P [say the equally weighted S&P 500 - RSP]? Is it simply a valuation consideration? What about the relation to sales and cash flow growth (I don't trust earnings numbers)? When the overall economy slows down what sectors or factors should do better than the overall market? More importantly what sectors or factors are not currently priced to reflect the likelihood/probability that they will outperform when the overall economy returns to "secular stagnation", as this article (along with many others (Lacy Hunt, Eric Basmajian etc) postulate? Thanks.
Lake OZ boater profile picture
@dana3 Don't forget about bond "convexity." Even at low rates, long duration bonds can deliver stock-like returns. You might like this article.


Not too long ago (2020), long- duration treasuries out-performed the
S & P 500.


EDV= Vanguard Extended Duration Trs ETF
SPY = SPDR S&P 500 ETF Trust

Full results at link:


L-T treasuries also provide a nice hedge for our stock allocations. The S&P 500 lost (-34%) in the steep sell-off from February 19, 2020, through March 23, 2020. During that same period, TLT was up + 13%.

IMHO: Transitioning to "total return" investing, i.e. living off of a combination of both capital gains and income, seems to be a rational approach in this era of financial repression.
Larry Swedroe profile picture
Few thoughts
First, I believe investment strategy should be based on these three core principles. 1. Markets highly but not perfectly efficient, thus invest systematically (passive) and avoid stock selection and market timing (active). 2. If believe first point you logically must believe that all risky assets should have similar RISK ADJUSTED returns. 3. If believe that then logically should try to diversify across as many unique sources of risk as can identify that meet criteria Andy Berkin and I established in Your Complete Guide to Factor Based Investing: premiums that have evidence of persistence, pervasiveness, robustness, intuitiveness and implementable (survive transactions costs).
Second, the problem with the typical 60/40 portfolio held by most is that it has about 85-90% of risk in one single risk (factor) called market beta. That doesn't make sense to me given points 1-3. So I own lots of other assets that have low to no correlation with market beta risks and/or trade off economic cycle risks to take other risks like liquidity (which almost all investors can do with some portion of their portfolio) and reduce risks like inflation. So I own funds like CCLFX & LENDX, (which take some economic cycle risks but much less than stocks, but have similar expected returns AND NO INFLATION risk) SRRIX & XILSX (which take different risks but have equity like EXPECTED returns and no inflation risk) and QSPRX (again uncorrelated risks). I also invest in other non correlated assets in private transactions, like life settlements and drug royalties and others. In other words, I want to build more of a risk parity type of strategy, avoiding concentrating risk in any one type of risk--as all risky assets go through long periods of poor performance.
Each investor needs to decide for themselves which risks they can deal with, which trade offs they are willing to accept and then have the discipline to adhere to your plan, ignoring the noise of the markets, rebalancing and TLH along the way.
Hope that is helpful
Larry Swedroe profile picture
@LakeOZ boater
Of course the reverse is true if rates rise which IMO is a high likelihood in the potential distribution of possible outcomes (though another is the debt makes us turn into Japan with very low rates as debt impacts economic growth). Consider that we get back to "normal" with say 2% gnp growth and 2% inflation and 50bp premium for tbills. That would put the tbill rate at say 2.5% and 10 year at about 4.5%. And that is not considering the risks of much higher inflation if Fed repeats mistakes of 70s. Now the rising rates would mean massive deficits, another 600-800b plus a year in interest costs and growing and that might not be absorbable by markets--and Fed then monetizes it. Not prediction, just saying possible and should be risk consider. And maybe foreign investors who are massive holder of dollars as reserve say no mas! So the "low risk" safe bonds become much riskier as their duration is at these current interest rates much higher than when rates were higher.
I have moved much of my fixed income assets to more floating rate like CCLFX and LENDX and private RE (real assets) due to those risks
Buyandhold 2012 profile picture
"Beyond a certain level, government debt is a drag on growth."


The national debt never should have been allowed to rise about 10 trillion dollars.
@Buyandhold 2012

How would MMTers reply to this ?
Some MMTers think investors are all evil squid heathens, so don't expect
them to reply.
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