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Using Savings, Not Debt,. to Fuel Growth.

It has been said that you need liquidity to fuel economic growth. But this can happen in two ways. Growth in the United States has recently been financed by progressively higher levels of debt. In the early 1980s, it took about $3 of debt to produce an additional $1 of annual growth. Now, the ratio is more like $6 of debt for $1 of annual growth. This "rubber band" cannot be stretched continually without breaking it. this is particularly true because some 45% of our debt is now held by foreigners.

Things weren't always this way. There was a halcyon time of growth, right after World War II that lasted for nearly three decades; one and a half generations. This was financed by a 25% annual savings rate during three and a half years of war. Then, the country had the best of both worlds; turbocharged (wartime) demand and consumption much less than production. (And think of all the inventions the war spawned.) Yes, there was a heavy wartime governemnt debt, but we owed it to ourselves (99% of it anyway). Netting out the two, there was basically no debt. But the average worker had nearly a year's worth of wages in the bank, or in U.S. government savings bonds.

There was a brief period of depression in 1945-1946, because the return of six million serviceme... the labor market. But oh, what a labor force. The soldiers and sailors that had won the war in Italy, Normanday, Iwo Jima, and other places became the best workers in the world. They also quickly married the "Rosie the Riveters" who had been waiting at home for them with the aforementioned savings, and started a "baby boom," America's last, of children.  

As late as the early 1990s, 1992 tax receipts covered 1988 levels of gvoernemnt spending, but not those of 1992. America was spending four years ahead of its capacity. (Today, the gap is even wider. )  In the 1940s on the other hand, the country was spending four years behind what it could produce. The resulting "pent up demand" drove the economy forward for a multiple of four years (six or seven times).

To restore that situation, the country needs about eight years of slow growth. Then off to the races for a generation or more. President JImmy Carter, of all people, had it right. We don't need another war to fuel our economy. But the "moral equivalent of war" would probably help. And the resulting prosperity would probably head off a real war.