The most important indicator of the three, of course, is total credit. This indicator can be examined from several perspectives: its annual growth as well as that of its individual components, and lastly its ratio to GDP by debt component.
The growth part involves only two sectors, government and non-financial businesses. Without the growth in government borrowings, the situation would have been much worse with all the other sectors showing worsening declines instead. Contrary to the Republicans' claim, it's Obama's deficits that have been holding up the economy. But not for long.
As banks dwindle in size, the credit or money supply will likewise contract putting more pressure on prices of equities, commodities and real estate. It is a truism that banking thrives on continuing loan growth. As loans grow, asset prices riding on the back of loans, rise as well to the benefit of both borrowers and bankers. Unfortunately, when the process reverses, bank failure is the natural outcome. During the 1930s Great Depression, a similar situation prevailed to the extent that nobody wanted to work in banking.
Even the Republican presidential contenders who are pressing for a balanced budget would surely change their stripes once they are in office. When Roosevelt campaigned for president in 1932, he criticised Hoover for deficit spending. Ditto for Obama. But once they became president, they broke all budget records because if they hadn't, the bond market would see to it that they be impeached. Undeterred, Roosevelt reattempted budget balancing at the beginning of his second term. The economy soon relapsed into a recession worse than that of 1929, forcing him to backtrack. In a depression, you don't meddle with King Bond; just let it grow.
In February 1993, James Carville, Bill Clinton's political advisor, presciently remarked, "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." Then, the bond vigilantes sold off bonds upon hearing that Clinton would embark on deficit spending. Clinton was only saved by the massive borrowings undertaken by the financial sector and the households that allowed him to balance his budget. Now it's not the bond vigilantes but King Bond itself that decides who'd stay in power.
Although lately, economic trends have been pointing towards a recovery, we should treat this as merely blips in a secular downtrend. We've been through this false hope many times. Even in the 1930s depression, there were seven such instances that subsequently left many in a worse state of despair.
Would humongous government debt lead to the downfall of any government? Actually, no. The strength of any modern government depends on the level of the country's new technology acquisition, and it's not just any technology but technology that meets the Kondratieff Wave criteria of capacity and communication. Because of this, the East Asian countries aren't likely to dislodge the US from its preeminent position, not now and never in the future.
However the Fourth and the Fifth Kondratieff Waves are stuffed with technologies that empower the small at the expense of the big. This is the root cause that will precipitate the decline of the US as a superpower. The symptoms of downfall that afflicted past empires will unfold for the US in the coming years. We will witness how hard-pressed the US will be to contain its debt load as the technologies that are in ascendant now and in the future will instead favour the breaking up of large nations.