That Nasty Ratio (Debt:GDP)
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2015-07-02 07:00 by Karl Denninger
in Editorial , 1564 references Ignore this thread
That Nasty Ratio (Debt:GDP)

Yes, Puerto Rico has a ~70% debt-to-gdp ratio.

That's hideous, and they can't service it over the long term.  The reason is found in math.

The United States has $18.2 trillion of debt and a GDP of roughly the same amount.  In other words, it is higher than Puerto Rico's.

This is why the US is cheating by spending in deficit.  But that can't work either as this spreadsheet shows.

The bottom chart is on the same scale in years as the other two I've recently posted.  The top is from roughly 1982 to today; I deliberately based both from right around that time (plus or minus a few months.)

Note that when you start spending in deficit there's a little "belly" between GDP and debt which appears to hold up for the first 20 or so years.  This is why people do it; it feels like you're getting ahead.

But you're not -- just a few years later debt is accelerating away from GDP and it's not that long before it's more than three times your economic output.  Long before it gets there you wind up with negative "growth" because the expense of financing that debt exceeds your economic surplus and you inevitably go bankrupt.

This is math, not politics and it happens every single time.

Incidentally that debt and GDP growth rate was not selected in an arbitrary fashion -- it is approximately the United States' rate of change from 1982 forward, and now we're getting much worse GDP growth than the 5% shown -- which will make the acceleration much worse.


There is only one question -- when would you prefer to deal with this -- when the chart is at the top point (which is roughly where we are now or are you going to sit on your butt until the below happens -- and it inevitably will as it is the same chart just extended out in time.

Further, if you actually believe GDP will be approximately $500 billion as this chart shows as an extrapolation I have a bridge to sell you.

Now let's put some other facts on this -- that historical GDP growth number in my spreadsheet, which was around 5% until the "Great Recession", appears to have been permanently reduced to about half that.

What reduced it?  The addition of about $9 trillion to our Federal Debt since 2007, which was immediately dilutive to your purchasing power, and what's worse all debt has a carrying cost and thus will depress GDP permanently thereafter.  This was my expectation and it is being born out as fact and has been accepted by policymakers.


You cannot argue with this chart.  Whenever public Federal Debt increases faster than GDP it exerts a downward slope on GDP growth.  When it is less than GDP advancement then the slope is positive.  Since the 2000 recession Federal debt growth has not been materially under GDP growth and the additions since the 2007 recession have been utterly outrageous.

Next question: How much more debt has to be added to drive nominal GDP to zero, given this experience, and how long will it take before we no longer can generate economic growth at all?

Answer: About another $9 trillion, and at today's accumulation rates of approximately 7% a year we're dead in less than seven years (since we only have 2.5-3% GDP now, not the historical since 1990ish 5%.)

That's the math.  Now here's the problem: Markets never let you to get to the mathematical endpoint because people figure out what's coming and act accordingly before it does.

Incidentally these projections of debt growth are already out there. The CBO, which amusingly claims a $483 billion "deficit" for last fiscal year (despite the fact that the government borrowed roughly double that amount!) accumulates more than that $9 trillion by 2025.  Since they are usually off by about half this means they're actually projecting that we hit the zero-GDP wall in about five years, not seven, and this presumes no recessions in the interim, an exceedingly unlikely outcome.

At the point recognition of permanent GDP impairment occurs the markets will collapse because "growth" of earnings is no longer possible.  At the same time borrowing costs for the Federal and State governments will skyrocket because without GDP growth increasing tax receipts to pay for said borrowing is also impossible without directly impoverishing the people, and simply emitting more debt results in a larger negative GDP print!

We either stop this -- that is, deficit spending -- or it will destroy us, exactly as it has destroyed Greece and threatens to destroy Puerto Rico.  The EU and ECB people, along with Krugman, Bernanke, all of Congress and our Presidents, both past and present are liars; they all know this and deserve to be in prison for the rest of their lives, as do any in the so-called "media" and our political sphere who keep lying about these mathematical facts.

You cannot bargain with math.

If YOU are not willing to do whatever must be done to stop this in the current time frame then you are a monster, you are "invested" in fraud, you are consigning your children to privation and you are destroying not only your future (unless you're older than 75 you're nearly-certain to get what's coming to us all) but theirs as well.


Not someone else, YOU.

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Comments on That Nasty Ratio (Debt:GDP)
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Cerich 1k posts, incept 2008-12-17
2015-07-02 07:47:13

Thank you.
Ktrosper 5k posts, incept 2010-04-06
2015-07-02 09:06:22

agree. Thank you, KD.
You cut to the quick with this one..

The unexamined life is not worth living.-Socrates
The only stable state is the one in which all men are equal before the law.-Aristotle
Liberty exists now in the spaces government has not yet chosen to occupy.-Doc Zero
I anticipate that 10 Dallas Cowboys Cheerleaders will blow me this evening.-K.D.
Pezhead 185 posts, incept 2009-09-22
2015-07-02 09:06:25

Ignorance is Bliss...until it hits you in the face.

We're rich! We broke even! We're in the poor house...
-- Simpsons 'Enron'
Keenan 523 posts, incept 2013-01-11
2015-07-02 09:06:57

I'm going to make this the topic of conversation at this weekend's get-togethers.
It is impossible to square the nation's independence with debt dependence.

Jefferson, author of the document we commemorate, also wrote this in his letter to Samuel Kercheval in 1816:

And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. If we run into such debts, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes; have no time to think, no means of calling the mismanagers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers.
Tdurden 1k posts, incept 2015-01-29
2015-07-02 10:11:45

Karl, we're probably further along that curve than the reported numbers reflect. With GDP being one of the gamed, bullshit numbers with padding for "gross computational units", adjustments for "quality," and "free" checking accounts, owner's equivalent rent and other detritus where no money ever was earned or changed hands, the debt probably blew clean past actual economic output many years ago. But that's just conjecture on my part.

"I'd like to live just long enough to be there when they cut off your head and stick it on a pike as a warning to the next 10 generations that some favors come with too high of a price." -Vir Cotto Babylon 5
Fedwatcher 1k posts, incept 2009-04-07
2015-07-02 11:40:42

mea culpa, mea culpa, mea mxima culpa

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