Wednesday, January 27, 2010


Total Debt-to-GDP Ratio: Help!

Seeking Alpha has a great article titled “Total Debt to GDP Trumps Everything Else.” Usually the debt-to-GDP ratio is calculated with a country’s public debt alone, but there’s a lot more debt out there to be accounted for (and, ultimately, either paid off or defaulted). That’s why using total debt gives one a much better idea of how serious the situation is. We learn here that the ratio for the US is about 370%. This is really bad, but as noted,
Even more incredible is that the present debt level does not include the entitlement and pension obligations that would just about double the total debt from where it is now.
Wow! And politicians are still assuring us that we’ll pull out of the recession and everything will be OK. Do they really believe that so much debt can be paid? Believe it or not, some other countries are even worse off.
The UK debt to GDP is about 470%, Japan 460%, Spain 340%, South Korea 340%, Switzerland 315%, France and Italy about 300%, Germany 275%, and Canada 245% (all are records of debt to GDP).
But there’s more shocking news ahead. Since the economy is like a big Ponzi scheme, it’s necessary to keep more and more new money coming into the system to fuel growth. So progressively more money is needed to generate the same amount of GDP.
This U.S. debt to GDP started accelerating in the 1960s (with the Vietnam War, Space Race and continuation of the Cold War) when it took $1.53 to generate an additional $1 of GDP. Then during the 1970s, with the continuation of the Vietnam War, it took $1.68 to generate $1 of GDP. In the 1980s (including Leveraged Buyouts and Star Wars) it took $2.93. In the 1990s (with the internet bubble) the debt it took to generate $1 of GDP climbed to $3.12. However, the most incredible of all was the first decade of this century when it took over $6 to generate an additional $1 of GDP.
Of course, securing the increasing amount money needed to maintain growth and keep the system from collapsing (not to mention the expense of maintaining an empire) necessitates issuing debt. Lots and lots of debt. That’s how we ended up with so much cheap credit. It was virtually inevitable if we are going to keep pumping up the system.

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