Help me understand GDP/debt ratio

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SkylightMT's picture
SkylightMT
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Help me understand GDP/debt ratio

I'm sure Chris explains this elsewhere but I can't find it.

I've heard many economists refer to a GDP to national debt comparison as a better indicator of where the nation stands, debt-wise, than just looking at the amount of debt alone. It makes sense to me that debt alone doesn't say much if ability to repay isn't also taken into consideration.

The current total debt is 10.625 trillion, and the current GDP is 14.408 trillion, making a current ratio of 73.75%. (I like the debt clock at http://www.optimist123.com/optimist/2008/08/index.html although I don't agree with much of what else he says sometimes) (incidentally in the last week the debt is going up much faster, and the GDP is dropping).

Following WWII, we had a debt ratio of 120%, which we brought down to 40% by growing the economy. Japan currently has a GDP of 180%, I think. Many other countries have a higher debt to GDP ratio than we do.

So why is our current debt so worrisome, at 73.75%? Is using debt to GDP a bad way to look at our debt? What's a better way?

Damnthematrix's picture
Damnthematrix
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try this
SkylightMT's picture
SkylightMT
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Re: Help me understand GDP/debt ratio

Thanks, Damnthematrix. I'm struggling to understand this, but it looks like if our private debt wasn't so incredibly high, our national debt might not be so worrisome, and vice versa? It would have never occurred to me to add private debt to the national debt because until private debt becomes so overleveraged it can't be paid back, it would seem not to matter - it wouldn't affect what the feds can take from GDP to pay on its loans. Or does it (e.g are there massive tax breaks for the overleveraged?)? I hope I am making some kind of sense and not sounding completely dumb.

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cmartenson
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Re: Help me understand GDP/debt ratio

Please check out Crash Course Chapter 12 (Debt).  I explain that the relevant ratio is total debt to GDP, not just federal debt.

Why?

Because ultimately whether the debt is held by a town, a state, a corporation or the federal government it is the labor of individual people that pays it off.

We don't have access to good debt figures on a per capita basis but the Fed tracks this on a household basis.  Close enough.

You are on the right track by wondering about the total debt load.  Attempts to reframe the argument in terms of  only federal debt are red herrings.  First because how we measure "GDP" has changed so dramatically over the years that it's not really possible to accurately compare federal debt over the decades.  Second because federal debt is only 20% of the debt pie.

 

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dmcmain
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Data underlying charts
I am very much interested in the data underlying these charts.  Is there any way I can get these data along with a description as to how they were compiled?
gonzy's picture
gonzy
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Re: Data underlying charts

Wouldn't it be more appropriate to look at debt/income or the % of income used to service the debt? GDP is a measure of overall economic activity it has no bearing on the gov't income except the potential to raise taxes. Not to mention that gov't stimulus money is also counted as gdp. Maybe we should pray for anothe Katrina so we can increase our GDP how much sense does that make?

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Travlin
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Re: Help me understand GDP/debt ratio

Damnthematrix

Regarding the US government debt chart, I have to question that.  I've see data where the ratio did not decline in the mid 90s, and continuted to rise since 2000, skyrocketing in the last two years.

I've read from good sources that the official US government debt is about $13 trillion now, or over 90% of GDP.  Off balance sheet obligations are around $65 trillion or more.

Otherwise it was a good explaination and data.

Thomas Hedin's picture
Thomas Hedin
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Re: Help me understand GDP/debt ratio

What should be waking the people up more than anything else is the fact that we cannot produce our way out of this debt.

yobob1's picture
yobob1
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Re: Help me understand GDP/debt ratio

If by "we" you mean the entire planet, you are correct.  Earth is bankrupt.  What the Mayans foresaw for 2012 is no doubt the return of our Galactic overlords coming to repossess the planet. Surprised

 

Thomas Hedin wrote:

What should be waking the people up more than anything else is the fact that we cannot produce our way out of this debt.

machinehead's picture
machinehead
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Re: Help me understand GDP/debt ratio
SkylightMT wrote:

Thanks, Damnthematrix. I'm struggling to understand this, but it looks like if our private debt wasn't so incredibly high, our national debt might not be so worrisome, and vice versa? It would have never occurred to me to add private debt to the national debt because until private debt becomes so overleveraged it can't be paid back, it would seem not to matter - it wouldn't affect what the feds can take from GDP to pay on its loans. Or does it (e.g are there massive tax breaks for the overleveraged?)? I hope I am making some kind of sense and not sounding completely dumb.

You referred to the very high debt/GDP ratio after World War II. Lower private debt levels back then allowed the ratio to decline. Probably the most important way was through higher GDP growth (the debt wasn't paid off; rather, GDP grew rapidly). Also, with Social Security in its infancy and no Medicare/Medicaid, US government spending was not on autopilot as it mostly is now -- the government could run cyclical surpluses when it chose to.

US marginal tax rates were also shockingly high during the Fifties. By today's standards, richer Americans lived under a confiscatory tax regime:

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

Economists have a hard time explaining how the US economy was able to grow so rapidly under such high tax rates. Probably it had more growth potential at the time, plus there was 'pent-up demand' due to wartime rationing. 

If such high marginal rates were attempted today to pay down debt, they still wouldn't be adequate to meet the relentless, programmed escalation of entitlements spending. But they would cripple luxury demand, probably sending the economy back into recession. And in a more globalized world, confiscatory taxation likely would provoke capital flight. Some Americans already are renouncing US citizenship, owing to the atypical worldwide income taxation imposed on US citizens.

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