Guest Post: How Long Before Massive Government Debt Buildup Triggers Another Financial Shock?

Tyler Durden's picture

From Madeline Schnapp, Director of Macroeconomic Research at TrimTabs

Stimulus Tactic of Increasing Government Debt to Increase GDP Broken and Unsustainable. How Long before Massive Government Debt Buildup Triggers Another Financial Shock?

Sometimes a picture is worth a thousand words.  A recent post on the popular ZeroHedge financial blog compared the annualized growth in federal debt to the annualized growth in GDP in Q1 2012.  ZeroHedge reported that while U.S. government debt rose by $359.1 billion in Q1 2012, the U.S. GDP grew only $142.4 billion.  Durden noted that, “It now takes $2.52 in new federal debt to buy $1 worth of economic growth.”

The surprising observation prompted us to examine the relationship between growth in debt and growth in GDP from 1975 through 2012.  What we found is both astonishing and frightening.

In Q1 2012, GDP rose $142 billion, while debt rose $359 billion.  In other words, it took nearly $2.50 in debt to generate $1.00 in GDP.  We wanted to understand how this relationship compared to those that prevailed in previous decades.  The graph below shows our findings.

Source: Bureau of Economic Analysis – and Treasury Department –
Note:  The negative value in 2008 was due to negative GDP growth.

From 1975 to 1980, each $1 increase in GDP was accompanied by an increase in debt of between 20 and 47 cents.  In other words, the increase in GDP was two to five times the increase in debt.

From 1981 to 2007, the amount of debt required to produce $1 of GDP growth crept higher, and it ranged from a low of 3 cents in 2000 to a high of $2.25 in 1991.  In only eight of those years did it take more than $1 of debt to produce $1 of GDP growth—1982, 1986, 1990 to 1993, 2002, and 2003.  On average, it took 79 cents of debt to produce $1 of GDP growth.  In other words, the increase in GDP was nearly 1.3 times the increase in debt.

Along came the Great Recession.  Since 2009, the traditional relationship between debt and GDP growth has been turned upside down.  Each $1 increase in GDP has been accompanied by, on average, a $2.50 increase in debt.  Before the recession, an increase in debt generally generated a greater increase in GDP, but now it takes an enormous increase in debt to eke out a small increase in GDP.  At some point, the amount of debt required to generate even modest GDP growth will suffocate the economy and trigger another financial shock.

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skepticCarl's picture

You're fricking kidding me:  the answer is "At some point.."  ? 

CrazyCooter's picture

I think this was a trend observation, not so much a prediction.

Besides, Eisenhower was the last president to actually shrink federal spending, so it shouldn't be a surprise to anyone. Paul, if he gets a chance to cut $1T in his first year, would break that trend ... otherwise its ... brick wall, here we come!



ThatGuyEhler's picture

It's a prediction of the continuation of a trend. A very easy one at that, since the ratio of debt/GDP of the US is not going down anytime soon.

The Alarmist's picture

We already crossed the event horizon, so " at some point" is already passed. We just don't know it, because as we get sucked into the black hole, time appears to slow down.

forexskin's picture

did somebody let Denninger loose in here?

The Big Ching-aso's picture



Until China gives us the big fat finger of fate.

economics9698's picture

Here let me write that money pit equation ... Y = C + I + (0.40) G + NX.

I like this one better...Y = C + I - G + NX

economics9698's picture

What you are looking at is the responsiveness to "crowding out" of the private sector by the federal government.  Here are the percentages of the GDP the feds consumes starting in 1975.

21.3 21.4 20.9 20.7 20.7 20.1 21.7

Now 1981 to 1990.

22.2 23.1 23.5 22.2 22.8 22.5 21.6 21.3



Notice how the effectiveness of debt decreases when Reagan ran a record, for then, deficit in 1982-83.

Now 1991 to 2001


22.3 22.1 21.4 21.0 20.6 20.2 19.5 19.1 18.5 18.2 18.2

When the fed spending gets around 18% of the GDP the more diminished borrowing becomes much more effective.

Now 2002 to 2007.


19.1 19.7 19.6 19.9 20.1 19.7

And finally 2008 to 2012 (est).

20.8 25.2 24.1 24.1 24.3

The correlation is strong, the more the government spends the less effective debt and stimulus spending is measures as a percentage of GDP.


Lesson of the story, if the federal government restricted spending to 15% of the GDP, had a "rainy day" fund for when there was a recession, they could actually be a productive member of society.  As it is the federal government creates poor economic performance with its overspending.

Here's a link, table 1-3.

jeff montanye's picture

"From 1981 to 2007, the amount of debt required to produce $1 of GDP growth crept higher, and it ranged from a low of 3 cents in 2000 to a high of $2.25 in 1991."

this sounds misleading when the graph shows a fifty cent decline "per" $ of gdp growth in 2009.  the implied causality, imo, is more tenuous.

JeffB's picture

Even if you took out 2009 the trend is still very obvious.

But I'm not sure why it should be taken out. They were cranking out money hand over fist and our GDP shrunk significantly anyway.

Our total debt went up $1,785,603,936,384.06 (per the Treasury) in fiscal year 2009 (10-1-08 to 9-30-09).

Shouldn't we be able to expect some bang for ou buck, or Trillions of bucks as the case may be? Why should they get a mulligan just because GDP went south despite the massive government spending?

If anything, that would seem to bolster the argument to me.

Sure the argument would be "a little more tenous" without the most glaring example, though I think it still stands even without that "anomaly", but that seems to be special pleading, much as former Washington D. C. Mayor Marion Barry claiming the D.C. crime rate wasn't so bad if you didn't count all the murders.



flacon's picture

Very interesting. I just wanted to address one point though: "they could actually be a productive member of society. ". Gov can never be a productive member of society because that would require them to actually produce something (instead of consuming first via taxation). :)

LawsofPhysics's picture

LOL!!!  Yeah the military is pretty useless along with all that technology that gets developed from government R&D.  What a moron.  Let me guess, all those "financial products" created in the private sector have "real value".

Wake the fuck up idiot, what we have now are useless people in the private sector stealing wealth by controlling your government.   One party, for the banks and financial sector, by the banks and financial sector.  You represent the perfect useful idiot.

Fine with me, crash the system, crash it all and let's have a total free-for-all.  At least then we will find out the real value of everyone's labor.  Fucking bring it.

spinone's picture

Roads, ports, defense, and a legal system are not productive? Try having an economy without them.

Calmyourself's picture

Exactly not one of them "produce" a damn thing.  Their existence allows productive people and enterprises to utilize them to be productive by themselves they produce nothing, a vitally important distinction.  Infrastucture is built through taxation which is money taken from the productive to increase private productivity.  I have a better question try having an economy without productive private enterprise, you can print money and build mega ports, roads and defense and if the private sector does not produce you got bupkus.. Modern liberals cannot think..

LawsofPhysics's picture

Private enterprise is very tight with their capital moron.

FYI, your taxes pay for police, firefighters, the military, technology R &  D (this investment produces  the next generation of drugs, cars, planes, computers, etc.)

You really think that all the innovation that got us here came from private companies?  You are a moron, get the fuck out of your parents basement and educate yourself.  Private companies will not risk their wealth on developing certain innovations due to the cost and extended time it will take.  There isn't a single technological device or drug that has come to the market without government funding.  Just crash the whole damn system, go ahead, I dare you.  Then you will see precisely how fucking tight private capital is (and other countries will continue to leap ahead, making your employment opportunities weaker).  Again, this is completely fine with me, at least then we get to find out what everyone's labor is really worth and compensation (in numerous forms) will find its way back to people who are actually worth a shit.

Calmyourself's picture

R&D wasn't the question lib..  It was ports, roads, courts and defense but of course that particular set of points kicked your lib ass so you of course like a good Statist changed the subject.

"There isn't a single technological device or drug that has come to the market without government funding."

In this case lets throw out 90% of the technology in existance and you can move back to to the Soviet Union which is a massive success as a result of complete Government control and spending..  One day soon there will be a reckoning you had better hope this economy never actually crashes because guys like you who believe the Government is a source of anything without private individuals whom it depends on to rob and redistribute are fucked..

The Alarmist's picture

Wonder why I am reminded  of the "What have the Romans ever done for us" scene in The Life of Brian.

Max Fischer's picture



It now takes $2.52 in new federal debt to buy $1 worth of economic growth....

This article erroneously presupposes that every dollar of debt is intended to increase GDP.  Where did that notion come from?  When GDP contracts, would you argue that all government spending leads to an immediate contraction of GDP?  What about spending on the Afghan war?  Is that intended to increase GDP or fight terrorism?  There are so many variables which influence government spending that it's nonsensical to draw any conclusions from overlaying GDP charts over government debt.

Tax revenues are up since 2008, right? Government spending is, too.  If I overlayed a chart of government spending and tax revenues, could I claim that increases in government spending increase tax revenues?

Correlation does not equal causation.


WatchingIgnorance's picture

Jamie Dimon said MF couldn't have his money back.

Poof. It's gone.

Move along sir. This line is for people who have money in this bank.

Calmyourself's picture

"This article erroneously presupposes that every dollar of debt is intended to increase GDP"

Your right Max a large portion of it is used to get worthless politicians re-elected..

malikai's picture

Is the liquidity trap actually nonsensical? I recall that Keynes spent considerable time on the subject. There must be something to it.

RiverRoad's picture

Also known as a slowly simmering pot of Sheeple-Frog soup.

Jack Napier's picture

Did someone say Event Horizon?

Charles Wilson's picture

"Ron Paul is right about everything though. He's just not the savior."


That's one of the points.  The Statists would criticize Ireland for its LOW 15% CORPORATE TAX RATE.  Not one German/Belgian Bureaucrat ever argued that maybe the EU should lower ALL CTRs to this 15% (or lower...) level.  Thus, the purpose of all their braying was for the purpose of skimming more and lowering the Collective IQ of the European Slave Zone.




Paul Paul is not the savior. ODrumbo is not the savior.  Mitty boy is not the savior.  THEY AREN'T SUPPOSED TO BE.  Someone should be screaming about the return of markets,  free exchange and all of it.  To argue that we need a "Savior", especially to the Leftists out there in La-La Land, is to play right into their hands.

At every opportunity, we should be asking each and every Big Smile Politician, "What are you doing to cut spending and promote Free Markets?"  'N not necessarily in that order.



Charles Wilson's picture

Left out the important quote:

When Nero had ordered Vespasian (and soon after that, Titus) to road grade Judaea, murdering millions, he ran slightly afoul of know...those pesky Roman subjects.  Just before he died, he was reported to have said,


"What a poet the world is losing."


This is the bubbly nonsense we put up with.  With a world in flames, Nero, who married...well, look it up...was contributing to the end of the Julio-Claudian line and rise of the Flavians within a year or two.  The Machine continued while the rulers changed with the wind.  Not even a Civil War would stop the carnage.


We don't need a savior.  We got enough of those.



The Alarmist's picture

Krugman says Diocletian was an effective emperor who turned things around for Rome ... why don't we just dig him up and run him for President?

F. Bastiat's picture

Dr. Paul's all talk; he's actually accomplished next to nothing - despite having 30-some odd years to at least do something.  Although his message rings true, the problem appears to be with the messenger.

Peter Pan's picture

The problem is not with the messenger but with the listener.

Jack Napier's picture

Paul is a masonic controlled Jesuit pawn along with Alex Jones and the John Birch Society. He plays the role of vampire killer well, but he is still being directed by a shadowy puppetmaster. All the players have danced with the devil in the pale moonlight if they wanted to live.

People think they are awake but they just woke up from a dream within a dream. There are more veils to peel back. Does anyone honestly believe the elite would let anyone rise to power against them if it wasn't part of the plan? The entire resistance is part of the plan, including Occupy, whether they know it or not.

citizen2084's picture

your point is...we should all just go die?

KennyW's picture

People will have a choice. 1. Join the new world order and ultimately accept the mark of the beast  or 2. Believe in Jesus Christ. 

Dexter Morgan's picture

Personally, I worship the Mighty Hawk, like Borat.

blunderdog's picture

Fuck that, Ron Paul's the real deal.  He's a talented politician, that's all, so he's been able to remain 100% true to his own totally simplistic world-view for 30 years.

He's honest, relatively intelligent, correct on most points, and ultimately just as incapable of "solving everything" as all the rest.  It's disappointing truth well communicated by H.L. Mencken's observation that each and every one of us are pretty sure we've got the one big answer.

fuu's picture

Everyone wants to hit that Silver Bullet Grand Slam.

disabledvet's picture

Hahahaha. "Honest politician." That's a good one. Still..."he's consistent" which IS saying something!

oldschool's picture

Just curious -- what examples of his dishonesty are you thinking of?

Victorio's picture

Perhaps, but they obviously would rather have obamney than Paul. I don't see how it could be otherwise. Why not at least try not to give them exactly what they want and hope for the best? Personally I do not engage in what is the illusion of choice of a country's president or its supposed effect on the course of this country. I've got other things I'd rather do than participate in mass mental masturbation. If someone started talking about sending bankers, warmongers and politicians to gitmo I might start to listen. Best of luck to Paul though...

Clinteastwood's picture

Utterly right.  Romney and his supporters (Goldman Sachs) don't really care whether or not they win the election.  They just want Romney CONFIRMED.  Obama and his supporters (Goldman Sachs) really don't care whether or not they win the election.  That's why President zero came out for gay marriage, despite the US population being against it 60-40%.  Obama just wants Goldman Sachs to notice he's still in the tank.

This election was about Ron Paul vs. Goldman Sachs.  The American people had the opportunity to digest Paul's message and they didn't listen well.  They have lost the wisdom needed because they've forgotten to pray to God, the source of wisdom in this universe,.......for wisdom.

A lotta people have gotten the message, though.  It'll be interesting to see if the Ron Paul Revolution (synonymous with the Tea Party) has a deciding influence on the Obamney administration, or whether we just get gridlock (and bankruptcy).

Harbanger's picture

Ron Paul has been around for long time but the larger Populist movement that finally woke up and "discovered" him only started in 2009.  I would say they had a very deciding influence in the last election cycle.   Congress in theory holds the purse strings so maybe a little gridlock isn't so bad when you're careening off a debt cliff.   

spinone's picture

I think you overestimate the "elite"

CrazyCooter's picture

LOL. Well, if I had to choose between "endorsing what congress has done for the last 20 years" and "oppose what congress has done for the last 20 years", I would have to side with Paul on that one at the expense of not having a lot of merit badges so I could be an Eagle Scout like all the other cool kids.

Right now, the best thing Congress can do is to STOP LEGISLATING.

Sometimes I wonder what would happen if we just rolled back the legislative clock 10 or 15 or 20 years. Not just repeal a few things, but every single thing passed. All Congress does is screw things up more ... so, lets do a little time warp and un-screw up things.

I think this is probably the big thing I learned reading Tainter. We have reached "maturity" in a lot of spaces, but keep on legislating, making things worse instead of better. Old fashioned common law didn't need a lot of improvement, yet look at how much shit is on the books now. If we can't figure out how to prune this beast back in short order, it will take us all down with it.



blunderdog's picture

The bottleneck is in enforcement.  Live well and when the law comes along, make it earn its due. 

They're bringing charges, right?  Just another bill.

wisefool's picture

Deadhorse: The tax code is what brings down every empire. Not monetary policy. Congress needs to implement a flat tax and just make honest women out of their K-Street whores. Take 'em back to their districts/momma.

Speaking of dead things, The STL fed is advocating the end of keynsianism . "Death of a Theory." 

Ron Paul helped. Krugman is probably breathing into a paper bag. Again,the tax code created by congress is the number one problem, the fed is secondary in blame.