This page has been archived and commenting is disabled.
Guest Post: How Long Before Massive Government Debt Buildup Triggers Another Financial Shock?
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.”
http://www.zerohedge.com/news/chart-day-change-q1-american-debt-and-gdp
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 – www.bea.gov and Treasury Department – www.treas.gov.
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.
»
- 24409 reads
- Printer-friendly version
- Send to friend
- advertisements -
The chart above is (change in debt) / (change in GDP).
In 2009, the change in GDP was negative, the change in debt was still positive, so the ratio went negative.
edit: nvm, poster Yes_Questions answered his own question, have to remember to refresh before responding.
The war on drugs is a major industry. It is every American's patriotic duty to smoke a little weed and thus contribute to job creation.
+manufactureres of food with melted cheese.
Well I guess you guys have arrived! Congrats on being popular.
...AND KICKING UNICORN UNBORN BABY ASS IN THE PROCESS.
Cheers and yes it's been a few... or 6.
Um its a guest post from 'a guest'. Its like someone who you had over quote you at your next dinner party.
But I understand, you're wasted and so enjoy the night. Hell to pay next day but I suppose that was the whole point of this article.
U always have to think positive!
Good news = bullish
Bad news = bullish (it could be worse)
Neutral news = bullish (at least it's not bad)
There is no positive without negative:
Bad News = bearish
Good New = bearish ( the growth is unsustainable )
Neutral News = bearish ( something always will break down )
But the truth is not in being bullish or bearish it is in understanding the reality of the underlying system and acting in accordance with that understanding.
I remember reading Mish moons ago, stating that it took $7 of debt or something to produce $1 of GDP or something, in 2009 or something. Either way, we'll make it up in debt volume.
let it be noted that Reagan was the original Big Spender.
Well, the numbers don't lie - though I wonder if you took this analysis back to the 60's and 30's how Ronnie Raygun would compare to LBJ and FDR on that score.
His "kitchen cabinet" was loaded with banksters ready to take over where Nixon left off by taking the dollar off gold.
Peak
Fuk'n
Oil
So what does this mean if you actually REDUCED debt by $2.50?
IE. Net debt reversal of $5?
Muppets - Back in Black
http://www.youtube.com/watch?v=uhG8UcjsKuo&feature=related
They can keep racking up the credit card, I am gonna buy as much gold and silver in this dip as I can get....
What would the correlation between increased debt and gdp growth look like I wonder. Dead horse I think.
All we know is that every time Bush finishes his term, there was a spike
Who is that "KOOL" poster that talks about "Expatriation", all the time? Even that little " douche bag" F/B moron gets' it!
The American Expatriation Guide | zero hedge
regretful decision.
http://expose2.wordpress.com
Black Horse Riding Whore Of Babylon http://www.biblegateway.com/passage/?search=Revelation%206:%205-6&version=KJV
http://www.reuters.com/article/2012/05/10/idUSWLA781820120510
http://www.youtube.com/watch?v=ji24Qm17S_g Lol, forgive me, too funny.
Sort of like asking how long before drinking and driving will cause another accident. Maybe we should have the same laws. How much have you charged today sir? Only $100? Hmmm slide your credit card in this here machine. OK you're 10% over the legal limit of debt. We are going to charge you with a criminal offence and take away your credit card for a year.
To be fair, Sprott and co wrote about this long before I read it here or at trimtabs. http://www.sprott.com/media/34078/MAAG-07-10-Fooled-by-Stimulus.pdf
In fact it was one of the first things I read that clued me in the whole game is rigged..Which naturally lead me here and I guess now trimtabs.
“It now takes $2.52 in new federal debt to buy $1 worth of economic growth.”
They wont stop till it take $5. When government fail, they don't fail small, they don't fail big. They always fail with something so jaw droppingly stupid, and with such epic bullshit you have to stand in awe.
Now are we talking about the US, Japan or the EU?
I don't think it's debt that contributes to GDP it's spending. Debt is persistent if you owe a dollar today and do nothing you will owe a dollar tomorrow with no impact on GDP, spending has to continue or risk contracting GDP.
A couple of things.
The quality of the GDP increase is important. Is the increase in GDP going for something that will pay down the debt eventually? Probably not (e.g. increased entitlement spending).
Second, it looks like the "free trade" fanatics will run the developed countries and the world into the ground before they are taken out. Free trade doesn't work when different countries play by different rules. You have to make your necessities within your economic zone. The Fed is printing money. But it is getting sucked right out to China & other countries via the trade deficits. That is why you have deflation (i.e. asset deflation) in the U.S. and price inflation in China & India.
The only way to come out of this is to start increasing duties on goods and services to an extent that the system is self-sustaining. Employment and the fiscal situation will rapidly self-correct in this scenario and will balance out vs. the asian countries.
Free trade doesn't work when you call it free trade but really mean slaves producing things cheap and you a debt slave.
Actually debt doesn't make the economy grow at all. It is merely theft from the future/people and/or other nations in case of default/inflation. Spending isn't growth, so the situation is in fact much worse than shown here.
The government is more of a drag on real growth. The more capital it takes away from the free market, the less sustainable growth remains left. It's astonishing that so little people actually grasp this simple fact.
we should replace the the national anthem with "Hotel cali (USA)" the eagles never knew how close they were.." kill the beast but you can never leave" get a new country try the swiss or signapore, but they will never let you leave the usa now we are all tax units (slaves to the money printers)..ruby ridge shows you cannot even hide in our mountains and if you do..they will get you with ATF goons and planted evidence. hint don't let the wife with the new baby stand in the door you know what comes next.
it seems the people running the governments and financial institutions are making a tacit assumption that they will be able to shift the government debt, no matter how large, on to the labs of public at large one way or the other.
A dangerous assumption indeed. What happens when the cake-eaters sicken on this diet?
What triggered the earlier financial shock wasn't a "massive government debt buildup" but a fraction of hundreds of trillions of dollars in unregulated derivatives. The buildup involved bailouts due to losses incurred through financial speculation.