The Root Of The Crisis: Every $1 Of Debt Generates Just 44c Of Economic Output

Authored by Simon Black via,

Exactly ten years ago, in the middle of the summer of 2008, the world was only two months away from the most severe financial crisis since the Great Depression.

At the time, the size of the US economy as measured by Gross Domestic product was around $14.8 trillion– by far the largest in the world.

And the US national debt back then was about 64% of GDP– roughly $9.5 trillion.

Fast forward a decade and take a snapshot of the same numbers:

  • US GDP has grown nearly 35% to $19.9 trillion.

  • But the national debt has soared 122% to over $21 trillion.

The debt-to-GDP ratio in the United States is now 106%, meaning that the national debt is larger than the size of the entire US economy. Yet the debt keeps growing. Rapidly.

Now, debt isn’t really the problem here.

The problem is the way that it’s been used.

Debt (affectionately referred to as ‘other people’s money’) can actually be a great way to enhance investment returns when used wisely and judiciously.

Private equity fund managers use debt to acquire businesses through what’s known as a ‘leveraged buy-out’, where they’ll put up a portion of the cash they need, and borrow the rest.

I did this a couple of years ago, for example, when I purchased an Australian-based business for $6 million.

A local bank offered to finance most of the acquisition with a $4.5 million loan at around 5.75%.

That meant I only needed to write a $1.5 million check for a business that was earning nearly $2 million annually.

It was a no-brainer, because I knew there would be more than enough money to make the loan payment (less than $500k annually) and still generate a substantial return on investment.

Real estate investors do the same when they purchase property.

If you have, say, $1 million, you could pay cash for a single property that costs $1 million… or you could use that money as a down payment and buy a $5 to $10 million property.

If the investment is a good one, the cash flow will more than cover the loan payments, and you’ll end up making a lot more money.

Intelligent governments (hopefully not an oxymoron) will do the same thing, borrowing money to finance infrastructure projects that generate more growth and tax revenue.

Several years ago in Panama, for example, the government borrowed billions of dollars to finance the expansion of the Panama Canal.

That’s a lot of debt to take on for such a small country. But they knew that expanding the canal would dramatically increase the revenue that it generates.

The canal was originally opened in 1914 back when cargo ships were much, much smaller.

But by the early 21st century, the US Army Corps of Engineers (which built the Panama Canal in the early 1900s) estimated that the number of cargo ships which could no longer fit in the canal’s locks accounted for 45% of global trade and shipments.

So increasing the size of the canal to accommodate those larger ships (and hence generate more revenue from the increased tolls) was a great investment… and one where debt made a lot of sense.

So Panama borrowed about $3 billion to finance the canal expansion in 2008; at the time the country’s GDP was about $23 billion.

A decade later, the Canal expansion is complete, and Panama’s economy has nearly tripled to $62 billion.

It was clearly a good investment: they borrowed $3 billion in debt and got WAY more than $3 billion in additional economic output.

Now let’s go back to the US.

In the same period, from 2008 through 2018, the US government borrowed an additional $11.6 trillion on top of the existing debt they had already borrowed.

So you’d think that there would have been AT LEAST $11.6 trillion in additional economic output, right?

But that’s not what happened in the Land of the Free.

Uncle Sam borrowed $11.6 trillion between 2008 and 2018. But the US economy only grew by $5.1 trillion.

So every $1 the government borrowed resulted in just 44 cents of economic output.

Again, you’d think that every $1 borrowed would have generated at least $1 in economic output.

After all, if you borrow $10 million to acquire real estate, you’d think you’d AT LEAST have an asset worth $10 million. And if it’s a good investment, hopefully more than that.

The US government used to make good investments.

In 1803, the administration of Thomas Jefferson acquired 2.1 million square kilometers of land from the French in what became known as the Louisiana Purchase.

Jefferson’s people negotiated a hell of a deal, paying the equivalent of about $300 million– just 40 cents per acre in today’s money. And yes, they used debt to finance the purchase.

Later administrations bought Florida from the Spanish, Alaska from the Russians, the Virgin Islands from Denmark, etc. These were all phenomenal deals.

Even as late as the 1950s, the bulk of the US federal budget was productivity-related investments like infrastructure. Mandatory entitlements comprised just 29% of the budget.

(Bear in mind, back then they still had plenty of entitlement programs including Social Security, the GI Bill, etc.)

By the early 21st century there were hardly any productivity-related investments remaining.

Mandatory entitlements alone account for more than 60% of the US federal budget.

And Uncle Sam managed to blow $2 billion on a website– literally six times more than the entire Louisiana Purchase cost in inflation-adjusted dollars.

With decisions like that, it’s easy to understand how $11.6 trillion in debt would only result in $5.1 trillion in economic output.

And that’s the real killer.

It’s not the debt itself. It’s the painfully wasteful decisions of what they choose to do with it.


FreeMoney Last of the Mi… Tue, 07/10/2018 - 11:28 Permalink

"The Root Of The Crisis: Every $1 Of Debt Generates Just 44c Of Economic Output"

What is missing from this analysis is that every dollar of 3% federal debt purchased can be posted back at the FED window as 99% collateral for a loan at .25%.  Hmm.  That sounds like a perpetual money making machine for those with access to federal debt and the fed window.

In reply to by Last of the Mi…

bshirley1968 J S Bach Tue, 07/10/2018 - 12:18 Permalink

The lack of return is a case of simple mathematical reality.

The larger the investment, the smaller the "Margin" of return.  It's easy for a tech company with 1.2 million in sales to double those sales for the next 5 years....seen it happen many times......but then they hit that wall.  Lot harder to double 250 million.

What we have is a situation where there is more "debt" than there are assets to collateralize the any reasonable rate.  Just look at the assets out there:

Autos (barely an asset), Real estate, Stocks, Bonds, Land, Equipment, etc.

It is all SKY HIGH.....because the need for more and more debt keeps pushing them up and up.  At these levels, there is no way you are going to get the return on your investment we once enjoyed.  The "Mother" of all returns, interest rates are at historical lows....ZIRP.

While I agree with what the author has said, it needs some perspective.  The problem is debt.  The automated creation of debt necessary for the survival of life as we know it.  We passed the point of negative returns long ago.


In reply to by J S Bach

Giant Meteor Joe Davola Tue, 07/10/2018 - 10:34 Permalink

The trouble as I see it, whenever the subject of the welfare state and it's growth is brought into conversation, I have to ask, which part of the welfare state are we talking about? Because as far as I can determine, the welfare state is an all emcompassing term, front run by the FED, digital money printing and primary dealers. What was learned, or should have been learned, the entire shitshow USA of fraud is one gigantic welfare state .. The military industrial complex, Big Medicine, Big Insurance .. most specifically however, the FIRE sector ..

When pondering the matter of welfare cheats, best to look on balance at scale in these "free markets." The lower species merely follow the lead .. which, as a nation of grifts, and grifters, should be fully anticipated .

In reply to by Joe Davola

oliviaemma705 Giant Meteor Tue, 07/10/2018 - 10:43 Permalink


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In reply to by Giant Meteor

pods Joe Davola Tue, 07/10/2018 - 10:34 Permalink

How can an Alpaca farm have $2 million in revenue per year?  Is Simon involved with that lady that makes $870000 per hour and bought the Land Rover?  Poor Alpacas.

Debt is pulling forward future demand.  Sure it works for a while. Just like heroin.  It's just the endpoint that isn't so fun.

BTW, the dirty little secret is that if the USA didn't do that debt expansion, we would be talking about 2008 as the start of the implosion of the USA, if we had enough time to talk while avoiding cannibalistic gangs.

Simon is smart enough to understand all of that. He's just pimping something while bragging about the checks he writes.  A sure sign of an insecure man.

Simon Black has Little Man Syndrome.


In reply to by Joe Davola

Iskiab cheech_wizard Tue, 07/10/2018 - 14:08 Permalink

During the bush years the neocons like Horowitz wanted to increase the government debt.  The thinking was if the government was stretched with interest payments they wouldn’t create new social programs.

That’s insane, but the real purpose was indentured servitude for Americans.  Fast forward to today and interest rate normalization is the next step.  When rates climb I expect 130 debt/gdp which is when Greece got in trouble won’t take long.

In reply to by cheech_wizard

skeelos Tue, 07/10/2018 - 10:21 Permalink


It’s not the debt itself. It’s the painfully wasteful decisions of what they choose to do with it.


I made millions and 90% of it I spent on booze and loose women.  The rest I wasted.

   --- Oliver Reed


PiratePiggy Tue, 07/10/2018 - 10:21 Permalink

Borrowed money to pay for "Cash for Clunkers"? ... still not repaid.


Borrowed money to ruin Afghanistan and Iraq? ... who will repay it?


Borrowed money to fiance years of Mueller, Comey, lovebirds Strzok and Page? ...


We need restitution as a deterrent.

Mini-Me Tue, 07/10/2018 - 10:24 Permalink

If it weren't for the Fed monetizing Washington's insatiable spending sprees, interest rates would skyrocket, thus limiting their borrowing ability.

End the Fed and put a leash on Congress.

ejmoosa Mini-Me Tue, 07/10/2018 - 10:27 Permalink

The rest of the world that buys US treasuries also deserve the blame.

There was a time where it was US citizens that financed the debt via Treasury and Bond purchases.

That day is long gone.

If the American people would not loan their own government the monies because we know they are bad investments, it's amazing that anyone else would think that it is a good idea to give this government more money.

In reply to by Mini-Me

PitBullsRule Tue, 07/10/2018 - 10:26 Permalink

Well lets ask France if they have any more land they can sell us at 44 cents an acre.

That was then, this is now, you can't compare today to 1803, things change.

a dollar spent today gets used to build things with 3D printers, it gets used to make calculations on computers running at Billions of operations per second, it gets spent on energy made from sun light.

Simon is all washed up again, as usual. No need to buy his book, or his newsletter, or join his club. He's full of shit.

Matt Tue, 07/10/2018 - 10:32 Permalink

The GDP is every year, though. So if you borrow $1 to earn $0.44 more every year, that's not too bad. The government gets about 18% of GDP, so that's an 8 percent annual ROI. If you borrowed the money at 3%, you're doing pretty okay.

HuskerGirl Tue, 07/10/2018 - 10:34 Permalink

We should have put all of our debt into unemployment payments.  Because "Economists agree that unemployment benefits remain one of the best ways to grow the economy in a very immediate way," 

Right Nancy? 

1033eruth Tue, 07/10/2018 - 10:40 Permalink

Uncle Fraud is the antithesis of financial management and it always will be because most spending is oriented towards buying votes and political purposes of repaying lobbying bribes.  

Politicians are like heroin addicts with the taxpayers money.  Its not there money so the sky is the limit which means that the size of debt has now become the sky.

I appreciate the above writers principle of only borrowing if you expect to get an ROI, but that's not what government is about.  

IT IS THE DEBT NOW and its mathematically impossible to repay except through balancing it on the backs of citizens with inflation.  I'm offended by his ignorance by claiming its not the debt as Uncle Fraud does not make spending decisions based on financial prudence.  

medium giraffe Tue, 07/10/2018 - 10:40 Permalink

I like to watch the numbers spinning around.  Sometimes, I even play a little game to see how much debt increase I can hold my breath for.  Visit:

And don't forget to have a quick glance at your latest payslip afterwards, and think about how meaningless modern currency is, and how firmly the fiat control system has your balls gripped.

Balance-Sheet Tue, 07/10/2018 - 10:45 Permalink

Wrong. Every dollar is created to close a transaction valued at $1. between two parties in the economy. If you enter an agreement to sell your house for 300K with a 250K mortgage and 50K in cash that 250K is created for the transaction at the moment the mortgage is created.

If a person wishes an operating loan for his or her business of 10M USD then the 10M USD is created for that loan when it is signed.

This has NOTHING whatsoever to do with the level of output across the economy though that output level changes as a result.

When the loan is repaid the amount of the principal is destroyed. If the borrower goes bankrupt the amount of the loan is wholly or partly destroyed. This is what a flexible currency is designed to accomplish.

Jefferson dreamed of restoring the slave empire of the Roman Republic which had vanished centuries before his birth and though he was a very flowery writer and ardent populist when people were looking directly at him he died penniless and in debt despite all his corruption.

Citing Jefferson in 2018 is past absurd as the Civil War and the Industrial/Scientific Revolutions buried him forever- strictly for daily and heavy marijuana smokers now.

venturen Tue, 07/10/2018 - 10:56 Permalink

THEY DON'T long as they get a piece. We need to BREAK UP Wall Street and Washington DC... They are stealing too much!

Move all government operations to flyover country! 

NYC_Rocks Tue, 07/10/2018 - 10:56 Permalink

Meaningless measure.  Debt does not create any value at all.  It just moves future spend to today.  Given that the debt can now never be paid back and will have to be printed to pay back, it's just a huge tax (inflation tax).  Not a very insightful article.  And GDP is an arbitrary definition that doesn't really make any sense: 

GDP completely disregards the intermediate stages of production.