Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Lately federal debt as a percentage of GDP has been rising. So very soon, the Debt/GDP police will tell you that if the ratio goes above 100% or 150% or whatever number is chic these days, some terrible things will happen. What are these terrible things? No one knows, but we can assume they have to do with economic growth and/or with inflation.
Previously, I have showed how Debt/GDP is a meaningless fraction. The numerator is a life-of-nation measure, and the denominator is a one-year measure. Further, federal debt is nothing more than Treasury securities outstanding, which the federal government could eliminate tomorrow, merely by instructing banks to credit holders’ T-security accounts and debit their checking accounts.
Nevertheless, it might be instructive to see whether there is any historical relationship between Debt/GDP and inflation or economic growth. Here is what GDP/Debt (blue line) looks like when compared with inflation:
Do you see any relationship between GDP/Debt and inflation? I don’t. Not surprisingly, this meaningless fraction has had no effect on inflation.
What about Debt/GDP as compared with economic growth. Here’s what that graph looks like:
It would be difficult to conclude that a high Debt/GDP ratio affects economic growth, negatively. In fact, one could make the case that for the past 25 years, increases in Debt/GDP have had positives effect on economic growth. Notice also, that Debt/GDP does not seem to be related to the beginning of recessions (gray bars). If fact, as befits a meaningless ratio, Debt/GDP does not seem related to any economic function.
So the next time you read a sky-is-falling article saying the Debt/GDP ratio is too high, unsustainable, will cause inflation or will reduce economic growth, send him/her this article.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
8 thoughts on “–Uh oh. The Debt/GDP police soon will be on the prowl.”
Well, no sooner did I publish the above post, than I saw this in another blog named “Before It’s News”: “Debt becomes poisonous once it reaches 80pc to 100pc of GDP for governments, 90pc of GDP for companies, and 85pc of GDP for households.
No differentiation is made between Monetarily Sovereign and monetarily non-sovereign entities, so the finding is bogus. Expect to read many more bits of Debt/GDP nonsense in the weeks to come.
Rodger Malcolm Mitchelll
The Tea/Republican talking heads and their professional (sic) economist facilitators will grab hold of these nonsensical “facts” and repeat them again and again to their bobble-head followers as absolute truths. The corporate media will do the same and the cuts will keep on coming until we find ourselves in a deeper recession or finally a depression. When it’s all over they (the bobble-heads) still won’t realize what hit them. Will the real facts, the real truth ever be told to the citizens of this nation? Are they even capable of accepting the real facts? I believe not.
no, the real truth will never willingly be told to the citizens, unless they seek the truth somewhere else besides the mainstream media.(though i have seen clips of mike norman on faux business, and randall wray on the real news network, but their message is not rammed home constantly like the deficit and debt bullshit is) maybe it is wilful ignorance. idont know, it makes no sense why people would continue to put up with such crap from their representatives and president. george bush said it truthfully “this is quit an impressive crowd, the haves and the haves more. or what i like to call my base” the system works too well for the haves and haves more, and you can be sure that they want to keep it that way. without this site and others like it, i would have never known how the macroeconomy works. (it is still confusing, the whole draining excess reserves and such) but i am not totally in the dark. (we dont borrow from china, we can never go broke,this entire monetary thing is set up for the public purpose and the public is getting screwed out of it and dont even know it, or dont care)
Rodger, do you think the claimed 85% GDP for household debt is a reasonable cut-off point?
Private debt to GDP ratios seem to be a useful measure, as currency users actually have to pay the debt back from a limited amount of income, and if the debt is high it means that a lot of income is being used to pay down loans rather than on consumption, not to mention that there is limited room for economic growth due to credit expansion.
I guess my question is, what number represents a reasonable level of private debt? Over 100% sounds bad, but is it?, as a perfectly reasonable, modest even, mortgage can easily be 200% of an individuals annual income.
I don’t know that there is a cutoff point but, this might help:
Is federal debt better than other debt?
Rodger Malcolm Mitchell
Hamish — I don’t know about percentages of total debt, but I think the important factor is going to be debt service rather than total debt. If my loans carry a very low interest rate and a long payback term, I can afford a larger amount than if the opposite is true. The traditional mortgage payment requirements where debt payments were supposed to be no more than 28-30% of income seemed to work well. (And still does).
Perhaps there’s a range that is ok then, or maybe more along the lines of Steve Keen’s work, the problem is around the way private credit has had to keep growing to keep the economy as a whole growing, and even a stall in that growth will cause recession (without govt spending to fill in the gap). It’s the change in debt rather than some arbitrary number that is most important. Though a high number probably indicates the financial sector is too big and getting a free lunch at the expense of everyone else.
Still, it’s very frustrating to see the focus placed on government finance when our current problems have been very clearly caused by excessive private debt, something I could see even before I discovered MMT/monetary sovereignty. Yet most of the attempted “cures” like QE, are aimed at trying to make the private sector borrow even more, and cutting back on the public spending which would give room for the private sector to de-leverage.
You get very little traction trying to talk about reducing private debt.