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:

Debt/GDP vs 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:

Debt/GDP vs GDP

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