bobbyw24
10-22-2009, 07:32 AM
An Unsustainable Path of Debt Expansion
Mises Daily by Thorsten Polleit | Posted on Wednesday, October 21, 2009
Debt Growth Exceeds Income Growth
In Q2 2009, total debt outstanding in the United States — financial plus nonfinancial debt — amounted to 373.4% of GDP.[1] At the start of 1952, the debt-to-GDP ratio stood at only 130%. In fact, in the last decades the rise in total debt has increasingly outpaced nominal income — a development which gained momentum after the erosion of the last vestiges of the gold standard in the early 1970s.
http://mises.org/images/3754/Figure1.png
The current upward dynamic of the debt-to-GDP ratio is economically unsustainable. It cannot go on forever. To see this, let us assume that the total debt-to-GDP ratio does continue to grow at the average rate at which it has expanded from Q1 1971 to Q2 2009 (case 1 in the chart above). The total debt-to-GDP ratio would exceed 600% at the start of 2029 and reach more than 1000% in 2050.
If one assumes that the total debt-to-GDP ratio will expand at the average growth rate seen from Q1 1995 to Q2 2009 (case 2), a level of 600% would be reached as early as the middle of 2024, and the ratio would go up further towards 1300% by the end of 2050.
Interest payments on total debt would rise substantially as a percentage of GDP. If one assumes that the average interest rate was 4% in Q2 2009,[2] total interest payments amounted to 15% of GDP. In case 1, interest payments would double by the middle of 2038, while in case 2 this level would be reached in the middle of 2031.
Continue:
http://mises.org/story/3754
Mises Daily by Thorsten Polleit | Posted on Wednesday, October 21, 2009
Debt Growth Exceeds Income Growth
In Q2 2009, total debt outstanding in the United States — financial plus nonfinancial debt — amounted to 373.4% of GDP.[1] At the start of 1952, the debt-to-GDP ratio stood at only 130%. In fact, in the last decades the rise in total debt has increasingly outpaced nominal income — a development which gained momentum after the erosion of the last vestiges of the gold standard in the early 1970s.
http://mises.org/images/3754/Figure1.png
The current upward dynamic of the debt-to-GDP ratio is economically unsustainable. It cannot go on forever. To see this, let us assume that the total debt-to-GDP ratio does continue to grow at the average rate at which it has expanded from Q1 1971 to Q2 2009 (case 1 in the chart above). The total debt-to-GDP ratio would exceed 600% at the start of 2029 and reach more than 1000% in 2050.
If one assumes that the total debt-to-GDP ratio will expand at the average growth rate seen from Q1 1995 to Q2 2009 (case 2), a level of 600% would be reached as early as the middle of 2024, and the ratio would go up further towards 1300% by the end of 2050.
Interest payments on total debt would rise substantially as a percentage of GDP. If one assumes that the average interest rate was 4% in Q2 2009,[2] total interest payments amounted to 15% of GDP. In case 1, interest payments would double by the middle of 2038, while in case 2 this level would be reached in the middle of 2031.
Continue:
http://mises.org/story/3754