US Debt Is Now Equal to Economy

Conservative Byte ^ | January 10, 2012

[Freedom_Is_Not_Free]

Why compare the total debt to the ANNUAL economic output? One year is an arbitrary length of time.

Debt equal to one year of GDP is accepted as the "point of no return" at which most countries will have to default on their debt. This is why it is so significant. It is a very reliable indicator of future default, and not very far in the future either.

That particular indicator, debt>annual GDP, is far from meaningless. In fact, the very meaning is, your screwed. You are absolutely, 100%, no-nonse, over-the-waterfall, "I've fallen and I can't get up", FUBAR screwed.

[Georgia Girl 2]

We be braced.

[yup2394871293]

Insanity.

[Jordo]

“Debt equal to one year of GDP is accepted as the “point of no return” at which most countries will have to default on their debt. This is why it is so significant. It is a very reliable indicator of future default, and not very far in the future either.”

I disagree. On its own, the comparison has no meaning. At the very least, one should also consider WHEN the debt is due along with the size of the debt.

Comparing the annual GDP to the total debt due in 1 year would be more interesting — but still far too simple to predict a “point of no return”.

Analogy: if you weigh more than the total amount of food you eat in 1 year, you are too fat; you’ve reached the point of no return. That’s nonsense. It makes no sense to consider the food you eat in a year, when the calories are mostly metabolized in a few days.

[Freedom_Is_Not_Free]

Feel free to disagree with a fact.

I did not say the USA must default. I said that the significance of debt greater than GDP is because it historically has proven to be a point of no return as seen by actual life experience.

For example, when someone owes more on their house than the house’s value, this TENDS TO BE an indicator tha many such owners will walk away from their house and let the bank foreclose. Some owners will chose to pay $200,000 for a home currently worth $100,000, but many others won’t.

So regarding home foreclosure, when home value is below home loan amount, it becomes a reliable indicator of potential foreclosure with many people chosing to default on their home loan.

With respect to nations, when the national debt is above annual GDP, it become a reliable indicator that the nation will default on the debt in some way, either non-payment or severe inflation.

Disagree all you want with a reliable historic indicator. It’s OK. You can also disagree that smoking TENDS to cause lung cancer even though George burns lived to 100 years old. That’s your perogative.

A question was asked about why National Debt greater than annual GDP is significant, and I answered it. It’s OK you don’t like the answer.

[Jordo]

Sorry, I don’t agree with either your assertion or your house comparison.

If annual GDP vs. national debt, ignoring all other factors, is a “reliable” indicator of anything, please offer some evidence. I’ll be happy to study it.

House debt vs. house value is a totally different kind of comparison. A similar comparison for a country would be something like national (government) debt vs. total government assets.

Annual GDP vs. national debt would correspond to a house’s annual rental income vs. the house’s debt. If the debt is due in a year (and the only money available to pay it comes from the rent), the comparison is interesting. If the debt is due over a 30 year period, not so interesting.

I’m NOT saying the debt vs. GDP comparison isn’t useful. I’m saying that using ANNUAL GDP - as opposed to some other time period that might be more relevant to the repayment of the debt - is arbitrary. Whether the ANNUAL comparison is a good predictor must depend on other factors which aren’t apparent from this simple ratio.

You’d have a MUCH more relevant comparison if you compared debt to GDP added up over some time period related to repayment schedule of the debt. But that’s much harder to figure out, because it requires analyzing the debt in great detail. The media is too lazy to do that, and when competent economists do it, the media mostly ignores it.

One more example to try to illustrate my point:
Country A’s debt is due in 1 year. Country B’s debt is due in 10 years. Both have exactly the same ratio of total debt to annual GDP. Everything else about them is the same. If the ratio - on it’s own - is a reliable indicator, we should predict that both countries are equally likely to default. But that prediction seems pretty bad to me.