tag:blogger.com,1999:blog-2836339018444123313.post2282665897362198342..comments2023-09-14T21:37:39.544-07:00Comments on U.S. Budget and Economy: Do Balanced Budgets Cause Depressions? (Part 2)R Davishttp://www.blogger.com/profile/00681139511824861368noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-2836339018444123313.post-45664376651774363062010-05-02T01:18:13.084-07:002010-05-02T01:18:13.084-07:00Further, the debt/GDP ratio is meaningless. Debt i...<i>Further, the debt/GDP ratio is meaningless. Debt is the cumulative, net debt from the beginnings of the nation; GDP is a one-year measure. The two are unrelated.</i><br /><br />Debt is cumulative and GDP is a one-year measure. However, the annual interest that must be paid on that cumulative debt is, like the GDP, a one-year measure. Otherwise, you could just as well say that one's personal debt as a ratio of their income is meaningless. As I mentioned, the government's receipts have remained around 18 percent of GDP for the past 50-plus years (see the first graph at <a href="http://www.econdataus.com/def10.html" rel="nofollow">http://www.econdataus.com/def10.html</a>). Hence, as GDP has risen, so have receipts. A portion of these receipts are then required to pay the interest on the debt. One can calculate the portion from the following formula:<br /><br /><b>(debt/GDP) * (GDP/receipts) * (interest/debt) = (interest/receipts)</b><br /><br />If (debt/GDP) is 0.5 (50 percent), (GDP/receipts) remains at (100/18) and the interest rate (interest/debt) is 0.05 (5 percent) then (interest/receipts) will be about 0.139 (13.9 percent). If (debt/GDP) doubles to 100 percent and the other two factors remain constant, (interest/receipts) will likewise double to 27.8 percent. As a result, twice as much of the receipts will be required to pay the interest on the cumulative debt. Hence, debt as a percentage of GDP is a major factor in our ability to service that debt.R Davishttps://www.blogger.com/profile/00681139511824861368noreply@blogger.comtag:blogger.com,1999:blog-2836339018444123313.post-536950451413755952010-04-12T08:32:07.912-07:002010-04-12T08:32:07.912-07:00"[...]the above graphs again suggest that the...<i>"[...]the above graphs again suggest that the initial events that lead to many financial crises are wars, not periods of paying down the resultant debt."</i><br /><br />What's missing from your hypothesis is the mechanism by which an approaching war causes a recession. Further, the debt/GDP ratio is meaningless. Debt is the cumulative, net debt from the beginnings of the nation; GDP is a one-year measure. The two are unrelated. See: http://rodgermmitchell.wordpress.com/2009/11/08/federal-debtgdp-a-useless-ratio/Rodger Malcolm Mitchellhttps://www.blogger.com/profile/13541817477277188031noreply@blogger.comtag:blogger.com,1999:blog-2836339018444123313.post-73962171067640953232010-04-12T08:17:42.857-07:002010-04-12T08:17:42.857-07:00"The debt as a percentage of GDP gives a bett...<i>"The debt as a percentage of GDP gives a better measure of our ability to service the debt since the government receipts used to pay the interest have remained around 18 percent of GDP for the past 50-plus years."</i> <br /><br />The government's ability to service its debt has nothing to do with GDP. <br /><br />Rodger Malcolm MitchellRodger Malcolm Mitchellhttps://www.blogger.com/profile/13541817477277188031noreply@blogger.com