[quote=livinincali][quote=davelj]
Well, not exactly. Roughly 1/3 of the annual growth over the last 30 years has been a result of debt accumulation. The problem, of course, is that if you keep building up debt at small incremental rates over a long period of time – say three decades – you eventually find yourself over-leveraged. As Dickens pointed out, “Annual income £20, annual expenditure £19 and six pence, result happiness. Annual income £20, annual expenditure 20 and six pence, result misery.”
It’s not that all of the growth has been fantasy… it’s just that a very small part of it has been fantasy over a long period of time such that now the cost of servicing that fantasy (resulting from prior debt) is (finally) dragging down our ability to grow.[/quote]
Maybe I’m just arguing semantics, or maybe we’re looking at different data sources but this is what I see. In 1980 the total outstanding debt was right around 5 trillion dollars, this includes public and private debt (Look up the Fed z1 for 1980). That total is now right around 55 trillion. Essentially > 10 fold increase in total debt.
The nominal GDP in 1980 was 2.788 trillion. Today’s it’s around 14.5 trillion. So the economy grew about 5 times in that same period. What I don’t see is any real GDP growth in excessive of debt. In essence we don’t have any example of total debt producing a positive return on investment as a whole. Certainly there are successful businesses that took on debt and produced a real rate of return, but in aggregate there’s been more failures than successes.
If there was real growth in excess of debt then we should be looking at an economy where GDP is well over 30 trillion.[/quote]
Nope, you’re not arguing semantics – it appears that the difference between an income statement and a balance sheet is eluding you.
But before I get to that, as I’ve explained many times here, the Fed’s measure of total debt is calculated incorrectly by any rational person’s way of thinking. That is, it includes securitized debt, which double-counts the vast majority of residential mortgages in this country, among many other things. Having said that, we still have WAY too much debt even after the adjustment, just not as much as it appears. Now, I know what you’re thinking: “If the Fed’s been doing that since time immemorial then the stats over time are comparable.” This is incorrect because securitizations only really came into vogue during the 1980s and then grew like wildfire to where they are today. So, prior to the 1990s the Fed’s debt figures are reasonably accurate; today they’re way off. I have discussed this with a Fed economist and his response, after checking into it (he didn’t even know about the double-counting), was: “Yeah, we don’t know when or if that will ever get corrected.” My response was, “Well, congratulations on a job… done.”
Now, to the larger issue… GDP is essentially an income statement item. Total debt is a balance sheet item. So, merely comparing how large an income statement item (which is not cumulative by nature) is at Year X with a balance sheet item (which IS cumulative) at Year X doesn’t prove your point. Instead what you’d need to do is add up EACH year’s GDP and then compare it to the cumulative amount of debt (using the correct figure, of course) that had built up. (I’m too lazy to do this, but in my head I can see that you’re going to reach a very different conclusion.)
Yes, debt has been growing at a much faster rate than GDP, so we know that it has had a positive impact on GDP (in the past). Now we’re at the point where debt is so large that it has a negative impact on GDP (too much to service). We have too much debt – there’s no question about that. But… you’re dramatically overstating your case when you suggest that there hasn’t been ANY economic growth ex-debt over the last 30 years; this is empirically incorrect. In fact, there’s been a bit of research done on this subject and most of it concludes that about 50-100 bps of annual GDP growth over the last 30 years has been the result of incremental debt.
