## Thursday, July 11, 2013

### Cost Hinders Growth: GDP-Debt Ratios

In this morning's post I showed the ratio of GDP to Total Debt as a blue line, and the ratio of the change in GDP to the change in debt as a red line:

In a comment on the post, Anonymous wrote:
The math dictates that over periods when the blue line is flat , the red line will cycle around the blue line so that its average value during the period is equal to that of the blue line.

When the blue line is flat at a value of , say , 1.0 , it means that \$1 of gdp is matched by \$1 of debt. If debt and gdp cycle up and down , but on average at the same rate of growth , then the ratio remains the same and the blue line is flat.

If the blue line is flat at a value of 0.5 , the percentage rate of change in gdp still happens at the same rate as for debt , the difference being that it is no longer at a 1:1 ratio , rather at a 1:2 ratio.

When the average value of the red line falls over time , it by definition means that the value of the blue line will fall as well, since the stock of debt is growing at a faster rate than gdp , which makes the gdp/debt ratio fall.

First, I want to say thank you for the comment. I couldn't see it till you said it.

Honestly, I couldn't even see it after you said it, so I made a spreadsheet so I could test out what you said.

Now I can see it. So, thank you.

#### 1 comment:

Anonymous said...

Art,

You're welcome , and thank you for that neat spreadsheet. I'm going to bookmark it for future use.