Tuesday, July 9, 2013

Key Points: The "Debt Productivity" Problem

From mine of 30 June and 2 July:

Second, it is not the failure of debt to increase that hinders growth. It is the success of debt. The excessive cost of excessive debt is the problem. Salmon himself reports that the ratio of debt to GDP increased from 1.6 to 1 (in 1970) to 2.8 to 1 (in 2000) to 3.7 to 1 (by mid-2008). All of that happened before the crisis. All the while, Real GDP growth was in decline:

Using credit for growth works well when the accumulation of debt is not large. It works less and less well as the accumulation grows. Ultimately, the accumulation of debt grows so large that the economy can no longer function normally. That's when people start noticing there is a problem.

By that point, of course, we're not just using credit for growth. We're using credit for everything.

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