Saturday, March 15, 2014

Type stuff in the yellow cells

I want to look at accumulated debt as a percent of GDP in 1955 and in 1980 and in 2005. I want to use ceteris paribus and assume the rate of interest is constant: We know interest rates are not constant in the real world, but we need to focus on something else at the moment -- we need to focus on the accumulation of debt -- and the effect of varying interest rates is something we can look at later.

Given a load of debt at say a 5% rate of interest, the cost of that debt varies with the level of debt relative to GDP.

According to one reliable source, debt was 132 percent of GDP in 1955, 159 percent of GDP in 1980, and 311 percent of GDP in 2005. Plug those numbers into cell D2 of the spreadsheet, and note the changes in the cost of debt as a percent of GDP.

Assuming a constant 5% interest rate, total interest cost in 1955 amounts to 6.6% of GDP; in 1980 to 7.95% of GDP; and in 2005 to 15.55% of GDP. We assume no change in the interest rate, so the increasing cost of debt shown here is due entirely to the increasing accumulation of debt.


Jazzbumpa said...

Does TCMDO include government debt?

I would suggest that public and private debt function differently, and private debt is more the root of the problem.


Jazzbumpa said...

I think it was Marko who left this in comments at AB [no time to check now].

Might be a good choice.


The Arthurian said...

Yeah, TCMDO includes the "publicly held" part of Federal debt, but not the whole gross thing.

I agree, they function differently. But I'm not sure the cost of debt has an equally different effect. Cost is cost.