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What Is A Safe Amount Of Debt As % Of Gdp

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Just wondered what is generally accepted a safe amount of debt to take on as a % of GDP.

It's widely accepted that people taking on a mortgage at 7x salary was insane but would have been acceptable at 3.5x. Using that logic, does it not follow then that a country should be ok at 3.5x GDP debt? If not, why not?

I'm not sure what % we're running at now - but it's nowhere near 350%.

I know this is probably a silly question, but i genuinely want to know the answer. Do we need to consider personal debt as well as government debt?

Obviously taking on a lot of debt means we have a lot more interest to pay back, but is the current level really as dangerous as some make out?

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Just wondered what is generally accepted a safe amount of debt to take on as a % of GDP.

It's widely accepted that people taking on a mortgage at 7x salary was insane but would have been acceptable at 3.5x. Using that logic, does it not follow then that a country should be ok at 3.5x GDP debt? If not, why not?

I'm not sure what % we're running at now - but it's nowhere near 350%.

I know this is probably a silly question, but i genuinely want to know the answer. Do we need to consider personal debt as well as government debt?

Obviously taking on a lot of debt means we have a lot more interest to pay back, but is the current level really as dangerous as some make out?

It depends on your assumptions about economic growth and whether it can be sustained forever ... debt that is manageable with a growing economy will be catastrophic when the economy starts to contract.

The comparison with mortgage debt is bogus IMO, because

- shelter must be financed somehow, i.e. the underlying"debt" emerges from a fundamental human need, not through choice

- mortgage debt in its pure form has a balancing asset.

Much our public debt is more analogous to MEWing, or to keeping an ever-growing balance on a credit card.

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Why should we have any? Why can't we just have debt free money?

Here's a thought...

Can't we just balance the books?

Maybe have an economy that was self-sustaining, where we generated real wealth rather than the imaginary wealth that the house price Ponzi scheme gives us.

Back to the OP, the fact that the government is not honest with the figures and 'hides' debt is a problem since it's difficult to get to the truth.

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Why should we have any? Why can't we just have debt free money?

Because there is no government in the world that runs its own country

Idiots in Britain are wasting their time with their feelings about Gordon for instance

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Just wondered what is generally accepted a safe amount of debt to take on as a % of GDP.

It's widely accepted that people taking on a mortgage at 7x salary was insane but would have been acceptable at 3.5x. Using that logic, does it not follow then that a country should be ok at 3.5x GDP debt? If not, why not?

I'm not sure what % we're running at now - but it's nowhere near 350%.

I know this is probably a silly question, but i genuinely want to know the answer. Do we need to consider personal debt as well as government debt?

Obviously taking on a lot of debt means we have a lot more interest to pay back, but is the current level really as dangerous as some make out?

At 0% interest rates.. it is infinity .. geddit ? Its Gordos strategy !!

Edited by moneyfornothing

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GDP = consumption + gross investment + government spending + (exports − imports), or,

GDP = C + I + G + (X − M).

Based upon this simple formula, it is pretty easy to see with consumption and exports/imports at records lows as they are now, there is only really government spending involved in this fanciful economic sight glass.

Debt, servicing of the debt, and government spending is just more debt.

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Its not really valid to compare personal debt burden with government debt burden for various reasons. A simplistic look reveals ....

An individual obtains a salary out of which they pay down debt. The salary isn't related to debt. If debt increases, this doesn't impact on salary. Generally, salary is fixed and moves only upwards (nominally at least).

The government obtains income in taxes which is uses to service its debt and expenditure on various public services & works. When the debt burden increases, tax burden increases. As we see at present, economic conditions can lead to the situation where the costs of servicing debt rises (from increased borrowing and bond market requiring higher yields) and tax income actually drops dramatically. This in turn requires increased borrowing and can quickly lead to a feedback situation where debt balloons out of control rapidly.

Equally, when a governments debt level reaches higher levels of GDP the market perception of default probability (because governments can choose inflationary default) will rise, simply because this is an option open to the government and not the individual. This will again drive up yields, increasing debt burden when the goverment rolls over debt or sell more bonds.

Edit: Ultimately though, this question can be answer by looking at statistics. How many people with debt of 3.5 times income actually fully pay back that debt? How many governments that have had debt around a 3.5 multiple of GDP paid back that debt. Look at that, and I think it will give you a very very clear answer.

Edited by meedge

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Its not really valid to compare personal debt burden with government debt burden for various reasons. A simplistic look reveals ....

An individual obtains a salary out of which they pay down debt. The salary isn't related to debt. If debt increases, this doesn't impact on salary. Generally, salary is fixed and moves only upwards (nominally at least).

The government obtains income in taxes which is uses to service its debt and expenditure on various public services & works. When the debt burden increases, tax burden increases. As we see at present, economic conditions can lead to the situation where the costs of servicing debt rises (from increased borrowing and bond market requiring higher yields) and tax income actually drops dramatically. This in turn requires increased borrowing and can quickly lead to a feedback situation where debt balloons out of control rapidly.

Equally, when a governments debt level reaches higher levels of GDP the market perception of default probability (because governments can choose inflationary default) will rise, simply because this is an option open to the government and not the individual. This will again drive up yields, increasing debt burden when the goverment rolls over debt or sell more bonds.

The salary is related to debt - there is the fault

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100,000% of GDP would be a concern, but we would still be well placed in a global position. And lets face it, now 20 pences are worht £50 or more, we are more than well placed to weather the financial storm which begun in America. Yours, Brown.

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Why should we have any? Why can't we just have debt free money?

Because pensioners vote!

We have a pension system that increasingly relies on annuities. Annuity providers are required to finance the annuities largely through government bonds. No debt, no pensions!

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Comparing Salary (Individual) and GDP (Country) isn't really comparing like with like - it's kinda like taking the profits of the company that you work for, rather than your salary.

What could be looked at is the 'salary' of the government - so how can we work that out - well let's assume that the total tax take is approx 30%, and that 50% of GDP is Public Sector (these sound roughly correct but I dont have any actual figures) - so lets assume that 15% of GDP is able to be 'salarised' by the government. Using a 3.5 x multiple on 15% would give a suggested Nebt Debt to GDP of ~50% which again, sounds roughly correct. What also has to be remembered is that for governments, they can attempt to move that tax take % upwards (but beware the Laffer curve) - on the other side, an Individual can usually expect there salary to increase more than wages (as they get more senior etc.) which doesn't apply to governments.

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