Tuesday, January 13, 2009

Why you can’t Borrow and Spend your way out of a Debt Crisis

Substituting Debt for Savings and Productive Investment It is a Recipe for Financial Disaster

"We showed that it took $1.50 of debt to generate $1 of GDP for the two decades of the 1960s and 1970s, and then it averaged $2.50 to generate $1 of GDP in the period from 1982 to 1997. Starting in 1997 the debt really took off and this economy wound up taking a little more than $3.50 to generate just $1 of GDP in 2008."

Posted by mountain goat @ 04:55 PM (1457 views)
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10 thoughts on “Why you can’t Borrow and Spend your way out of a Debt Crisis

  • mountain goat says:

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  • mountain goat says:

    The discussion on what to do for governments seem to have come and gone. Even Germany is putting together a big stimulus package. For Germany and China these seem appropriate because they are running growing trade surpluses. However, for the UK and USA I don’t understand why a massive spending spree isn’t challenged more by economists. They all come from the same Keynesian or Monetarist viewpoint, politicians who question this are dismissed. Anatole Kaletsky: Punish savers and make them spend money is a typical mainstream view. He wrote “I believe, in line with the vast majority of non-socialist economists, that Mr Cameron’s campaign for savings is completely wrong; that “borrowing our way out of debt”, paradoxical as it sounds, is exactly the right prescription for our present problems.”

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  • mountain goat says:

    Periods of deflation are natural and should be allowed to happen. The Fed and now BoE/GB are trying to stop this, threatening an enormous “day of reckoning” when the natural cycxle of finance re-asserts itself.


    Source: http://www.caletters.com/OccasionalLetter.html

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  • mountain goat says:

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  • stillthinking says:

    mg, I don’t follow this explanation about borrowing and gdp. The idea that you need 1.50 borrowing to create 1.00 GDP seems a bit weird to me. Is this just the excess savings/debt argument again?
    Put it another way, does this suggest that if you borrow 1.50 you would only spend 1.00?

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  • stillthinking says:

    Forget that last sentence. I meant if somebody had the opportunity to save 1.50 they would spend 1.00 and save .50 . Causing a savings/debt imbalance.

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  • excuse my ignorance, but hasn’t this got something to do with compound interest?

    and the fact that the debt is ~created~ but the interest comes out of the economy so it just keeps getting worse?

    was it crunchy that kept going on about this?

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  • mountain goat says:

    Stillthinking – I understand it in the way of running a business. Taking on debt is necessary to expand a business. To increase your profit you may decide to increase your turnover (GDP). You may need to borrow to expand your factory for example. So long as your turnover and profit does increase then it is worth borrowing. But if your profit does not increase then taking on more debt hurts the business. As our economies have borrowed more and more the GDP has increased, but GDP hasn’t gone up proportionally. So that is why “it took $1.50 of debt to generate $1 of GDP for the two decades of the 1960s and 1970s, and then it averaged $2.50 to generate $1 of GDP in the period from 1982 to 1997. Starting in 1997 the debt really took off and this economy wound up taking a little more than $3.50 to generate just $1 of GDP in 2008.”.

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  • troy @ 5.40pm

    When they create the debt based money supply they do not create the interest.

    Therefore no matter how successful a business, country or economy is, wealth is always drained out of the system.

    Therefore the money supply will always reduce unless replaced by more debt based interest baring funds

    Some-one has to borrow.

    Wining is not an option in this game at least not for the majority and not long term.

    The current process under way is simply acute wealth extraction.

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  • stillthinking says:

    Thanks.

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