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**wrefrinny** · 08-12-2006, 10:03 PM

Originally posted by DanS

This isn't true, but is a typical misconception. It all depends on how much your economy has grown in the meantime. For instance, in 2005, the US economy grew at a 6.3% nominal rate. Inasmuch as the deficit was less than 3.8% of the economy, the nation's debt as a percentage of the economy went down.

For the long-term, the debt on a 2% deficit yearly would stabilize at around 40% of the economy.

Really, you should look at all levels of gov't and the "net lending" line item in the national accounts as the deficit rather than the federal deficit given by the Treasury, but that's a separate issue.
An equally typical misconception is to confuse an increase in the GDP statistic with an increase in productive economic activity.

Simply borrowing 5% of its economic output per year results in the US increasing its GDP number by (give or take) 5%. Since US debt is deemed to be extremely secure, when it borrows, it does not take money out of the economy, it simply creates it.

So when the US borrows money, the GDP figure goes up, regardless of what else is happening in the actual economy. It doesn't matter if if manufacturing is collapsing and the trade deficit is out of control. So long as you can continue to increase your real debt, everything looks good. Just like it did at Enron.

But once we can no longer increase our debt as a fraction of GDP, everything will instantly look very bad indeed.

08-12-2006, 10:03 PM	#26
wrefrinny Join Date Oct 2005 Posts 583 Senior Member	Originally posted by DanS This isn't true, but is a typical misconception. It all depends on how much your economy has grown in the meantime. For instance, in 2005, the US economy grew at a 6.3% nominal rate. Inasmuch as the deficit was less than 3.8% of the economy, the nation's debt as a percentage of the economy went down. For the long-term, the debt on a 2% deficit yearly would stabilize at around 40% of the economy. Really, you should look at all levels of gov't and the "net lending" line item in the national accounts as the deficit rather than the federal deficit given by the Treasury, but that's a separate issue. An equally typical misconception is to confuse an increase in the GDP statistic with an increase in productive economic activity. Simply borrowing 5% of its economic output per year results in the US increasing its GDP number by (give or take) 5%. Since US debt is deemed to be extremely secure, when it borrows, it does not take money out of the economy, it simply creates it. So when the US borrows money, the GDP figure goes up, regardless of what else is happening in the actual economy. It doesn't matter if if manufacturing is collapsing and the trade deficit is out of control. So long as you can continue to increase your real debt, everything looks good. Just like it did at Enron. But once we can no longer increase our debt as a fraction of GDP, everything will instantly look very bad indeed.
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