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Following up on davefairtex’ comments, I also think that this is an example of the economic science of confusing stocks and flows. GDP is a flow, $/year, and debt should be a stock, $. I think that one way to work with graph #3 is to integrate the flow over a period of time and see what change in stock was required to generate it. So for 2000 to 2010, the average GDP was maybe $12T/yr or $120T total, while the stock went from -$30T to -$54T for a total change of -$24T. So over the course of that decade we saw maybe +$5 in GDP returns for every -$1 in new debt. We’ll leave aside whether we like what we measure as GDP – rigged contracts, weapons against hearts and minds, expensive health care, etc – and whether inflation zeros out the real changes. This still seems bad, but it is more subtle than depicted above.
In his search for a pony, Dave linked a FRED chart that shows that GDP shrinks when debt growth moves towards 0: We currently require debt growth to get GDP growth. So maybe we have a choice between endless debt growth and some GDP growth as long as we can borrow more, or a falling GDP if we choose not to borrow more, or can’t borrow more.
Whether or not Dave and I are right, it is important to get these ideas right when you engage in public debate. After skimming the article the other day, I was going to send the link to someone as a concise explanation of why the USA path is unsustainable, but now I think that I’d risk being discredited for not recognizing the difference between stocks and flows, even if the conclusions about borrowing, growth, and sustainability are correct. Don’t risk the audience or the message on math errors! I stop reading sites that promote sloppy math.