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The Utility of Debt

Interest-Rates / US Debt Aug 19, 2010 - 01:54 AM GMT

By: Dr_Jeff_Lewis


For many, debt is a burden.  For many others, it's a utility to be respected.  Regardless of which position you take, realize that there are some situations in which debt is beneficial - and others where it's just dangerous.  For the US Government, debt is now just simply dangerous.

Δ GDP/Δ Debt

This very simple mathematical equation is what so many economists use to understand the utility of debt and its value-added influence on the economy.  The delta, Δ , means change - and in this case, the change in the GDP divided by the change in debt.  This number, if greater than one, means that for each percentage move in US debt, a larger percentage move is generated in the GDP, or total output.  This is relatively simple to understand, and it paints an excellent picture of the benefits of economic stimulus.

Since the 1960s, the numbers derived from the simple equation of Δ GDP/Δ Debt have become worse and worse.  In the 1960s, for each 10% increase in US debt loads, GDP increased by 9%.  In the 1980s the rates dropped even further to a point where a 10% increase in Debt meant a 2% increase in GDP.  That 20% ROI line was held until today, when an increase in the amount of debt creates a decrease in actual production.  Today's numbers show that a 10% increase in Debt creates a 1 decrease in GDP - which is clearly not a good sign. 

Keep in mind that debt should only be used when the Δ GDP/Δ Debt equation is greater than 1.  That would mean that debt is positive for the economy.  Anything less means that we're losing more than we're getting back in the form of increased output. 

Also realize that the trend from the 1960s to today followed a downward sloping trend in interest rates.  Debt in 2000 yielded a much lower rate than it did in the 70s and 80s, so we should expect that year 2000 would post higher Δ GDP/Δ Debt numbers than would 1970-1990.  This, of course, isn't the case.

Savings is King

Since it is unlikely anyone will learn from these macroeconomic numbers in government or at the Federal Reserve, we can, at the very least, apply them to personal finance.  Since debt no longer drives growth, but actually encourages economic contractions, investors should start buffering up their own personal savings.

The best way to build personal savings is to do so with a medium that will maintain its purchasing power well into the future.  A hefty cache of gold and silver should do the trick, and if the government decides to go the route of austerity, investors will have enough cash on hand to make deals that would put them in a prime financial situation.  When cash is king, don't be afraid to show your cards.  Most of the best performing business deals have been made at the height of a recession, with payment entirely in cash.  Let that thought run around your cortex for awhile.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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