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01/27/2008

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Anonymous

You have seen articles in which the author frets about the federal debt becoming a larger percentage of GDP (Gross Domestic Product – the total value of goods and services produced in America). The author may even have supplied a graph showing federal debt eventually will exceed GDP (as it already has in Japan and Italy).
This comparison is made to horrify – to demonstrate federal debt is wildly out of control, and to imply GDP is an economic Mount Everest, which federal debt dare not climb.
Yet the ratio of debt to GDP is totally meaningless – a classic “apples to oranges” comparison. The size of GDP does not in any way bear on the usual questions surrounding federal debt, i.e.: Is a growing debt sustainable? Will a growing debt cause recession, depression or inflation?
GDP does not affect the government’s ability to “sustain” its debt – an ability that technically is unlimited. Beginning in 1971, the end of the gold standard, the federal government has had the infinite ability to create money with which to service any size debt.
Nor, does the GDP/debt ratio predict recession or depression, which historically have occurred when debt growth has declined, not increased.
The GDP/debt ratio also does not predict inflation, partly because GDP refers only to domestically produced goods and services, while inflation measures domestically consumed goods and services, two vastly different measures becoming more different each year. Further, changes in debt historically have not been predicative of changes in inflation.
Data demonstrating the negative effects of federal debt have been virtually non-existent, and disseminating a meaningless debt/GDP ratio does not add to our knowledge. The next time you see a debt/GDP ratio, understand it is meant to frighten, not to enlighten.

Rodger Malcolm Mitchell
rmmadvertising@yahoo.com

www.rodgermitchell.com

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