The madnesss of GDP related debts.

Friedrich Dominicus — Wed, 18 May 2011 14:27:00 GMT

I'm suprised that a debts rate of is calculated with the GDP.

I know "every" does it. But if are at the edge of a canyon, and everyone is marching on, makes this march not less stupid

Let's translate it into our "world" (the non government world) So I'M living in Heidelsheim around 5000 inhabitants. Now what the produce can be seen as "my" GDP. So let's assume I have 100 000 EUR debts. But all i all the 5000 people would produce an GDP of 1 000 000. So my debt/GDP ratio is just 10%. According to this I guess my finances would be sound.

But know we get back into reality. I do not have access on the money of my neighbours. I've my income. So let's calculate with an income of 25000. So I'd need at least 4 years to pay back all my debts. Would you think my financial situation is sound? Well you would ask what else does he have to "secure" the liability. So let's be generous and give me 200 000 EUR . So in reality I'd just have 100 000 EUR (assuming I could make my property to money at an immediate notice) Still the question are my finances sound? We still don't know.

Now let's switch back to the state analogy. As we know states do not have a balanced balance sheet. Each year they need extra credit. Now let's assume I'm one of the better one's and just need 10% extra debts on my income. That means each year I'd add another 2500 EUR debts. So let's calculate with an interest of 5%. So my payments currently are around 5000 EUR. Next year I've to pay 1375 EUR interest. No let's calculate if I do that for 50 years. I than have a debt of 600 000 EUR (if I could bear at lest all the interest) and my interest payment would be around: 30000. Which is absolutly impossible. So now you can say, my situation is all but sound.

But now back to the case of the government. Let us assume a GDP groswoth of the Heidelsheimer inhabitants of around 2.5%. So in 50 years we'd have a GDP (without inflation!!!!) of 3 437 109. EUR and my debt/GDP ratio just would be: 0,174565311 that are 17,5%. Still for states this is sound?

So I do not think that Debt/GDP is a wortwhile measure. We should just allow governments do calculate their debts with their income. Just imagine what 160% debt of the GDP means ... So I can not see how e.g Greece could "bear" that and in fact it's getting more and more obvious... they can't....

F Dominicus Blog : manipulation

The madnesss of GDP related debts.