The madnesss of GDP related debts.

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….

The US creditability

Well how interesting that the verdict of the rating agents still is on AAA for the US. They just have a few trillions debt and they “just” another 1.4 trillion during this year.
And still the blame the rating agents and call it a “politicial” decision. I wonder what does it mean? Is S&P a unknown party? Are the democrats and republicans not the only
parties everywhere else.

Are the owners the democrats or the republicans or what?

No it’s very easy the deledefs are fucking afraid. They know they are just playing on time and it seems there only desire is being pensioners if their own build card-house will collapse.
They fire out money as mad and never hardly anytime in history there was such a fiat-money flood. Just in and around the finances are devastated. And this was all done by the politicians of the both parties.

If AAA gots lost the debtors can not count on getting money for nothing (and the taxes for free). No they will have to offer higher interest. And this means it will get more expensive and still there is no plan for “paying” back the debts. Just the “plan” to reduce the amount of new debts. So we translate this kind of saving into our world.

Problem 1. The debt of a rate is measured against GDP so there is no GDP for use. That’s bad so we must calculate differently. I found this as “official” values for paying the debt. It’s 10% of the budget we need to use it for the “income” of our family so let us assume our debt are as official told 50 000 ME (money equivalents (read dollar)) . So we’d have to pay pay (we are not the government so we have “real” interest of let’s say 5%. BTW having this as interest rate would break the US.) So we’d have 2500 ME to pay for debs. So our budget is 2500 / 0.1 = 25 000 ME.

We are still lacking our GDP. So we need some help. Because the GDB is nearly exactly 100% of the debs we have GDP of 50000 ME. Great so we need new debts at or around 10% of it, that are 5000 ME.
Just let us assume this stays for “let’s say 3 years. Let’s compare it with how much it is for our budget. The the 5000 ME are 20% of our budget we had before taking the debt. So in reality we’d just have 20 000 ME at our disposal (- the interest which we must pay) . But we spend 25 000.

So in three years we’d have a debt of around 65 000 ME and have to pay 3250 ME interest /year. Now how much does our budget grow? This is hard to tell, but I have calculated with constant 5000 ME extra debts each year. And so our budget still is the same 25 000 three years ago we’d have to pay 2500 for the debt (the 10%) and three years later 3250 / 25000 = 13% of our budget. We’d have not paid bake one cent of our debt and we still are spending 25 000 ME (which is not possible because we can not spend the amount we pay for interest. So in fact we are taking new debts to pay old debts. And that means we have pay on interest of interest of our debt and we extended our whole debt around 30% !!!

If you can see you can stand that. Well you’re right. You can stand that for roughly 10 or so years, then you are fully broken. And well now see the US they are doing something similar for more than 10 years. And yet they still should have a rating of triple A? Hard to believe that something so obvious unsustainable should get a rating of “being” save….

You can see however how besides reality this kind of debt calculations are. We do not have any GDP which can help us, we can not tax away other. We just have our income as the “only” calculation base. I can not see and accept that this should be different for states. Just imagine the following all the pension payments are not covered in the budgets of today, although we know there will be some expenses in the future. In private you must save to have something, but the states do not do that. So the pension payments have to be beard from the current budgets, and you still have to pay for zillions of other things. There is nothing comparable in the private sector. (GM was broken by their pension plans BTW)

States should not be allowed to use GDP for calculations but their own budgets, and if they promised for pension payments this money has to be “saved”. If that is not possible no pension promises can be given an the money should be left to the peopleâ€¦ They have to take care that they have enough for later. If you think how different the rate is comparing GDP and budget. Now let’s see what really is our income. We have a budget of 25 000. We have new debts of 5000 ME and 2500 ME interests payments. So that are 25000 – (5000 – 2500) = 17500 ME that’s your “earned” money.

And yes I have used official numbers, there are so many shadow budgets etc around that this may be just the tip of the iceberg…

I write “earned” because the earning of states are in fact robbed. You have to pay tax and you have no choice…..
With everyone else you pay what you ask for with governments you pay what you asked for and everything else also…..

Very interesting to read

Here on the Mises blog:
http://mises.org/daily/5170/The-Myth-of-Japans-Lost-Decades

That is interesting and we can really build on it.
Let’s assume the production stays the same for one year. Let’s say it#s 100 PP (Product Pieces) now we just have the amount of 100 (money units) for paying this services.

Now the “stimulius should” start with more “money” . Well we increase the amount of money to 105. nothing will happen to PP. So we have 105 MU for 100 PP and so what happens to the +5 MU?
Well in the end the prices will have to rais to 1.05 MU/PP.

f

But in fact nothing more was produced. And still we’d an GDP growth of 5%. Which would imply that there are more goods. But it’s just an illusion. We have the same products just more money
so we did not get richer by any means. We could not have saved more nor could more be consumed.

I’m quite aware that the “illusion” of having more money makes a difference. If you think you have more money. You either consume more or of you are a producer you think about expanding your production. And here comes the base for the boom/bust. You invest in something under the impression that there is “really” more demand. But it’s not there really. And you investements will make you more poor.

So our problem always is to figure out if there really is more demand or just more money. I have though about it today and written down my ideas here:
http://fdominicus.blogspot.com/2011/04/welche-art-von-aufschwung-haben-wir.html
Sorrry it’s in German but I concluded from all the surrounding that we here in Germany see a boom driven mostly by thinking the demand is higher. It’s not fully clear because our car makers produce much more than before, but you have to see they had a sharp decline the former years. I’M not fully sure if we are on the same level of production as in 2008. But even if we’d have we do not know if all the cars really get sold.
So the above articles makes it very clear on how difficult this areas is. And it’s getting worse with every other non-market driven action like tax reductions or tax raises or new laws for social security etc.

Anyways the link gives us an idea. We can take e.g the car output as measure. Cars are real and so we’d have at least some better base. If we than see the raise in the in money valued growth, We can see if we really got “richer” by the means of more production or the “production of” money…. From this I think one can draw better conclusions as from any money valued growth alone…