What Is The Rate Of Debt To Productivity?

The U.S. economy relies on ongoing credit and debt generation for sustenance. The Federal Reserve is expected to increase the money supply, leading to further debt accumulation for the average American. Meanwhile, foreign nations continue to desire the U.S. dollar, despite their own economies facing significant challenges, some even worse than that of the U.S. This situation raises concerns about who will ultimately bear the consequences of these economic dynamics.

Thanks for making this. Being in prime house buying and family starting age in Canada, I have lots of conversations with my peers about the long term implications of poor policy decisions our government makes, including artificially supporting our real estate bubble instead of funding investment in and business incentives, and other productive assets.

One factor about the debt to GDP ratio not addressed in this episode is that GDP is generally an annual value, while most debts are not meant to be paid in a single year or even a single decade. People don’t normally take out a mortgage equal to their yearly salary, and virtually nobody pays their entire mortgage in a year. It might be more informative if we had a way to measure a yearly debt repayments to GDP ratio. Oh and one other thing. Any discussion of debt in the USA is not complete without taking into account Student Loan debt and medical debt.

“When the global economy borrows money, it’s not so much borrowing from some other entity as much as it’s borrowing money from its future self” feels like an unnecessary complicated way to say, that a national or commercial bank is creating money & debt by extending their excel spreadsheet 😀 The way our monetary system works, at least the base functionality without its complex implications, is rather simple.

One big problem here is, that we compare the debt to our assets, but these assets themselves are also linked to the debt. That means, that as showed in the article 68% of our assets value are real estates, but the reason why they can make such a massive part of the asset value is, because those prices are already pushed to the upside for decades by increasing debts. Especially the real estate area profits from our debt fueled system, because the interest on those loans are very low. As long as this system works its fine, but once it breaks the value of real estate will fall dramatically and with that decreasing the net value of our assets to a point where big debt IS a big problem. 2008 was a first sign for that. After that the 0% Interests were set up to keep real estate prices up. In my opinion something that cant work for that long, because at some point a new generation isnt able to afford any real estate on their own (or they have to take even bigger debt). This gets rather worse than better.

To me, there is an apparent blind spot in this narrative, being that debt creates a power imbalance. Those who have can lend to those who don’t. In other words: when debt increases, the power of the rich increases while the poor become less powerful. Growing debt means growing inequality. Hopefully, this will be addressed in the next article.

The article is interesting but has such a narrow focus that it’s almost useless. The idea of what industries are useful and which aren’t is changing with the advent of climate change and the toll that companies take on the planet. We are hitting the limits on resources that are less abundant making the world scramble to find a path forward that is sustainable. The growth of the past will not be possible anymore so I don’t see how paying that debt will ever be possible. There are already many countries that are defaulting on their IMF debt and more will come. Just surviving is going to trump macroeconomics.

The whole concept of summing debt without deducting assets is pretty useless. I could take out a $1bn loan, place the funds in an offset account, and pay no interest indefinitely. I’ve added $1bn to world debt, but my net assets remain unchanged. Debt, as a single metric ignoring assets, is simply a measure of financial transaction volume. The more ‘debt’ in an economy, the more movement of funds taking place. It says absolutely nothing about net wealth and financial stability.

It is important to say, that the intervention of the government in the economy to stimulate growth in a recession is a Keynesian theory and not a fact. Nobody really knows what a government should do to create economic growth. There are other theories that are highly respected like the one from Milton Friedman.

Debt is a good idea, to an extent. Debt is basically non-productive capital being converted to productive capital – the factory owner produces X goods for Y return, but only spends half of Y. The other half can either sit in a vault as non-productive cash, or be issued as debt and make a percentage return each year – so generally issuing it as debt is better. Meanwhile, another factory scaling up can access this excess capital to scale up their own business, meaning both halves of Y are generating economic output, while before only one half of Y would, while the other half sits in a bank vault doing nothing. This is the capitalist approach, the other way to ensure both halves of Y are being used productively is a soviet-style centralized command economy, which has had a pretty bad track record since markets are generally far too complex to plan centrally and still match the output of a more free market. So debt only becomes a problem when the invested half of Y isn’t invested into productive assets – this is EE’s point about real estate. Treating non-productive but necessary assets like real estate and food as investment assets is terrible for the global economy because it grows the expected repayment rate in the economy (as a percentage of the loan), which drags other consumption down, without actually adding any production into the economy.

So if i’m getting this correctly, the global economy borrowing from the global economy future self is like someone borrowing a “good time” from their future self by going to a bar and getting wasted, but their future self have to repay that good time by dealing with the terrible hangover tomorrow morning, as opposed to just having a boring friday night and a normal tomorrow morning

EE, could you do a article series on Environmental Economics? The value of natural assets in dollars. How this compares to earnings generated vs exploiting those resources and their lost value. The subsidies to fossil fuels vs the money spent to reduce carbon emissions. I’m interested in exploring the perverse tendency of humanity to be self-destructive in totally irrational ways.

12:34 NOT TRUE. You cannot blindly assume value = $$ somebody might be willing to pay for it. – hospitals and public healthcare save lives – public transport infrastructure save lives (reduces noise and pollution in cities) – social welfare programs act to reduce poverty and homelessness (otherwise you get thousands of tents on the streets of LA) – houses are overpriced because of greed and systemic issues The true value of assets is so much different from either price tag or “market value”. And what about liquidity. This simplification does more harm than good.

GDP only measures the production of goods consumed by families. It doesn’t include corporate or institutional consumptions. It makes little sense to compare GDP with something much more general like the global debt. It’s comparing apples and scalpels. This is making me question the rest of the content from this website..

At 4:11 World assets…. I believe you were mistaken when you say the world assets is equal to 1 quadrillion US dollars. There was a TV episode in the US, something to the effect of “Selling America”. The host at the episode totaled up yes that’s the United States, and came up with a value considerably larger than that…. The Host, if my memory serves, with a guy by the name of Donald Trump….so it should be easy to go look up what the television episode was on IMDb or something. Still enjoy your articles, especially with the ones with the economic leader board….

I look at US debt the same way I look at a bank. The US acts as the world’s bank. People and countries around the world need a place to store cash they have. Where? North Korea? China? Russia? The US is seen as the most secure place because of our stable and fairly transparent system. We have a good track record of managing our economy. So foreign cash gets deposited into the US gov “bank” and they get a receipt called a “bond”. Just like a bank the US pays interest on the deposit and then puts the cash to work to hopefully earn a higher return. Given the increasing power and wealth of the US we seem to be doing a good job…not that most Americans see that. Americans love to complain.

All that’s happened is business cycle bailouts, putting everything onto the tax payer. What’s worse, these debts cannot be ‘restructured’, so yes debt does amount to assets, we’re in servitude more and more as a country. To the old people or whoever. Debt is someone of working age who can work it off, directly or indirectly (taxes). All debt is showing is a growing mountain of pledged future work. Growing gdp is a mirage. If a car or house is more expensive now wrt salary than 30 years ago, then gdp has shrunk for all I care. All gdp is is a sort of relative comparison of different countries economic size. The only gdp metric that does matter is exactly that debt/gdp ratio. That capital has been squandered is shown directly by a growing ratio. All that’s needed to clean up malinvestments and for balanced house prices is for interest rates to remain somewhat elevated. Every time there’s a crash, all that opportunity is squandered because the govt lowers rates, people are laid off in masses, reducing demand like crazy, so now the govt has to become the employer by indenturing future generations. The ‘business cycle’ is the worst catastrophe of modern economics. (Wage inflation is completely benign. I can’t think of a case showing otherwise. The only people losing out are the wealthy. But as soon as wages start increasing, the people in charge crash the economy with very high rates, so that these wage expectations can be ‘reset’)

You haven’t mentioned Blackrock or Vanguard in any sentence. How they own large portions of assets debt and can impose policies on businesses and the whole industries. Take ESG score for example. What about debt leading to servitude? You haven’t mentioned the case like currently happening with China in Africa or in the past with the IMF, USA and some other poor countries. Some country borrows the money and if the default they have to give up their land or precious resources and the debt they took was not even spend on anything that would benefit their citizens but foreign corporations that under obligations got the contracts

Excellent article as usual. A few things to add. There are debts that are not included in this article. Responsibilities such as pensions, social security, medicare and other obligations. According to one economist who calculated the total US debt taking these into consideration the US debt alone is $220 trillion. However some of these obligations are fully funded, as do some states have their pension plans, others like California have a shortfall of $1.4 trillion, and social security is going to run out of those treasury bills in the next few years and only be able to make 79 percent of their obligations once that happens. I would love to see Economics Explained delve into this issue and how demographics might impact this debt load Thank you!

A financial guru in the US says “never borrow money to buy a liability, borrow only to buy assets “. Could this idea work for Government budgets? Our politicians have run deficits over and over. If the deficit spending was only for investments ( like roads ) would this work and what effect would it have? The guru is Dave Ramsey.

What’s the reply to government debt getting too high even if the debt is used well? Isn’t there a need for preparedness for the crises which turn up every few years? Wouldn’t the Ukraine War be over if NATO countries were simply tapping a surplus to support Ukraine? Would we be having the same hardships from the pandemic if the over spending weren’t borrowed? Aren’t we now trapped trying to hold low interest rates because of government debt?

The underlying problem with your analysis is that you’re assuming that the value of global assets stays the same over time. If, for example, you take out debt to buy overvalued assets, the value of those assets will eventually crash while the nominal debt will remain unchanged, thus exacerbating the debt problem. There is no reason to believe the economy will keep growing indefintely, but it has become clear that government debt will keep growing, as governments aren’t willing to accept any form of significant downturn. It’s a vicious cycle, it’s a bubble economy.

Economists SHOULD be more concerned with HOW goods, such as a television, ACTUALLY ARE CONSUMED!! BECAUSE HUMANITY IS KNOWN FOR WASTING THINGS. Perhaps, economists could bring such findings…(discovery of a huge, intentional wasting of things, for example), could then be shared with a bureau dealing with fraud and waste, to see if it needs investigation .

There are two fallacies here as I seeing it. Firstly, as I always say, to fully and correctly understand or discuss any high level or abstract or complex economic concept, one MUST “demomitize” the context. That is, if you dicuss it or not try to understand in terms off money, YOU WILL get it wrong. You MUST conceptualize it in terms of the production, EXCHANGE (for which money SERVES as proxy, key point), and consumption of thise goods and services. Lending is noted lending money but lending of owed consumption (for which money serves as proxy for that owed consumption). The second is “false aggregation”. I this case, global debt is NOT the world lending to itself but is the AGGREGATION of all of the INDIVIDUAL lending. No it’s nit and “global” lending but is till all INDIVIDUAL lending that is taken in aggregate. Some to falsely aggregate all the INDIVIDUAL lending into some false homogenous singular “global” lending to itself is a to misrepresent the reality of life the actuality underlying mechanism. As I always say, a forest is not a thing that exists as a singular independant physical thing but is an abstract entity that exists only as an emergent property of the aggregation of the INDIVIDUAL trees that comprise that forest. Global debt is the aggregation of all of those INDIVIDUAL debts owed.

National debt isn’t a problem at all, except for politics. For instance, in 2023, USA paid 659 billion dollars in interest, while it paid 816,7 billion on military. The politicians can’t raise taxes and that means they either have to cut in other spending or they have to take up debt to pay the interest. At some point, it will cause conflicts. You could probably calculate how much a newborn American will pay for the Vietnam War during their lifetime. Compound interest is a very powerful thing in the time horizon of a nation. I think that’s the issue. Not necessarily conflicts between nations, but between age groups.

On the graph showing debt and GDP from the 1900’s to now: You are telling about growth without telling about the inflation in each period. Money is getting worthless at the moment, compared to 1935 (after the big inflation back in the 20’s) so there is no growth only money printing. I haven’t finished the article yet but the money printing is only beneficial to a good few very rich people. And to politicians who can keep on funding their pet projects to keep their voters happy. Voters who appear to be dumb enough to time and time again vote for these money printers.

Genuine Question: Are economists stupid enough to quantify consumed food as without value (vs an eternal pot)? Because the food consumed literally translates into “+1 day of production by a worker, instead of eventual death leading to halt of all personal economic production”. How is that not evaluated, considering the sheer MASSIVE economy and necessity represented by food consumption? I’m genuinely curious.

There’s just one MINOR detail that wasn’t ever covered… the currencies used to pay back the debt are BASED on debt. Meaning it can’t ever be paid back since the value of a currency based on owing something is essentially zero. Money loaned on any level, if it’s not backed by physical collateral then it has no intrinsic value – how then can it gain worth in which to pay back what it owes. Short answer – You DON’T.

US Geological Survey estimates of global reserves of metals and minerals are only 2-5% of the future needs. Global crude oil production has declined since 2018 as has liquid fuel production. Money/currencies are virtual representations of energy and commodities. Debt is committing energy and commodities from the future without knowledge of cost or supply.

What isn’t sustainable and is heading towards disaster is household debt. People used to pay 30% or even less for rent/mortgage. Now it’s up to 50% or more for most people. No not the rich. But the 95% rest of us. The crash in 2008. Likely paltry to future crash because of the inflation and need to tame it via central bank raises of interest. People are being priced out of their homes and even rent. It’s not the inability to even own a home, a lot of people can barely afford to rent small apartments. The cost keeps increasing far faster than income. New housing projects produce apartments that are exceedingly expensive. “renting a room” has become more common, kids staying home much longer more common. Room mates more common. Good luck trying to retire at normal retirement age as well unless you’re really well paid or rich. You’ll be working until you die now or the choice is live on the streets.

It’s a bit disappointing you didn’t further caveat the point about debt fuelling consumption being a bad thing, because that’s not necessarily true. Consumption is necessary for the economy and can be a very good thing. (The plate of pasta was produced by someone growing wheat, milling it, turning it into pasta, cooking it for you if you’re at a restaurant) In fact consumption is necessary for any multiplier effect of fiscal policies to come into play. (If you spend money on building a highway, that means workers are getting paid and they then spend the money in the market, leading to more jobs being sustained)

Very good presentation. You touched upon the fact that this all works as long as money/debt is invested in income/wealth generating activities that produce a higher return that the cost of debt. The Chinese economy might be an example of where there are now no new investments (or very few) in that give a positive economic return. Which is why the Chinese government and its’ economy are in a quandry. If this happens world wide and given the imbalance of income distribution in the population, this will all come to an unpleasant end. Am I right?

There is a clear misunderstanding of finance. The debt only has to be matched to productivity (current) and anticipated productivity (future) as any individual believes they have the capacity to clear or service that. Global debt then is the summation of this. There is no such thing as good or bad debt* (*value calculations don’t often summate properly to account for efficiency; for e.g., if you continue to buy pots and no-one eats, the biological consequence is one of extinction). Often, with credit and debt cycles, this can sometimes becomes decoupled from the fundamental drivers of value (people buying too many pots, too many houses etc.). Ever since finance, the basis of which is a unit of currency (the strength of which is essentially only related to the underlying government, legal and financial systems that regulate it), became floated, this is only effectively required to be relative (in some semblance). This was necessary. Imagine if we all had to split our wealth between the finite amount of gold that exists. How ridiculous a proposition.

The problem with countercyclical fiscal policy is that public sector spending is fundamentally different from private sector spending. Private sector spending occurs when the person doing the spending believes it will profit them in some way. Sometimes that belief is mistaken, but on the whole private sector spending leads to increasing wealth. Public sector spending is driven by political concerns, not maximizing profit. This leads to things like the US government funding cowboy poetry because the Senate Majority Leader was from Nevada. Indiscriminate spending on welfare and education has led to massive reductions in the returns on that spending, and useful infrastructure spending is rarely “sexy” enough to attract significant political support (and in many cases draws political opposition).

Why does no economist account for environmental or human resource future liabilities? For instance we currently consume 200% of natural resources, but yet who is accounting for that? It’s unsustainable and someone has to pay. The entire worlds water supply has PFAS that need to be cleaned. Who will pay for that? There are hundreds of similar examples that the world economists never take into account and they all pretend these costs don’t exist when making these calculations.

As someone heading into the city infrastructure industry in the US, suburban sprawl is a huge issue here related to productive debt because it’s so incredibly pervasive in US society and is very expensive to build yet gives very little return on that investment for the government. I’m worried that in the near future, the US will hit a tipping point where the ponzie scheme that is the suburbs cannot grow anymore due to insane real estate prices and therefore cannot sustain itself, and many local or even state governments will go bankrupt… Or the infrastructure (roads, bridges, pipes, etc.) will fail and we’ll have many more problems. Anyway point is the US infrastructure was designed extraordinary poorly on such a fundamental level that I don’t think this is avoidable, even if it takes a decade to really hit the country hard. I hope we can lessen the impact before then.

No need to watch this article if you consider the following;- With a debt based money system, global debt can only increase, because more dollars need to be borrowed into existence to pay the interest on the dollars created before them. This is why we see huge monetary premiums in asset markets. The assets aren’t increasing in price so much as the value of the dollars (they are priced in) is going down.

As someone who studies pubic debt, I’m a bit underwhelmed by this article. Sure it’s only a 15 min article, but to not even mention the most important points.. Why can some states borrow extensively and other can’t? How do governments use financial repression and inflation to lower their debt? Growth-Interest Differential? Different kinds of debt (domestic currency vs. Foreign)? Advanced vs emerging economies? I mean…

Here’s my question. At what point does the system collapse due to the burden of exceedingly high greed that was generated by the years of increasing rates on the borrowers? Truth is if the interest were shaved there is no telling how much debt wouldn’t even exist and how much debt would never have even been needed to begin with. It’s usury and slavery to all humans and a certain group punishes the rest to a certain extent if you think about it

The problem is not really the debt already accumulated. The real (or the biggest) problem for the USA (or all of the Western Countries for that matter) is that they cannot function without creating a new debt. Spending more than is produced and collected by taxation will not end well in the long run.

Money is stupidity. Its very existence defines a debt. Worse still any pretence of maintaining mathematical equivalence when we assign values to things has long since disappeared. In other words we are operating within the framework of an unbalanced equation which is inherently unstable. If our species was intelligent enough it would have put aside war, money politics and religion. Sadly we have demonstrated almost no moral or ethical advances over the last 10,000 years. We do not learn from history and we have a practical working memory of around 90-100 years after which there is nobody left alive to testify first hand to mistakes made in the past. It should be noted that the calculations mentioned in the clip take no account of the resources which humans have destroyed. The “assets” which are considered to have been created are more than offset by the lost of biological diversity, and right now, the very real existential threat of reducing the planet to a plastic-coated, radioactive cinder. Since most of the numbers used by economists are entirely arbitrary any statement based on them is unreliable. The entire financial system is simply an irrational belief structure. Until we can dismantle the whole thing an learn to function within the bounds of reality we do not have a future.

What debt is, is the artificial demand to use finite resources now that would have been available for future use otherwise. In short, it’s the definition of unsustainable. It’s not the “money” that will have to be “paid back”. It is the dealing without the use of resources for a time, either from willfully abstaining, or lack of availability.

Why is debt all bundled together?? Why doesn’t the expected lifetime of the debt come into play? Eg if I purchase in cash, debt is instantly resolved, purchase with credit, debt is resolved usually within a month, vs mortgage where best is resolved after a few decades. I assumed there is some correlation between the expected debt lifetime, and the value generated from holding the debt. Maybe there are multiple dimensions, eg size and lifetime of debt vs value generated over some time period. The point being, if such a correlation exists, we should be able to apply it the global debt to determine how much of it is for short term consumption vs for longer term value generation. Then I guess the next metric would be the serviceability for those different dimensions.