Thursday, March 25, 2010

The Most Important Chart of the Century

Nestled in a report from the U.S. Treasury is this chart which, while self-explanatory to some, needs explaining to others. I was one of "the others", as I am no economist, but once it became clear to me, I did have to agree with those who are giving this chart the grandiose distinction of being "the most important chart of the century."

Simply put, the chart takes the change in GDP (Gross Domestic Product) and divides it by the change in debt, over a period of the past 45 years (starting in 1966). The chart shows the GDP and debt concurrently on the Y axis, and the years on the X axis. Back in 1966, bringing a dollar of new debt into the system would add almost a dollar to the nation's GDP. Over the years, as more debt entered the system, the productivity of the debt in adding money to the GDP decreased (e.g., in 1986, bringing a dollar of new debt would bring about a roughly 20 cent increase in GDP. The value zig-zags over time, but it's clearly decreasing). It's pretty much in accordance with the Law of Diminishing Returns. The chart's end result will be that by approximately 2015, each dollar added to our debt will do nothing for our GDP.

However, there is a new wrinkle in something known as debt saturation, which is something having to do with total income no longer being able to support total debt. As a result, every dollar of debt now being introduced into the system is now resulting in negative productivity in GDP (or, put in another way, the opposite of growth). Our current system is built on debt, it's nothing but debt, and adding even more debt to the system is only leading to more bad things down the road.

So, basically, we can no longer borrow our way to prosperity, and this chart is telling us that we can no longer kick the can down the road for future generations to deal with. This will be our problem. But TPTB want to keep this party going for as long as they can. This can only go on so long, of course. The only question is, how long? To this, I do not have the answer.

These links go into much more depth, and the comments are well worth reading:

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