Jeopardy Answer: Just Take on a Lot More Debt!

Question: How do we generate more GDP growth?

Trim Tabs:

From 1975 to 1980, each $1 increase in GDP was accompanied by an increase in debt of between 20 and 47 cents.  In other words, the increase in GDP was two to five times the increase in debt.

From 1981 to 2007, the amount of debt required to produce $1 of GDP growth crept higher, and it ranged from a low of 3 cents in 2000 to a high of $2.25 in 1991.  In only eight of those years did it take more than $1 of debt to produce $1 of GDP growth—1982, 1986, 1990 to 1993, 2002, and 2003.  On average, it took 79 cents of debt to produce $1 of GDP growth.  In other words, the increase in GDP was nearly 1.3 times the increase in debt.

Along came the Great Recession.  Since 2009, the traditional relationship between debt and GDP growth has been turned upside down.  Each $1 increase in GDP has been accompanied by, on average, a $2.50 increase in debt.  Before the recession, an increase in debt generally generated a greater increase in GDP, but now it takes an enormous increase in debt to eke out a small increase in GDP.  At some point, the amount of debt required to generate even modest GDP growth will suffocate the economy and trigger another financial shock.

Source: http://www.zerohedge.com/news/guest-post-how-long-massive-government-debt-buildup-triggers-another-financial-shock
Source: http://trimtabs.com/blog/2012/05/11/stimulus-tactic-of-increasing-government-debt-to-increase-gdp-broken-and-unsustainable-how-long-before-massive-government-debt-buildup-triggers-another-financial-shock/