Sunday, March 21, 2010

Marginal Utility of Debt

Click on the image for a larger view.

This graph is from SwarmUSA, and it is one of the most critical graphs you may ever see. What it shows is the relationship that adding debt has to GDP. At first, adding debt (that is, borrowing from future economic activity in order to spend in present economic activity) produces a large gain in GDP- almost as large as the debt added. Over time though, adding that same amount of debt produces less return in immediate economic activity. People and businesses are leery of spending even though more credit has been injected into the economy because they are hindered by their debt load. Eventually, the madness of trying to "borrow our way to prosperity" because inescapable. The additional debt produces zero gain in GDP, and even goes to negative. That's where we are now.


Anonymous Jeff said...

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8:46 AM, February 02, 2013  

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