Home > Economy
What Does Debt "Buy" For the U.S. Economy?
The Law of Diminishing Returns, Applied
Over the years I've had to unlearn most of what I was taught in Economics 101, and I suspect that today's students continue to have their hats stuffed with the same rubbish. Apart from the little chart that showed how the price of widgets is a function of the supply/demand curve, the only other useful idea I took away from econ 101 was the law of diminishing returns.
Perhaps you remember it too. The classic illustration is fertilizer and crop yields -- picture a graph with a simple domed curve inside a vertical and a horizontal axis. Use "fertilizer" for the vertical axis and "crop yield" for the horizontal axis and you have the basic idea. Too much fertilizer, and you get diminishing returns on your crop.
Now let's discuss debt and economic growth, and you probably know where I'm headed: As with fertilizer and crop yields, it's no less true that debt can "yield" economic growth. And yes, there comes a point where too much debt will produce diminishing returns.
Question is, "When" is debt at the optimum point for economic growth? Is such a thing even measurable?
It IS measurable, and that's the good news. The bad news is, the returns from each $1 of new debt in the U.S. economy have been diminishing since 1967.
This is plain to see on a chart in the chart below, which The Elliott Wave Financial Forecast first published in 2006.
GDP has obviously grown over the years, yet what's even more obvious is how debt has grown far faster. And something tells me that things haven't improved over the past 12 months, given that household debt service is at an all-time percentage high, even as the savings rate has hovered near zero (occasionally in negative territory) for years.
The next few days will see a slew of economic reports, but don't expect any of the usual suspects to reprint the chart above, much less discuss what it implies for future.
You can find analysis and forecasts that do consider this data, and other crucial but all-too-often overlooked indicators of the economy's health. EWFF is online right now, and comes with a subscription to The Financial Forecast Service. You can begin yours immediately with the fast steps below.
Tags: