Friday, July 2, 2010

Debt-to-GDP Ratio: Great Recession vs. Great Depression

The US government entered the current "Great Recession" with $65 of debt for every $100 of Gross Domestic Product. That ratio has exploded to 90%. Meanwhile, household debt (the sum of the personal debts of all of us individually) hit close to 100% of GDP early on in the Great Recession and has dropped to about 92% as the Great Recession has continued.

At the beginning of the "Great Depression", on the other hand, the debt-to-GDP ratio was 16%, and it was 44% when the Great Depression ended. But while household debt was around 100% at the onset, like it was recently, it went down to about 20% as Americans deleveraged themselves.

In one scenario our government borrowed less than the other scenario. And, respectively, We the People unwound a lot more of our personal household debt then than we have thusfar.

Problem: the measures taken by the government to stimulate the economy have, arguably, the desired result for a period of time, but they then lead to significant economic contraction. When the economy slows, individuals may have the option to leverage-up their personal balance sheets to pick up the slack... if they have room to spare.

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