Thursday, July 21, 2011

Growth and Inflation are keys to managing the debt!

Monday I described how even with the debt increasing at one percent per year, with an attainable growth rate of three percent per year, were the initial ratio of debt to GDP 50 percent, it could be reduced in a decade to 41 percent. If there were a modest inflation applied to the GDP but not to the debt, the ratio of debt to GDP would be reduced to 31 percent.

If instead of an increase of one percent per year of the debt, it could be reduced by one percent per year, then without inflation the the debt to GDP ratio would be reduced to 31 percent; with three percent per year inflation, the ratio would be reduced to 25 percent.

The point is that with attainable levels of economic growth and modest inflation, a government that pays it costs as it goes will rapidly reduce its debt to manageable levels (as compared with GDP).

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