Mortgage debt, which was on track to fall 3% as a proportion of GDP prior to The Boost, instead increased by 6% of GDP — a 9% turnaround that was equivalent to an additional $100 billion stimulus to Australia's A$1.25 trillion economy.

Please enable Javascript to use our menu! Then we get the following situation: This is the real danger posed by debt: once debt becomes a significant fraction of GDP, and its growth rate substantially exceeds that of GDP, the economy will suffer a recession even if the debt to GDP ratio merely stabilizes. While I doubt this claim, it is undeniable that if the "deficit hawks" make the government reduce its own spending, then there will be no force standing in the way of accelerated private sector deleveraging. From this perspective I identify the ratio of debt to GDP — and the rate of change of that ratio — as the key determinant of the state of the economy, and this is what alerted me to the approaching Global Financial Crisis in late 2005. This phenomenon was not taken seriously by conventional economists — which is why the crisis took them by surprise — and they continue to misunderstand why it matters, even as the crisis that they did not see coming continues. Its collapse from a peak rate of growth of 7% p.a. Though this is painful, it at least addresses the cause of the crisis — too much private debt — by reducing it rather than increasing it once more. Whether government spending can continue to counter private sector deleveraging is now a moot point. By Steve Keen. The same pattern repeats from late 1988 till early 1993 — from a growth rate of 7% to falling at 3.5% p.a. To get the debt-to-GDP ratio, simply divide a nation's debt by its gross domestic product. in early 2008, only to fall to minus 5% in mid-2009.

However, a careful scrutiny of the data based on which this claim is made shows that the relationship between debt-to-GDP ratio and macroeconomic instability is weak. In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). Since America is even more of a Ponzi-dominated economy than Australia, this reduction in private debt — now that the Ponzi Scheme has collapsed — is the key cause of the USA's current slump. Why the Debt to GDP Ratio matters. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt . This approach not only explains why the GFC was inevitable, but also gives a very different explanation to preceding crises, and it explains why, to date, Australia has successfully avoided the worst of the GFC while America has suffered from it very badly. The overwhelming reason for this rapid turnaround was the First Home Owners Boost (which I prefer to call the First Home Vendors Boost). Debt to GDP levels in both Australia and the USA — the two countries for which I could get reliable data — were clearly on an exponential path that I knew had to break and cause a large economic breakdown. So Australia has avoided the GFC by recreating the conditions that led to it. Needless to say, this is not entirely a good thing. Note that between 1945 and 1965, the ratio rose as often as fell. The main feature distinguishing my approach to economics from mainstream theory (known as "neoclassical" economics) is a focus upon the importance of credit in a dynamic, non-equilibrium framework.

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