The Deleveraging Trap

by Aziz
Azizonomics

Hayekians and Minskians agree on one key thing: an increase in debt beyond the underlying productive economy is unsustainable.

In my view, the key figures in defining this are total debt as a percentage of GDP, and its relationship with industrial production. Debt as a percentage of GDP tracks how much debt there is relative to one measure of economic activity, GDP. Yet GDP is a very limited tool of measurement; all GDP really tracks is the circulation of money. To get a clearer sense of the true relationship with underlying productivity, it is useful to compare the ratio of debt-to-GDP with the level of industrial production.

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