You know that recessions are bad and depressions are worse, but I bet you didn’t know why. To be honest, I don’t think many people do.
Why does GDP always have to go up?
Before reading on, I really encourage you try to write down an answer, or even google the web for one. Here’s the kind of answers you might find online:
- Negative GDP is an indicator that something in the economy wrong (vague and meaningless)
- Growing populations should by default result in growing GDP (true, but so what?)
- Growing GDP correlates to an improved standard of living (true up to an extent)
- When money is loaned two things are created, credit and debt.
- Credit = money.
- Debt intrinsically grows by an agreed upon interest rate.
- Capital does not intrinsically grow.
- Capital grows through production, speculation, or trade.
- In other words, capital grows through productivity.
- Say you borrow $10,000 from the bank to buy a machine for your business.
- Buying the machine makes your business more productive by $20,000
- So the machine didn’t really cost you anything over the year, because it increased productivity more than the debt + interest.
- Increasing productivity makes debt repayments easier.
- If on the other hand, the machine didn’t increase your productivity, then it would have cost you $10,000 + interest.
- Since you now have to pay this out of pocket, you will have to spend less in the future to cover this cost.
When productivity rises, debts are repaid by capital gains, rather than capital reserves. This is good.
- This same principle applies to governments.
- Governments borrow money in the form of bonds.
- It collects revenue through income and business taxes.
- When GDP goes up, incomes go up, and hence taxes go up.
- This makes repaying existing loans easier since debts are repaid with capital gains.
- When GDP goes down, incomes go down, and hence taxes go down.
- Governments then have to borrow more money to keep current expenditures and repay existing debts.
- Borrowing money to repay debts exacerbates the problem, as now you have more interest to pay.
There you have it, the real reason why GDP needs to always go up 👍 nice