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I'm sure I've complained about this before, I'd love to read a similar article to this that compares two quantities that share the same unit. Debt is in dollars

I'm sure I've complained about this before, I'd love to read a similar article to this that compares two quantities that share the same unit. Debt is in dollars and GDP is in dollars per year. Those are different units. For example, tax revenue versus debt service payments -- or where are the debt service payments actually going? Or future debt service vs future tax revenue under different scenarios. Or for that matter, what are the actual constraints to borrowing and how can they change.

nabla9 8y ago
Really good point. In the US you can compare federal debt and debt payments easily if if you use "percent of GDP" as a unit. (a) Federal Outlays: Interest as Percent of Gross Domestic Product, Percent of GDP, Not Seasonally Adjusted (FYOIGDA188S) (b) Federal Debt: Total Public Debt as Percent of Gross Domestic Product, Percent of GDP, Seasonally Adjusted (GFDEGDQ188S) Formula: a/b The result: https://fred.stlouisfed.org/graph/?g=lcpR https://fred.stlouisfed.org/graph/?g=lcpR --- ADDEDUM: Part of those interest payments is paid for the Federal Reserve who then pays them back to Treasury. In 2017 Treasury paid something like $262 billion interest and Fed pays $80 billion back to Treasury. Debt from government institution to another is not really worrying or 'real' debt. It's just accounting trick.
AnimalMuppet 8y ago
Yes, you've complained about it before - more than once. (At least, someone has - I don't specifically remember if it was you.) And it's a valid point. The units are wrong for them to be compared. And yet, it's only half of a valid point, because the only thing people are doing with that ratio is comparing it to the same ratio for other years or other countries. The number can be dimensionally wrong and still be useful to use in that way. Why would the number be useful to use in that way? Well, it seems intuitively reasonable to say that the bigger an economy is, the more debt it can carry without the debt burden being any more of a strain. The US can carry more debt than Vanuatu can, and not because the US government is more credit-worthy. So scaling the debt by GDP makes some sense. And, in fact, dimensional analysis can make sense of this. Let's say the GDP is $10 Trillion. Well, it's not really $10 Trillion, it's $10 Trillion/year. If the debt is $30 Trillion, then the ratio is $32 Trillion / ($10 Trillion/year), which equals 3.2 years. That's how long it would take to pay off the debt using 100% of the GDP (which of course never happens, but it's still a measure of how much of a load the debt is). So when you see them report that debt is 320% of GDP, what they're really saying is that the debt load is 3.2 years.
- nabla9 8y ago
  This is also a good point. But it's not as easy to interpret as you say. The currency, maturity distribution and interest rate of the debt are all important. If the average maturity is 20 years for 1%, it's completely different from 3 years and 5 percent. Differentiating debt in foreign or domestic currency is even more important. In the US and Japan all government debt is in local currency. It's completely different problem from countries like Venezuela or Argentina that have also debt in foreign currency. Hyperinflation occurs only in countries with large debts in external currencies.
karambahh 8y ago
I don't understand why the comparison even makes any sense: Let's say debt is equivalent to the mortgage on your house. You compare an individual exposure by their monthly repayment against their income, not income against mortgage amount! Why is it any different for this? Usually in France, it's customary to allow this ratio to be 30%. With median income at 20k€, this leaves about 5k€/y, or 410€/month. At current rates, mortgage size of 100k€, total cost of 150k€. The "debt to GDP" is thus 150/20=750%. Apples to oranges?
- zaro 8y ago
  It can be apples to oranges but it can be useful metric also. I think of it as the higher the debt to GDP ratio is the longer/harder it will be to repay the debt.
stephengillie 8y ago
Dimensional analysis is an oft-forgotten but highly valuable part of financial understanding.
HIPisTheAnswer 8y ago
A dollar is 24 3/4 grains of gold.

nabla9 8y ago

Really good point. In the US you can compare federal debt and debt payments easily if if you use "percent of GDP" as a unit. (a) Federal Outlays: Interest as Percent of Gross Domestic Product, Percent of GDP, Not Seasonally Adjusted (FYOIGDA188S) (b) Federal Debt: Total Public Debt as Percent of Gross Domestic Product, Percent of GDP, Seasonally Adjusted (GFDEGDQ188S) Formula: a/b The result: https://fred.stlouisfed.org/graph/?g=lcpR https://fred.stlouisfed.org/graph/?g=lcpR --- ADDEDUM: Part of those interest payments is paid for the Federal Reserve who then pays them back to Treasury. In 2017 Treasury paid something like $262 billion interest and Fed pays $80 billion back to Treasury. Debt from government institution to another is not really worrying or 'real' debt. It's just accounting trick.

AnimalMuppet 8y ago

Yes, you've complained about it before - more than once. (At least, someone has - I don't specifically remember if it was you.) And it's a valid point. The units are wrong for them to be compared. And yet, it's only half of a valid point, because the only thing people are doing with that ratio is comparing it to the same ratio for other years or other countries. The number can be dimensionally wrong and still be useful to use in that way. Why would the number be useful to use in that way? Well, it seems intuitively reasonable to say that the bigger an economy is, the more debt it can carry without the debt burden being any more of a strain. The US can carry more debt than Vanuatu can, and not because the US government is more credit-worthy. So scaling the debt by GDP makes some sense. And, in fact, dimensional analysis can make sense of this. Let's say the GDP is $10 Trillion. Well, it's not really $10 Trillion, it's $10 Trillion/year. If the debt is $30 Trillion, then the ratio is $32 Trillion / ($10 Trillion/year), which equals 3.2 years. That's how long it would take to pay off the debt using 100% of the GDP (which of course never happens, but it's still a measure of how much of a load the debt is). So when you see them report that debt is 320% of GDP, what they're really saying is that the debt load is 3.2 years.

nabla9 8y ago
This is also a good point. But it's not as easy to interpret as you say. The currency, maturity distribution and interest rate of the debt are all important. If the average maturity is 20 years for 1%, it's completely different from 3 years and 5 percent. Differentiating debt in foreign or domestic currency is even more important. In the US and Japan all government debt is in local currency. It's completely different problem from countries like Venezuela or Argentina that have also debt in foreign currency. Hyperinflation occurs only in countries with large debts in external currencies.

karambahh 8y ago

I don't understand why the comparison even makes any sense: Let's say debt is equivalent to the mortgage on your house. You compare an individual exposure by their monthly repayment against their income, not income against mortgage amount! Why is it any different for this? Usually in France, it's customary to allow this ratio to be 30%. With median income at 20k€, this leaves about 5k€/y, or 410€/month. At current rates, mortgage size of 100k€, total cost of 150k€. The "debt to GDP" is thus 150/20=750%. Apples to oranges?

zaro 8y ago
It can be apples to oranges but it can be useful metric also. I think of it as the higher the debt to GDP ratio is the longer/harder it will be to repay the debt.

stephengillie 8y ago

Dimensional analysis is an oft-forgotten but highly valuable part of financial understanding.

HIPisTheAnswer 8y ago

A dollar is 24 3/4 grains of gold.