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> Because debt-to-GDP is apples-to-nonsense. No it's not. Debt is measured in dollars. GDP is dollars per year. Debt/GDP is $/($/yr)=yr This ratio converts
by _edo 7y ago
> Because debt-to-GDP is apples-to-nonsense.
No it's not. Debt is measured in dollars. GDP is dollars per year.
Debt/GDP is $/($/yr)=yr
This ratio converts debt, a number it's hard to have intuition for, to years. It tells us how many years of productivity we owe. For those of us who don't manage $30 billion in assets years of productivity probably carries more meaning than big numbers with 12 zeros.
- QuesnayJr 7y agoThis is a very clear explanation.
- JimboOmega 7y agoIt does, but the author's point, I think, is that dividing by GDP isn't particularly meaningful. They argue that the cost of additional borrowing is a better measure - will people loan you more or are they getting nervous they won't get their money back? You could divide by other numbers - an example the author gives is hard assets- and come up with a different percentage.
- platz 7y agoso, 103 years of productivity for the US?
- dustingetz 7y agoThe book "Looting Greece" by progressive economist Jack Rasmus explains in technical detail the "twin deficit" strategy budget deficit is balanced by trade deficit, which hints at why USA has aircraft carriers stationed around the world, projecting power that tilts the free markets in its favor which is what makes this strategy work. Here is an excerpt: http://www.dustingetz.com/:rasmus-usa-twin-deficit/ http://www.dustingetz.com/:rasmus-usa-twin-deficit/
- theflyinghorse 7y agoI don't understand why US having military presence around the globe tilts the free markets in their favour. Realistically, no military outside of perhaps Russian could stand up against the US but I don't think US are outright forcing trade agreements at a gun point, or am I wrong?
- deleted 7y ago[deleted]
- Transfinity 7y agoThe United States has a variety of techniques for making sure its business interests get what they want. Aircraft carriers are one (see Iraq, and possibly Iran if things go south), CIA-sponsored coups another (Guatemala, El Salvador), economic sanctions a third (Iran again, Russia, much of Latin America). Negotiation at gun point often takes the form of crippling sanctions until and unless a US-friendly regime is in power - there's no actual guns, but there's also no free elections. Noam Chomsky is a great resource if you want to go deeper on this topic.
- tptacek 7y agoThis sounds like something a lot of people might believe.
- deleted 7y ago[deleted]
- gnode 7y agoIt's more nuanced than that. The debt/GDP number is talking about future dollars above the divider, and present dollars below the divider. FutureUS$ / (PresentUS$ / yr) is meaningless. The government could choose to reduce the productivity value of the debt by reducing the value of the dollar (quantitative easing), or numerous other monetary policy levers it can pull. How many years of "productivity we owe" isn't a sensible metric when it's not to be paid now, and we can manipulate the number between now and maturity.
- topkai22 7y agoHis proposed alternate metric, interest as a percentage of tax revenue is also deeply flawed- it misses the obligation to pay the principal, which has tripled since the low point in the early 2000s. I like the finance wonks word for debt- leverage. Taking on debt is like going out further on a lever- the debter is more exposed to swings in the overall economy. While it's worked out fine so far, a high debt to gdp ratio exposes the US to higher risk on the downside.
- pjc50 7y agoBut so long as the debt rollover remains straightforward, the principal never has to be repaid. Large parts of the economy probably couldn't survive repayment of all outstanding treasury bonds, they're too useful. They behave more like huge denomination bills with a tiny coupon.
- JackFr 7y ago> it misses the obligation to pay the principal But you never really have to do that. You can just keep rolling them. If we could keep the debt at the same absolute level inflation and productivity increases would drive it into insignificance. Of course the idea of keeping it at the same level is a fantasy.
- mrfredward 7y agoWhile the government will almost certainly never pay down it's debt completely, looking at the effort needed to pay off the debt is a useful way to ground the discussion of debt when future interest rates are unknown. In the last 40 years, the 30 year treasury bond has gone for rates of less than 2% and more than 14%. The interest as a percent of tax revenue metric would have predicted the death of America in the 1980s, while oppositely making it look like things will be forever rosy today. Neither of those perspectives accurately characterizes the debt burden.
- abecedarius 7y agoI wonder how people reconcile how it's OK to rely on progress to grow our way out of a debt burden but also incredibly irresponsible to expect progress to cope with our carbon problem. Both seem defensible to me but like they kind of need an adaptor to fit in the same worldview.
- pjc50 7y agoHow long do we expect roads to last? Or the investments that have to be made over someone's lifetime to enable them to retire? Even the big "high tech" weapons and aircraft investments which consume a big chunk of spending have 30-50 year project lifetime. The B-52 fleet is 55 years old, not counting the design time. Is it not reasonable to spread payment for that over the lifetime of the asset?
- _edo 7y agoThe financing of long-term Public Goods has to be one of the best arguments for government debt there is. I'm not against debt[0] so much as I like interesting units and metrics. If you want to compare debt levels of different countries across history getting the local currency to cancel out means no converting 1870 dollars to 2019 dollars, no converting 1920 Yen to 1995 Azerbaijani Manats, etc. The fact that Debt-to-GDP reduces to years, even if it's unclear what that means, lets us make years-to-years comparisons and makes charts like this possible[1]. [0] - Though I think what it's being spent on really matters cough: https://en.wikipedia.org/wiki/United_States_federal_budget https://en.wikipedia.org/wiki/United_States_federal_budget [1] - https://en.wikipedia.org/w/index.php?title=File:Gdp_to_debt_ratio.svg&lang=en https://en.wikipedia.org/w/index.php?title=File:Gdp_to_debt_...
- treis 7y ago>It tells us how many years of productivity we owe. That's not accurate though. We can pay off the debt tomorrow and skip the years of productivity. It really is an apples to oranges comparison. The debt isn't denominated in productivity. It's denominated in dollars that the government can create for "free". Of course there are knock on effects of creating enough dollars to zero out the debt, but it's not equivalent to the entire country working for years.
- 0x445442 7y ago> that the government can create for "free" One of the very smart things the U.S. has done is take a good portion of those printed dollars and invest in weapons which allow us to force the world to accept the same printed dollars. That's what really allows our government to be in that globally unique position. Resistance to this by other nations has various consequences. If you're a country that doesn't have a certain level of military deterrent you become victim of "regime change". If you are a country that meets that deterrent threshold you become victim of the foreign boogeyman FUD.
- treis 7y agoThat's not really accurate either. Switzerland and Japan aren't out there regime changing countries but their currencies are valued. The dollar is valued because the US is the largest economy and has a history of sound monetary policy.
- taylodl 7y agoNot only that, but the Nixon administration cut a deal with the Saudis to ensure that all OPEC oil would be sold in US dollars. This creates a demand for US dollars.
- onlyrealcuzzo 7y agoSimilarly, the Rubble is garbage, even with Russia flexing their guns.
- JohnFen 7y ago
- littlestymaar 7y agoDebt/GDP ratio for a state doesn't make more sense than a debt/turnover ratio for a company. > years of productivity You got the units wrong: the GDP isn't productivity, it's production (it's even consumption actually,but this is another subject).
- RealityNow 7y agoYou're being pedantic and ignoring the whole point of the article.
- dskjbfsakljb 7y agoI'll add that debt is the integral (well sum) of deficits. deficit/GDP, or deficit/revenue ($4T/$3T = 33%? is that right?) is far more worrying than just the debt/GDP. However, I will concede that GDP as a measure of productivity is hard to measure, easy to manipulate, and less effective than other measures of productivity.
- tehabe 7y agoThe problem is, state debt is not like personal or corparate debt. If you cut your spending to pay of a loan, it is usually not a problem. If the state cut its spending to pay back a loan, it means people have to spent more money on another spot to make up for the budget cuts. We see this currently in Germany, the German government is proud of their budget but at the same time the infrastructure is crumbling, trains are delayed, bridges are in need for repair or even replacement, broadband doesn't reach all places and I don't want to talk about climate change and the structural issue to which it will lead. There is also one more thing about state debt, many people invest in state debt because it is a secure investment for the retirement and when a country no longer takes debt, this possibility is gone. The ideology to have little or no state debt is hurting the economy and will do so in the future. And I'm not even talking about a recession or a depression which will come sooner or later.
- samsonradu 7y agoGerman infrastructure is top-class, trains work quite well and bridges are not collapsing. May I ask where you got this from? EDIT Please don't turn this into a flame war. I am slightly worried about the effects of mainstream media, as I've seen these kind of posts on Reddit also. People keep hearing about the low/inexistent economic growth of countries like Germany or Japan and start thinking that these countries are a deep mess. The reality is quite far from it.
- aNoob7000 7y agoLOL - He's talking about the USA.
- jaypeg25 7y agoEspecially compared to America, which has awful infrastructure...
- ethbro 7y agoIt's interesting how much design tolerances and overbuilding factor into this. Assuming linear failure to fault (e.g. rust or structural weakening), an overbuilt bridge makes a big difference if one is skimping on maintenance costs.
- yellowstuff 7y agoNo single number will tell the whole story about a country's debt. GDP today is not a perfect proxy for GDP in 10 years (Japan's will probably be about the same, the US's will probably grow a bit, China's has a decent chance of growing a lot.) GDP today is not a perfect measure of economic activity today (Ireland has a really high GDP because companies are incorporated there but don't really pay much in taxes or do much to benefit Ireland. Actual Individual Consumption may be a better measure of a country's wealth. https://johnhcochrane.blogspot.com/2017/04/consumption-vs-gdp.html https://johnhcochrane.blogspot.com/2017/04/consumption-vs-gd... ) So Debt/GDP isn't nonsense, but it also could be potentially misleading. Current interest rates can give a somewhat distorted picture for the US. Banks buy US debt because they have to due to regulation, other countries buy US debt as part of their economic policy, the net effect is that the US government is able to borrow money more cheaply that it should based purely on credit risk. Even so, the US is able to borrow money at historically cheap rates. My understanding is that if current trends is health care costs and economic growth continue then in the long run the US will be unable to service its debt and maintain its current spending programs without raising taxes. Most spending is on the military, Medicare, Medicaid and Social Security, so there will be some difficult political decisions. However, that doesn't mean the US is close to a debt crisis today.
- Someone 7y ago”No single number will tell the whole story about a country's debt.” I don’t think anybody is making that claim. Problem is: if you can only rank values that have a total order (https://en.wikipedia.org/wiki/Total_order https://en.wikipedia.org/wiki/Total_order), so if you want to rank countries, you have to simplify. For the judgment of “how deep is a country in debt” it also seems desirable to have the property that splitting a country into equal parts yields smaller countries that are equally deep in debt. If you want that, “debt” on its own doesn’t cut it. Debt/population and debt/GDP are two metrics that have that property. They also are simple, so do not seem doctored, which correcting for modeled/guessed at/hoped for future growth or correcting for the age distribution of the population, average fertility, etc. easily could. ”GDP today is not a perfect proxy for GDP in 10 years” Again: I don’t think anybody is claiming ‘perfect’.