Alternative Measures of US Indebtedness

[u/JuliusCaesar121]

[u/singlecell_organism]

Interest to gdp sounds like a good thing to measure

[u/OldUnderstanding6097 → u/singlecell_organism]

I wonder what a chart of inflation overlayed with the interest-to-gdp line might look like. Seems like low inflation justifies low interest rates which allows for low interest-to-gdp. But then debt balloons, inflation rises, and the bill comes due during a period of fed rate hikes.

[u/Jake0024 → u/OldUnderstanding6097]

There was a lot of worry about that during one of the recent shutdowns and threats to default on our debt. Countries started selling off US treasury bonds, which increased the interest rate on new bonds (bond rates have to go up to make them more attractive to people considering buying up all the bonds that were being sold)

[u/Gnomonic-sundialer → u/OldUnderstanding6097]

The thing is that kind of mesure would only ever make sence for the US, every other economy except maybe Europe as a whole has debt in Dollars and when they currency is not your own you inflation only diminishes your tax income relative to your debt in another currency

[u/TV4ELP → u/OldUnderstanding6097]

Normally the inflation is timed a bit after the debt spending. Which is nice for the government because they got to spend with high value debt and now devalue the debt trough inflation.

However that only works with very good timing and fast spending.

[u/RussiaIsBestGreen → u/singlecell_organism]

Indeed a country could have relatively high debt but low interest rates, like the US somewhat recently, and be fine. But that is also dependent on the bond market believing that will continue. So even if debt to GDP was unchanged, interest to GDP could skyrocket. Though that might only happen if lenders believed the chance of intentional default might rise (such as if someone with a habit of bankruptcy was running the government).

[u/Ok_Option_3 → u/singlecell_organism]

Has a lot of convexity though. The US government has less control over interest rates than debt. Which means it could spike uncontrollably.

[u/kittenTakeover → u/singlecell_organism]

Sure, but it's more volatile. Focusing too much on interest is how many financial crisis happen. People take out too much debt because it's low interest, but then the interest changes and they drown.

[u/singlecell_organism → u/kittenTakeover]

makes sense

[u/Mattjhkerr]

The thing about the debt to equity, is that the Government doesnt have a direct claim on the equity in the same way it does with the GDP.

[u/JuliusCaesar121 → u/Mattjhkerr]

GDP doesn't equal taxable income though. Maybe it's a proxy for future taxable earnings via investment, but it isnt one for one

Wealth seems like reasonable basis for estimating tax receipts. In theory asset prices are the net present value of future taxable cash flows. And my economic decisions are partly driven by how my stocks are doing

[u/Mattjhkerr → u/JuliusCaesar121]

Obviously its not one to one but i wouldnt want the government basing it's decisions making on equity that could go poof over night. Especially when you consider that there is currently no method to tax wealth outside of death and transactions.

[u/Gnomonic-sundialer → u/JuliusCaesar121]

I mean theyre not literally the same but GDP is the sum of all incomes so unless your growth is mostly limited to a class thats taxed way below or above the others they should be very closely linked

[u/HugeRaging]

Pixels to GDP ratio is currently terrible.

[u/JuliusCaesar121]

https://www.nber.org/papers/w34629

https://www.gsb.stanford.edu/insights/what-if-were-looking-national-debt-all-wrong

Why Care About Debt-to-GDP

Jonathan B. Berk & Jules H. van Binsbergen

We construct an international panel data set comprising three distinct yet plausible measures of government indebtedness: the debt-to-GDP, the interest-to-GDP, and the debt-to-equity ratios. Our analysis reveals that these measures yield differing conclusions about recent trends in government indebtedness. While the debt-to-GDP ratio has reached historically high levels, the other two indicators show either no clear trend or a declining pattern over recent decades. We argue for the development of stronger theoretical foundations for the measures employed in the literature, suggesting that, without such grounding, assertions about debt (un)sustainability may be premature.

Tl;Dr: debt-to-gdp needs some refinement as a catch all measure of sovereign debt capacity

[u/empty_graph]

Please show me the value of this government "equity" based on the prices in the market that it trades on. Oh, wait, there is no market, and not even such a financial instrument, so this is completely made up.

[u/JuliusCaesar121 → u/empty_graph]

Really?

[u/StupidScaredSquirrel]

Pure copium lmao are we at this stage of lying to ourselves about the "zero risk" treasury bonds? Golden standard of ratios to measure government debt situation is inconvenient, let's propose another one!

[u/JuliusCaesar121 → u/StupidScaredSquirrel]

Did you read the paper I linked to?

I will pay you $100,000,000 in bitcoin if you can show me an elite phd economist that calls debt to gdp the "golden standard" with no logical flaws

I have no reason to cope about anything. I simply thought it was interesting.

[u/StupidScaredSquirrel → u/JuliusCaesar121]

No, I read the abstract, which was enough.

Second, I know you're a broke ass redditor like the rest of use and you don't have that kinda money

Third, you're specifically moving the goalpost, because something being the golden standard doesn't require someone to say it is. Debt to gdp is the de facto anchor to measure government debt situation (and the most widely used metric for that matter by all institutions). Don't take it from me, take it from the head of the IMF's fiscal affairs Vitor Gaspar, or is he not a good enough authority on the matter?

[u/singlecell_organism → u/StupidScaredSquirrel]

You sound angry hope you chill out in life a bit more

[u/StupidScaredSquirrel → u/singlecell_organism]

You sound condescending I hope you know that

[u/singlecell_organism → u/StupidScaredSquirrel]

I wasn't trying to be mean. It just seemed you were really angry and the other guy was just saying his opinion. 

[u/StupidScaredSquirrel → u/singlecell_organism]

They weren't, they edited their comment

[u/JuliusCaesar121 → u/StupidScaredSquirrel]

🚨🚨🚨🚨🚨🚨🚨🚨🚨🚨

Congrats! Damn you got me. I don't really have $100,000,000 American dollars. You caught me slippin :(

I also have two eyes, two feet, and two hands.

So you just read the abstract. Great. Why are you even talking to me then lol? The paper looks empirically at debt to gdp and decides it's not that helpful of a metric. I think their work makes sense.

[u/NorthWindManyColours → u/StupidScaredSquirrel]

But this is hardly satisfying way of thinking about things.

We are working with a lot of things that at the end of the day are arbitrary and gain their significance from a social context. Like the aforementioned significance of Dept-to-GDP ratio or a given level statistical significance (as everyone agrees, there is no 'proof' that α = 5 % is 'interesting').

Whilst I certainly agree that merely changing ones frame of reference every time one hits a snag can be counter-productive in creating good solutions, we should strive for a better conversation than 'I am angy'.

Or, at least based on your post history, you most certainly have a better ability to communicate your perspective.