The Aesthetics of Public Debt

It shouldn’t necessarily be a surprise, but it still aesthetically pleasing to see it proven: public debt over time across countries with widely varying GDPs is scale invariant:

Scale invariant properties of public debt growth 

Public debt is one of the important economic variables that quantitatively describes a nation’s economy. Because bankruptcy is a risk faced even by institutions as large as governments (e.g. Iceland), national debt should be strictly controlled with respect to national wealth. Also, the problem of eliminating extreme poverty in the world is closely connected to the study of extremely poor debtor nations. We analyze the time evolution of national public debt and find “convergence”: initially less-indebted countries increase their debt more quickly than initially more-indebted countries. We also analyze the public debt-to-GDP ratio R, a proxy for default risk, and approximate the probability density function P(R) with a Gamma distribution, which can be used to establish thresholds for sustainable debt. We also observe “convergence” in R: countries with initially small R increase their R more quickly than countries with initially large R. The scaling relationships for debt and R have practical applications, e.g. the Maastricht Treaty requires members of the European Monetary Union to maintain R < 0.6.

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Related posts:

  1. Public Debt, Then and Now
  2. Growth in a Time of Debt
  3. Tracking Global Leverage: External Debt to GDP
  4. Frontline: Ten Trillion and Counting — The U.S. Debt
  5. Jeremy Grantham: We Need to Halve Private Debt