The stock and flow of debt

Recently I said:

The debt-to-GDP ratio goes up because GDP is a flow that starts every year at zero, and debt is a stock that starts every year where it left off the year before.

Let's look at that:

Graph #1: All Sectors Debt Stock (blue) and Flow (green) Compared to GDP (red)

The red line shows GDP, which begins every year at zero. The blue line shows the stock of debt, which begins every year where it left off at the end of the year before. The blue increases much faster than the red because the blue is a stock.

The green line shows the flow of debt. It increases almost not at all because the green is a flow. It starts at zero every year.

Of course, you could eliminate the red and blue lines from the graph, and let the green line expand to fill the plot window. Increases in the flow of debt would then be more apparent. But in context, as this graph shows, those increases are extremely small and they do not accumulate: In the green line, they do not accumulate.

A second look at the same data, this time as a percent of GDP:

Graph #2: All Sectors Debt Stock (blue) and Flow (green) as Percent of GDP.
The red line shows GDP as a percent of itself, for comparison.

The blue shows the stock of debt as a percent of GDP. The green shows the flow of debt as a percent of GDP. I am perfectly comfortable saying that the debt-to-GDP ratio goes up because debt is a stock (it starts every year where it left off the year before) and GDP is a flow (which starts every year at zero).

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I am not saying debt isn't a problem. I think debt is not only a problem, but the problem of our economy, and the problem of our time. But the problem is not that debt exists. The problem is that debt accumulates.

Debt accumulates, so we have to look at it as a stock. You can't make the problem go away by looking at debt as a flow.

"Ideally," Cecchetti Mohanty and Zampolli say in footnote 17, "we would prefer to measure either a stock relative to a stock or a flow divided by a flow... Unfortunately, the limits of available data precluded both of these approaches."

Fortunately, I'd say. For as our green line shows, when we pretend debt doesn't accumulate, debt doesn't look like a problem. Debt is a problem, though, because it does accumulate.