The Debt Capacity of a Nation

When it comes to its national debt, how much ruin is there in a nation? Our question about the amount of ruin in a nation actually traces back to the surrender of British troops under the command of John Burgoyne at the Battle of Saratoga in October 1777 during the American Revolution, when a contemporary of Adam Smith lamented that the nation was ruined, to which Smith replied "There is a great deal of ruin in a nation." But can we quantify how much ruin that might be? That question is immediately relevant today because of the reaction of global stock markets to the news that the heavily indebted nation of Greece was much closer to the edge of a fiscal precipice than had previously been understood, where the Greek government is now scraping the "bottom of the barrel" in hunting for "cash to stay afloat" as it seeks to make promised payments to its creditors. Thanks to Louis Woodhill, we have the math to be able to quantify how much debt a nation can afford to accumulate before it might reach the point of its ruin, based upon its inflation-adjusted, real economic growth prospects, how much it costs for it to borrow in real terms, how much of its GDP its government is capable of collecting through taxes, fees and other revenue-generating schemes, and also how much of its revenue it is able to devote to making debt payments.

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