Stock vs Flow

A bathtub has a level and a tap. The level is a stock, measured at a moment; the tap is a flow, measured over a period. Debt and deficit, wealth and income - the pair is the same idea twice.

The bathtub

Picture a bathtub. What sits in it right now is a stock: a quantity that exists at a single instant. What comes out of the tap per minute is a flow: a quantity per unit of time. You cannot add them, and you cannot compare them without dividing one by the other.

Two pairs that matter

Debt is the stock; the deficit is the flow that adds to it. Wealth is the stock; income is the flow that builds it. GDP is a flow - the year's production - which is why a debt ratio is written as debt divided by GDP: a stock over a flow, giving a number expressed in years of output.

This is exactly the stock vs flow distinction, and it is where bailout and 'growing out of debt' arguments go wrong. A country can grow and still see its debt ratio rise, if the stock is growing faster than the flow.

Why the ratio is what matters

A level alone tells you little without the capacity to service it, and that capacity is the flow. When the tap runs slower, the same level becomes a heavier burden even though nothing new was added to the tub.

One checkable use: whenever someone quotes debt, wealth or a reserve balance, ask whether it is a stock or a flow, and what it is being divided by. If the two sides of a comparison are not the same kind of quantity, the comparison is empty.

Related: GDP · Real vs Nominal · Broad Money

Next: Base Money