• Milton Friedman Society

Debt and Wealth: new metrics for fiscal solvency

Aggiornamento: feb 28

By Renato Lembe Agurto

The Brazilian economy is a living paradox: bizarre, unapproachable phenomena have taken place here since time immemorial. At least, that is the implicit assumption overwhelmingly shared by important Brazilian economists, who invented a specific term for these abnormal facts: “jabuticaba”, borrowing the name from a typical Brazilian fruit (Franco, 2012).

Four years ago, Brazilian real interest rates, among the highest in the world, were the nation’s most intriguing “jabuticaba”, thought to be unexplainable in terms of conventional reasoning. According to common sense economics, real rates in open markets are driven by fiscal (in)solvency: more indebted governments, if committed to price stability, must attract private savings so to maintain their regular net expenditure. To do so, they must lift interest rates – controlling for other variables – and, thus, real rates tend to grow.

However, when one compares Brazilian data with those of other advanced and emerging economies, its real rates cannot be explained by its public debt (if measured as a percentage of national output). Between 2011 and 2016, Brazilian rates, for instance, doubled those of Iceland, though linked with a smaller debt/GDP ratio.

Source: IMF

In the world of “jabuticabas”, extraordinary facts must be explained by extraordinary reasons. In search of the latter, some have argued that Brazilian monetary policy is unusually ineffective, pushing rates to “exorbitant” levels as a compensation. Others have suggested that jurisdictional uncertainty is the explicative key factor. A third group has accused monetary authorities of forming a policy network with the financial sector, composed of five oligopolists – both parties interested in sustaining high real rates for political and managerial reasons (Barboza, 2015).

On the other hand, the previous comparative graph may strikingly suggest that the conventional reasoning for real rates does not apply in other economies either. Especially when considering advanced nations, rates and debt seem to be rather uncorrelated.

An immediate question arises: why are investors more willing to have its funds yielding negative rates in advanced, more indebted economies rather than yielding positive rates in developing, less indebted ones? Institutions have been regarded as the proper answer to this problem. Nevertheless, conventional wisdom may still account for it, if taken from another perspective.

Reacting to the “jabuticaba” assumption, Brazilian economists Gustavo Franco and Evandro Buccini (2017) argued that debt should not be measured as a share of national output, but of private wealth – and the reason for this is very simple: investors buy government bonds not with their income (which may be completely consumed in daily expenditure), but with their financial wealth, or their savings.

Mathematically, this conceptual detailing would be useless, leading to similar results, if output and private wealth were proportional across the world. But they are not: two economies with the same per capita GDP may differ a lot in terms of household wealth. This difference occurs because a year’s production, though irrelevant for future outputs’ measurement, will be taken into account in future wealth estimation, until that production is completely consumed. Durable goods produced in 2020, for instance, will not be included in the production of 2021, but will certainly be in the wealth of 2021, since they will be still available for further consumption. Consequently, industrialized nations tend to be richer than commodities-based economies, even when producing the same annual output. Therefore, assuming the same public debt and the same GDP (thus, the same debt/GDP ratio), the former will be less indebted than the latter.

Source: IMF, Global Wealth Report

This new calculation method, used to build the second graph, allows debt to explain Brazilian high rates and saves conventional wisdom from discredit. If Japan (the right-side outlier) was removed, the positive correlation between debt and rates would be even stronger.

Obviously, private wealth’s measurement is subjected to many operational and conceptual challenges, but its theoretical and practical benefits for economic analysis cannot be underestimated. Macroeconomics should develop in this direction, enhancing wealth measurement precision and testing hypothesis in which wealth is the comparison standard.

It is not by chance that Adam Smith and Jean-Baptiste Say, the fathers of economic reasoning, focuses more on wealth than on income: its explicative power covers broader economic phenomena – even the paradoxical “jabuticabas” from Brazil.


Franco, G. (2012). As Leis Secretas da Economia: Revisitando Roberto Campos e as leis do Kafka. Rio de Janeiro, Brazil: Zahar.

Franco, G., Buccini, E. (2017). Riqueza e ‘intolerância com dívida’: Estimativas empíricas muito preliminares [online]. Available at: http://www.gustavofranco.com.br/uploads/files/EB75%20paper%20riqueza%20final_limpo_.pdf [Accessed 20 Feb. 2021].

Barboza, R. (2015). Taxa de juros e mecanismos de transmissão da política monetária no Brasil. Revista de Economia Política, 35(1), 133-155.

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