The debt trap: a two-compartment train wreck

We aim to shed light on the debate among policy-makers trying to find prescriptions that will take troubled economies out of their debt trap. We do this with a highly stylized two-compartment dynamic model consisting of the stocks of money in Government and Society. The dynamics of the system are described by a simple four-parameter linear system of two differential equations. The solutions are investigated in closed form and provide precisely quantified "escape conditions" from the debt trap: receipts must be slightly larger than outlays and there must be sufficient annual inflows of funds into the system. The model fits the data for the U.S. between 1981 and 2012 with a coefficient of correlation of 0.996. The model is used to extrapolate the two stocks beyond 2012 with three escape scenarios which shed light on monetary flows needed to take the U.S. economy out of its debt trap.