Wednesday, October 7, 2009

Debt-O-Nations

After yesterday's post on American national debt and the value of the dollar, a reader asked to see debt/GDP ratios for other countries as well. Here is a table from the IMF (Int'l Monetary Fund) - click to enlarge.



Government Debt As % of GDP

Japan has the largest government debt in relation to its GDP and has been in this position for over a decade, as its government has fruitlessly attempted to revive a stagnant economy by spending public money on useless infrastructure projects, mostly roads and bridges to nowhere (what if they had spent it on "green" instead?). But then again, Japan's domestic savings readily finance this debt and the yen is not a global reserve currency. This should serve as a warning for our own policy makers, who continue to serve out red ink as if it were green beer at an Irish pub on St. Patrick's day.

The US government debt is projected to reach 97.5% of GDP at the end of 2010, the third largest in the G-20 after Japan and Italy (another perennial debt basket case, with the added twist of Mr. Berlusconi as Prime Minister). In absolute numbers the US has the largest debt in the world, of course.

Now, being the world's reserve currency perforce means that an adequate supply of dollars must be available globally to act as reserves and be used in pricing and trading various commodities. But how much is, in fact, needed for these functions? That's the multi-trillion dollar question, isn't it? Too little makes the dollar too dear and strangles the global economy, while too much makes it increasingly worthless, so people don't want to hold onto it, preferring hard assets instead ( including another, "harder" currency).

For quite some time now we have been flooding the world with too many dollars, first from the private sector in the form of mortgage, consumer and corporate debt and now as government bonds. To be sure, some of those Treasury bonds and bills are simply replacing private debt that defaulted on the books of banks and investors world-wide. That's what constitutes a financial sector bailout by the government: socializing private losses.

The battle of the dollar to keep its global reserve status may, therefore, be summarized thus: can US authorities regulate the amount of newly-issued debt so that it does not exceed by much what is currently defaulting? If the Great Recession keeps the flood of defaults going, then overall debt goes down through write-offs, the absolute number of dollars declines and the dollar becomes relatively more valuable. If, on the other hand, the economy stabilizes and starts to improve there are fewer defaults, more debt on the books and the value of the dollar declines.

This explains the inverse relationship between the value of the dollar in foreign exchange markets and prospects for the economy, as seen in stockmarkets and other risky investments such as junk bonds and second-rate mortgages. Stocks go up, the dollar goes down and vice versa.

It is a bit ironic and counter-intuitive: If the US economy starts tanking again, faster than the government can issue debt and induce domestic and foreign investors to buy it, then the dollar may strengthen - for a while anyway, until the nation's ability to service this debt ultimately comes into question.

19 comments:

Debra said...

This is ultimately a question of trust/faith and BELIEF.
Just how far are we willing to go in order to maintain our BELIEF that all this shuffling of numbers is an adequate translation for the activity of the "real" economy ?
Your quotes from Pope, and Joe's quote from Voltaire suggest that WE are not really fooled. Just suffering from a massive case of denial.
It's anyone's guess when we're going to wake up.
But... I haven't yet seen a Ponzi scheme that doesn't bottom out at SOME point in time.
But...Most people really don't like to have their faith in the legitimacy of their government shot to pieces in the recognition that the latter is engaged in Ponzi scheme economics.
So... we simultaneously get a crisis in GOVERNMENT too, right ?
Our leaders are pretty naive. They lack imagination too.
In France the standardized response when the people get riled is to.... ROLL a head or two (in 1789 it was literal, in 2009, it is just figurative).
But cutting off heads, literally or figuratively, is just not going to solve this problem...

Thai said...

Re: international debt comparisons.

This obviously just looks at the public portion of the debt.

What does the comparison look like if one changes the viewpoint to total debt as % GDP (e.g. public + private)?

Jo said...

Given that the GDP 'growth' of the past 10 years has been discovered to be largely fictitious, we need a better metric for comparison.

marcus said...

Hell, great 30,000 foot view, thanks much.

Debra, when many people with Hell's acumen and Warren Buffet's money (think ten times George Soros and their followers) engage the currency market BELIEF gives way to REALITY--the relative value of your currency in a MARKET.


Here's your answer Thai. The difference between private debt and public debt is that individuals either service their debt or default, they don't dilute their country's currency with monetization.

"Second, levels of private-sector debt in Italy are among the lowest in Europe. Household debt was about 49% of disposable income in the third quarter of 2008, compared with about 100% in the euro area and about 150% in other major developed economies such as the US and the UK."

http://www.economist.com/daily/news/
displaystory.cfm?story_id=13096792

Hellasious said...

The real problem in the US is that TOTAL debt has reached 360% of GDP - that's including debt of the financial sector, which may overstate net debt as it includes things like mortgage pass-through securities. This means that some debt is counted twice.

But even excluding ALL financial sector debt leaves the rest (households+govt+corp) at $34.5 trillion or 245% of GDP.

Unless the economy comes roaring back AND the saving rate keeps rising, I cannot think of how the US can service this kind of debt load.

The until-recently popular US macro-economic model (consumers spend beyond their means) obviously cannot meet both of these conditions and will have to be replaced.

And that's the MAJOR reason why I am calling for radical reform of the US (and global) economy, preferably towards a Green and Sustainable one.

Best,
H.

Edwardo said...

Debt to GDP or Government debt to GDP isn't the issue where U.S. government indebtedness is concerned. It is the marginal utility of debt-which has more than likely reached the zero point-that is the most crucial metric going forward.

I refer all to the writings of the good Professor (of Economics) Antal Fekete.

But What do I Know? said...

I'm on your side in all this, Hell, but I don't understand what will cause the ability to service the debt to come into question. Japan is ten years ahead of us in this regard and they seem to have no problems rolling over their debt--of course, they can never raise interest rates again, but I don't think we can either.

The crazy thing is that the yen keeps strengthening.

Camabron said...

Another excellent post hells! Clearly written and as usual you make tough concepts easy to grasp.

Greenie said...

Thanks Hell. Very informative post !!

Joe said...

"until the nation's ability to service this debt ultimately comes into question."

I don't think we can service our debt anymore. Gold is indicating a major crisis, like it did in March, 2008. Something big is about to blow.

And yes, hell, we will get reform but only after your Great Reset.

Joe M.

Joe said...

One more thing I failed to mention, only those who survive The Great Reset will see reform.

I cannot imagine what will happen when we lose our unit of exchange. We are the most heavily armed and most heavily deluded populace on the planet.

Joe M.

Debra said...

Marcus, you are neglecting the fact that money, SUPPOSEDLY a symbol used for exchange of goods and services, is being treated as... a commodity, in debt form.
This makes for the debt bubble, and speculation à la Ponzi.
The question is : regardless of all the richies, and the powerfullies, at a particular point, group psychology takes hold, and a minority starts divesting itself (of... euros, dollars, what you will).
Then the landslide begins.
And... even if you have tons and tons of money and power, do you REALLY believe that you are going to stop that landslide ?
Not me, in any case.
Reality is STILL independant of the rich and powerful, Marcus...

Joe said...

Those that try to hold on to the current status-quo will become decimated by it. Period.

Joe M.

marcus said...

Debra,
you say:

"Marcus, you are neglecting the fact that money, SUPPOSEDLY a symbol used for exchange of goods and services, is being treated as... a commodity, in debt form."

I says:

I see you've joined "The end is near" Joe crowd, and you call me cynical? Last time I checked Debra, Mercedes, McMansions, McFries, and McBiodeisel were all being exchanged for dollars, and out of that basket of food, shelter, and transportation, which McItems are more expensive (you know, cost more dollars) in 2009 than 2007?

"This makes for the debt bubble, and speculation à la Ponzi."

Bernie Madoff was a Ponzi artist, Goldman Sachs is a bit more complicated.


"The question is : regardless of all the richies, and the powerfullies, at a particular point, group psychology takes hold, and a minority starts divesting itself (of... euros, dollars, what you will).
Then the landslide begins."

And what McItems or McFeathers are these masses going to invest in?

"And... even if you have tons and tons of money and power, do you REALLY believe that you are going to stop that landslide ?
Not me, in any case.
Reality is STILL independent of the rich and powerful, Marcus..."

Let us look at recent "reality" Debra. All the major investment banks on Wall Street went bankrupt or would have without a taxpayer bailout (you know socialized support for bad judgment ) to the tune of--pick a trillion dollar number from three to fifteen. What is happening to the people--Joe the plumbers, sixpacks, or soothsayers--that are going bankrupt for bad judgment or lack of health coverage?

Their debt is being vaporized along with their credit and financial security. Do you see equal treatment here Debra? Do I have to reach for the Thai hammer?

Oh and speaking of health care...

marcus said...

Debra, Excuse me please, my second to the last question was dumb, of course I don't think you think it is equal treatment. But do the rich and powerful interests in this country have, well, near absolute power? Absolutely.

Is it in the moneyed interest to have a currency collapse? No. Is it in their interest to have hyper-inflation or deflation? No

Can they deflect attention away from their scams by pitting Average Joes against each other, minority groups and "foreigners"? Yes. Are the trend-lines of the richest 10% accumulating more wealth going up, and the lower 20% growing poorer? Yes.

These are not conjecture, these are realities.

Debra said...

Marcus, Thai has some interesting links about what happens when systems get too complicated and sophisticated (and specialized, I may add...)
They collapse.
Who knows why and when things explode. One of the biggest lies that we tell ourselves is in our capacity to predict the future.
Who knows why Louis XVI's head rolled ?
There are a lot of complicated factors working together, and SOME of these factors are CHANCE ones.
A lot of our so called scientific models have the effect that we conveniently eliminate the chance factor in favor of statistical predictions to which we assign a verdict of truth (or reality... the most recent golden calf is "reality").
But careful observation suggests that there is a hell of a lot more chance out there than we would like to believe. And... when there's more chance, there's more uncertainty, and... more individual liberty, which also means more individual... responsibility.
For the apocalytpic vision, yes, I do think that the ROMAN empire is ideologically exhausted. That which in our culture is directly or indirectly inherited from Rome is crumbling in front of us.
Will this take down the "thought" intricated in the Roman model, i.e. our Greek heritage, AND our Christian heritage, I don't know.

marcus said...

Debra:

"Marcus, Thai has some interesting links about what happens when systems get too complicated and sophisticated (and specialized, I may add...)
They collapse."

Thai is a prolific font of gobbledygook or hadn't you noticed?

"A lot of our so called scientific models have the effect that we conveniently eliminate the chance factor in favor of statistical predictions to which we assign a verdict of truth (or reality... the most recent golden calf is "reality")."

Well I guess you have noticed the Thai arguments: "...so called scientific models..."

Notice I don't deal with "predictions" in my recent arguments but history and trend-lines (kissin' cousins to "reality", huh?)

Now Debra, you are a student of history, yes? When is the last time a world-power's universal currency (not commodity, i.e.tulip bulbs) collapsed overnight?

How many powerful interests are lined up against such a collapse as opposed to for said collapse? Is there a chance such a collapse could occur? Sure. Is there a chance you could jump out the 40 story window of a Manhattan high-rise and survive like the proverbial cat? Sure, but not likely.

Thai said...

Marcus, one minor point I am pretty sure you already know.

Every time you or I lend or borrow or default (whether we are using cash or barter), we are messing with the money supply and causing inflation or deflation just like the Fed.

Our personal effect on the system is obviously much smaller than theirs.

But do not underestimate its effect.

It is a chaotic system after all.

Regards

Debra said...

Marcus, a fast forward to Hell's most recent post should indicate for you that history gives points of comparison to observe and analyze, BUT...
"time makes ancient good uncouth".
We are living NOW, in a different world, so... putting history on a pedestal is not going to do us any good either, is it ?
Implementing the solutions used in 1929 for 2009 just because the word of the day is "depression" (when we break through the denial, that is...) is not sound logic or intelligent thinking, Marcus.