Monday, April 11, 2011

Debtworld - We're drowning in a sea of debt



Remember the 1995 flick, Waterworld?  I have to agree with Rotten Tomatoes, it was lucky to get a 42 percent rating on the old Tomatometer.  I'm proposing a remake, but instead of water, the world is drowning in fiat currency debt!  Too bad it's not fictional, isn't it?

Now that Eurozone and American debt issues are front page news once again, I thought that I'd take a look at a paper published by Eswar Prasad and Mengjie Ding entitled "The Rising Burden of Government Debt" from the Brookings Institute.  As background for those who aren't aware, the Brookings Institution, founded in 1916 by philanthropist Robert S. Brookings is:

"... a nonprofit public policy organization based in Washington, DC. Our mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations that advance three broad goals:

•                Strengthen American democracy;
•                Foster the economic and social welfare, security and opportunity of all Americans and
•                Secure a more open, safe, prosperous and cooperative international system."

I don't know about you but this kind of reminds me of the mission statement for the Department of State.  The Brookings Institution states that they are non-partisan.

Mr. Prasad, one of the authors of the paper, is a Senior Fellow at the Brookings Institution and a Senior Professor of Trade Policy at Cornell University.  He is a former Chief of Financial Studies Division at the International Monetary Fund's Research Department.

Back to the "Rising Burden of Government Debt".  The authors noted that the Great Recession of 2008 - 2009 triggered a rather massive increase in the levels of sovereign debt in terms of both absolute level and in terms of ratio to GDP.  In 2007, the world's sovereign debt level stood at $23 trillion.  This rose to an anticipated $34 trillion in 2010 and is forecast to rise to $48 trillion by 2015.  What is most interesting about recent sovereign debt accrual is which nations are the most guilty of adding to their "pile of debt".

According to the IMF, the world's overall fiscal deficit reached 6.7 percent of GDP.  The ratio of world debt to world GDP rose from 44 percent in 2007 to 59 percent in 2010.  IMF projections anticipate that the ratio could rise to 65 percent in 2015; while that seems low by Japanese standards (currently approaching 200 percent), keep in mind that relatively fiscally prudent countries like China and Australia are being lumped in with Japan, the United Kingdom, Ireland, Italy, Greece and their ilk.  The IMF has calculated that the average gross general government debt-to-GDP ratio for the world's advanced economies will rise from 91 percent at the end of 2009 to 110 percent in 2015, an increase of 37 percentage points since the beginning of the Great Recession.  Among the G-7 nations, the government debt-to-GDP ratio is on target to rise to levels above record post-World War II levels with the United States and the United Kingdom getting medals for the largest debt increases.  Here is a graph showing the projected government gross debt ratios for both advanced economies and for emerging nations from 2000 to 2015:


You will notice in the graph that the debt-to-GDP levels for emerging nations is projected to gradually decline.  This projection is based on sustained economic growth and low interest rates resulting in lower bond yields.

Here are two graphs showing the debt-to-GDP ratios for the nations in the study for 2010 and 2015.  Note that the debt-to-GDP ratio for the advanced economies (in purple) rises far faster than those of the developing nations (in rose):



Remember 20 years ago when it was "so 80s and 90s" to watch what we used to insensitively call "third world nations" default on their sovereign debt?  Well, it turns out that in today's world, those same nations are the relatively prudent ones.  It is the so-called developed nations that really suck badly at keeping their spending in line with their revenues.  It's kind of like watching what happens to a family fortune as the generations pass.  The first generation works really hard, saves money and builds up the business to be a financial success.  The second generation, while not quite as savvy as the first generation, still manages to hold the business together.  They may take on some debt and make some bad spending decisions but, overall, the business grows modestly and by all appearances it is a success.  Things fall apart when the third generation takes over.  Debt ramps up massively, inadvisable acquisitions are made and the company becomes the target of both a shareholder revolt and a hostile takeover.  I'd say that most "developed" nations have reached the third generation point in their fiscal existence.

Prasad and Ding state that advanced economies account for the bulk of the increase in sovereign debt since the start of the Great Recession.  Here's a table showing just how true that is:


Interestingly enough, the IMF has just the solution for all of our woes.  That's right, you guessed it - raise taxes.  Not just any taxes, mind you, but the ones that hurt us where we spend.  Here's a quote from their Fiscal Monitor dated May 14th, 2010:

"...a package of tax increases that are relatively less distortionary— including elimination of below-standard VAT rates and increases in tobacco and alcohol excises, carbon taxation, and property taxes—that could yield almost 21⁄2 to 3 percentage points of GDP in advanced economies. Introducing a VAT or raising standard VAT rates in some countries could also yield sizable revenues. Finally, tax evasion remains significant in many countries, and fighting it should be a priority."

Notice how they throw in the spectre of the dreaded "tax evader", leading us to believe that tax evasion has a meaningful impact on why sovereign debt levels have risen.  Damn you tax evaders, look at what you've done to the rest of us!  Perhaps that's why the mainstream media in the United States is warning American taxpayers that the IRS is waiting on the doorstep to audit taxpayers.

If we look back at the debt crisis of the world's poorest countries, we can readily see just how different the scale of the problem is for developed nations.  In 1970, the world's poorest countries owed $25 billion in debt.  By 2002, this had risen to $523 billion and, of that, $153 billion was owed to the World Bank and the IMF.  For Africa alone, the debt in 1970 was just under $11 billion; this had risen to $295 billion by 2002.  While $523 billion seemed like a rather large pile of debt back in 2002, it certainly looks like chump change when compared to the United States debt of over $14.3 trillion and Japan's debt of over $10 trillion, doesn't it?  Here is one more interesting statistic; according to World Centric, Nigeria borrowed $5 billion and has paid back about $16 billion and still owes $28 billion because of bias in creditor nations' interest rates.  That sounds like a loan shark operation to me.

Here's a fascinating chart from the Financial Times website.  It shows the debt levels for what are classified as "advanced nations" (i.e. Eurozone nations, United States, Canada, Japan and the like) and "emerging nations" (i.e. Hungary, Argentina, Brazil, South Africa etcetera).  The chart can display net debt per capita (my favourite metric), net debt as a percentage of GDP and one of the best metrics I've seen, debt per working-age person.  You can get country specific data by clicking on the bars and the data can be filtered for G20, EU and G7 plus the BRIC countries.  It also shows projections for the year 2015.

Here is the table showing the total net debt, net debt-to-GDP, net debt per capita and net debt per working age person for the world and divided into advanced economies and emerging economies:


While I realize that the $48.4 trillion world total net debt by 2015 sounds more than a tad daunting, it is miniscule when compared to the United States' fiscal gap of $202 trillion calculated by Lawrence Kotlikoff, a professor of Economics at Boston University.  He calculates the fiscal gap by adding the official public debt to the underfunded and unfunded Social Security, Medicare and Medicaid benefits.....but that's a subject for another time.

It is most fascinating to look at the world's overall sovereign debt situation.  One has to wonder how long we can stay afloat in this sea of debt before fiscal mismanagement at all levels of government sinks the world's economy for good.



17 comments:

  1. Excellent, many thanks for this. I have long been pondering global debt-to-GDP and where the tipping point is. At what point does it become unsustainable for the planet? With individual sovereigns it is easier to understand but globally more difficult. How much debt is too much for the planet....

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  2. "The IMF has calculated that the average gross general government debt-to-GDP ratio for the world's advanced economies will rise from 91 percent at the end of 2009 to 110 percent in 2015, an increase of 37 percentage points since the beginning of the Great Recession."

    Is 37% actually 21%? ([110-91]/91 * 100) or am I missing something?

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  3. You story would be more interesting if youhad included themoney flows betwencounties. some one has to buy that debt. So who is it?
    Second, even given the debts, no one also counts what is owed to others-that is what has been lent to other countires and not yet paid back. So the debt contest is not complete-because if the owed fund were paid back some of the debt would be self liquidating-and that would be a truer indication of where a county stands.
    Third-all debt is not equal-tha tis to say it is due on a schedule of repayemts. And interest is not the same on all loans. Yet almost everyanaylisis of debt I've seen lumps th ebaby in with the bathwater. Youjust yell "debt" and the world craps in its pants. Another point ignored is the why of debts- a debt to finance a war is different than thatof finanicng a railroad or dam to generate electricity. Debt to allow a goverment to feed straving people is differnt than fianicing a militarybuild up.
    NOne of these is at all adressed in you atricle.

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  4. Anonymous:
    Can you substantiate your claim that no one counts what is lent to other countries and not paid back with an objective source?
    When you say all debt is not equal, you have a point.
    The federal government lists 4 levels of debt obligations, with level 1 being the strongest obligation to pay back, and level 4, the weakest.
    Debt held by the public, which is debt held by entities outside the federal government is level 1. This includes, of course, debt we owe other countries.
    Level 4 debt includes intragovernmental holdings debt, debt one agency of the federal government owes to another. Debt held by the public is also considered more serious debt by many of the economists I have read, while intragovernmental holdings is frequently not even mentioned as part of our debt.
    It is interesting to note that future Social Security and Medicare payments are part of inragovernmental holdings debt, and thus is the government's weakest obligation to fulfill.
    I think most Americans would be shocked to know of this.
    Don Levit

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  5. A wealthy person is accused of corporate fraud, he hires the best lawyer, or lawyers, to find the right jury that would decide his fate. Why doesn't the government have a jury pool system to decide the future leaders, or politicians.
    I propose that the political arena have a jury pool type system to decide who should run for government. No more nepotism in government. Every person should be scrutinized thoroughly before they run for public office. No former witches, or sons of former presidents, should be tolerated. After al, if you want to run a major company, you hirer a headhunter to get the quality person for the job. The same should go for politics.

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  6. Um, scrutinised by who exactly Paul? And who exactly sits on the jury, and who decides who sits?

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  7. I didn't have time to read the whole blog; but, I have a hard time rectifying that China is an 'emerging economy' and Czech Rep and Slovak Rep are included amongst those in the 'advanced economy' side. Last I heard, China is the number two economy in the world (can't recall whether that is with or without the Euro Zone or whatever). Keeping one's people under state-sanctioned slavery doesn't mean that it is an emerging economy in my eyes. Just sayin'...

    And let's not forget that those on the 'emerging economy' side tend not to have the debt service of those on the other side - that's because the 'advanced economies' are providing assistance to the 'emerging' ones and also being held to a different standard to 'level the playing field'.

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  8. Nigeria borrowed $5 billion and has paid back about $16 billion and still owes $28 billion because of bias in creditor nations' interest rates. That sounds like a loan shark operation to me.

    Yes the first world nations rides on the backs
    of third world. It's called capitalism but
    the third world has learned....so get ready because you think the US are capitalist hahahaha you have not seen anything until you visit Asia
    that is the purest capitalism.

    Who cares it's a dog eat dog world.

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  9. Notice how they throw in the spectre of the dreaded "tax evader", leading us to believe that tax evasion has a meaningful impact on why sovereign debt levels have risen. Damn you tax evaders, look at what you've done to the rest of us! Perhaps that's why the mainstream media in the United States is warning American taxpayers that the IRS is waiting on the doorstep to audit taxpayers

    In the USA it is calculated that there is apprximatley 1 trillion dollars sitting in off shore accounts (personal and corporate) Obama enacted FATCA as a means of repatriating that money taxable at 35-38%. That amounts to 350-380 billion dollars that can go to deficit reduction, repayment of outstanding debt and infrastruture development projects. Corporations are holding that money hostage and will only agree to repatriate it if the tax rate is lowered to 5%. This is unconscionable in my opinion

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  10. The unimaginable scale of global sovereign debt and the knowledge that none of it is owed to anyone off the planet, points to the end of the nation state and its replacement with world government.

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  11. So when the totality of global debt becomes unmanageable, who is owed all this money?

    Might they be encouraged to write it off in the interest of being able to continue playing the game?

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  12. Those who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

    See: Monetary Sovereignty

    Rodger Malcolm Mitchell

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  13. “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
    This is the shabby secret of the welfare statists" tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists" antagonism toward the gold standard.”

    - Allan Greenspan

    “Gold and Economic Freedom”, 1967

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  14. The individual (taxpayer) is now the collateral that gold used to hold.

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  15. quote"In the USA it is calculated that there is apprximatley 1 trillion dollars sitting in off shore accounts (personal and corporate) Obama enacted FATCA as a means of repatriating that money taxable at 35-38%. That amounts to 350-380 billion dollars that can go to deficit reduction, repayment of outstanding debt and infrastruture development projects. Corporations are holding that money hostage and will only agree to repatriate it if the tax rate is lowered to 5%. This is unconscionable in my opinion." end quote


    Well that's the difference between corporate and tax agencies... tax agencies look for money to spend while corporate look for ways to produce profits to satisfy wall street and keep their stock price up.

    If GE can make billions of dollars and pay $0 in tax legally how many more do you think will try to jump in this line?

    Washington needs to do more than close loop holes. United Technologies Corp who just bought out Goodrich for some 16Bil is a primary example of a corp who pays their taxes. What is their benefit?

    119,000 pages worth of tax returns and anywhere from 10-12 FULL TIME IRS agents who audit them constantly... and some think closing a few loop holes is going to fix this mess?

    Har-Har it is to laugh.

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  16. Thanks, for this post "Debtworld - We're drowning in a sea of debt". Good knowledge about what is debt consolidation

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