Wednesday, October 14, 2009


Defaults by Developed Nations?

You betcha. There’s a lot of complacency in the industrialized nations, with people thinking that debt defaults are things that happen to banana republics. Rich countries don’t go bust, right?

Think again. One of the prime indicators of fiscal health is the debt-to-GDP ratio, which shows how a country’s public debt compares to its GDP. You’ll hear different opinions on what a healthy or manageable level is, but if you think of it in terms of a household economy, having a debt load that’s near half your annual income is pushing your luck. Yet, many countries are at 50% or over. Here is a table compiled by the CIA. The latest figures are from 2008, so you can bet most of these are now higher. The big shocker for many people will be seeing that economic powerhouse Japan at the number 2 spot, right after Zimbabwe. It’s a prime example that a lot of our “prosperity” is actually financed with debt. While Japan is listed here at 173%, it is widely believed that it will approach 200% within the year. Now, let’s be realistic. Even if the world economy heats up again, which it won’t, do you think debt like that can be repaid? Can you spell “default”?

But of course, such talk is taboo. Yet, we are hearing more and more of it. This blog entry notes that “By 2014, says the IMF, total public debt in the advanced economies will balloon to an unprecedented 115 percent of their GDP, compared with 75 percent in 2008.”

Another thing to keep in mind is that this indicator is a ratio, so it changes when either debt or GDP changes. If a country has the same GDP, but rising debt, the ratio will go up. On the other hand, even if debt is not rising but GDP falls, the ratio will go up. Since GDPs have been sustained by growth that is in turn fueled by cheap energy, it’s a safe bet that few countries will escape GDP decline as energy constrains build. Do you see a problem here? The bottom line: Look for massive government defaults.

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