Sunday, November 01, 2009


Public Debt, Default and Prosperity

In a previous post, Defaults by Developed Nations?, I said of Japan’s public debt-to-GDP ratio, “It’s a prime example that a lot of our ‘prosperity’ is actually financed with debt.” I don’t mean to say that I told you so, but in this article The Telegraph’s economic commentator Ambrose Evans-Pritchard outlines Japan’s — let’s be honest — absolutely hopeless financial situation. Japan’s skyrocketing debt-to-GDP ratio is projected to keep shooting for the stars:
The IMF expects Japan’s gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014.
With the industrial system in decline and no more hope for economic growth as in the good old days, this is tantamount to digging one’s own grave. You’ll find more sobering (terrifying?) facts in the article, so I encourage everyone to read it themselves.

Of course, Japan isn’t the only country headed for a train wreck. The world is full of toxic and unsustainable debt, with a raft of matter-of-time defaults and bankruptcies just waiting to happen. China looks hot, but upon closer inspection appears to be growing a big bubble. What’s more, the world as a whole is sitting on a huge derivatives time bomb. The amount is so big that just one glitch could prove catastrophic. So, name your poison.

But to return to the matter of prosperity, it’s abundantly clear that modern industrial prosperity has come from cheap fossil fuel energy and from debt. Further, all this debt accumulated because the world has always counted on cheap energy to fuel still more growth, which would, in theory at least, make it possible to pay off the debt. At least that was Plan A, and now we have come to the point where Plan A has failed and, mired in denial, we still have no Plan B. Even at this date, all governments in the world preach more economic expansion and assure their citizens that the good old days will return and that we’ll achieve sustainable growth.

So again, name your poison. And strap yourself in — it’s going to be a rough ride.

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