This Fortune magazine article compares countries according to how their debt levels relative to GDP, population, energy consumption, and land area. Japan is an outlier, with a ridiculous debt level compared to what you’d think its capacity to repay that debt would be. I wonder if this isn’t the best explanation for Japan’s slow economic growth.
Stepping back from an economy we see a group of people producing some stuff. They consume what is necessary for food, shelter, clothing, transportation, etc. What’s left over is available to pay debt, provide a return to investors, and invest in capital equipment such as factories. If debt obligations are high, most of the society’s surplus will go to pay debt. The return on existing investments will be low and there will be no incentive to make additional investments, even if there were enough surplus available to make such investments.
What do folks think of this Fortune article and its application to Japan?
[Separately, the article points out that the U.S. is a very unattractive place to invest compared to developing countries such as China and India, which have negligible debt.]
Reinhart and Rogoff would seem to be the place to start here. Apparently it’s high and declining levels of combined public and private-sector debt-to-GDP that bring the hangover: the phenomenon Irving Fisher named “debt-deflation”. As long as private sector debt-to-GDP is high and still rising (in other words, while a credit bubble is still inflating) then the party continues. The Japanese government has run up its enormous public debt over the past two decades trying to slow and palliate the relentless contraction in its private-sector debt.
Morgan Stanley Says Government Defaults Inevitable
http://www.bloomberg.com/news/2010-08-25/morgan-stanley-says-government-bond-default-is-question-of-how-not-if-.html
“Population trends may be a better predictor of the ability to meet obligations rather than debt as a percentage of gross domestic product, which doesn’t reflect governments’ available revenue and is “backward-looking,” Mares wrote.
While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Italy has one of the highest debt-to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said. “
MB has it right.
I think the article is not very good, and mixed up in terms of causality.
As MB points out, Japan has failed for 20 years to escape the deflationary forces. Their debt is just an artifact of that failure. The US appears to be following Japan’s lead.
As for the investment debt thesis on developing economies, I think it is far simpler to say that one might want to be an investor there simply because they are growing faster. Duh. The low debt levels are just an artifact of that fact along with their trade surpluses.
It will be interesting.
Rob: Recent rapid growth leads to low debt? I would think the opposite. Traditionally it takes capital to achieve growth, no? So the countries that were growing 8-10% per year from 1990-2010 should have some debt to pay off now, no?
India purportedly holds only 2.3% of the world debt according to the Fortune article. But one look at Wikipedia (http://en.wikipedia.org/wiki/Economy_of_India) says that India’s debt level is 58% of GDP. FWIW, as a percentage, it is greater than that of the much maligned USA.
This is consistent with my empirical experience growing up in India, with borrow-and-spend politicians who had to mortgage the country’s gold reserves to the Bank of England in the early nineties so as to not default on their debt payment.
Jagadeesh: U.S. debt, including Social Security and Medicare obligations, is actually around 500% of GDP (see http://www.nytimes.com/2010/03/12/business/global/12pension.html ). India does not promise to pay unlimited health care expenses for its older citizens, does it? The same nytimes story says that U.S. public debt is “about 60 percent of GDP”. So the U.S. would seem to be more indebted than India by any standard.
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Yes, rapid growth swells tax revenues and can lead to lower debt. Remember the 1990s when the rapid growth in the economy lead to surpluses and erasing the deficit?
Looks like the measures are only of the debt itself, not annual expenditure on debt servicing, or in purchasing debt. Aren’t the latter 2 what really matter when it comes to disposing of any ‘surplus’?