Britain - A World Leader In Indebtedness! (Source McKinsey Reports). Alt image URL - http://goo.gl/k6soE
debt problems of the western world go much beyond the current crisis. For one thing, as the authors point out, public debt levels are likely to rise as populations age and governments try to deliver on the promises (pensions, health care and so on).
As public debt levels rise beyond the “danger threshold”, they will tend to pull growth down. This, in turn, could make household and corporate debt servicing far more difficult and countries that are already saddled with dangerously high levels could find themselves in the middle of a crisis. Thus, even if there is a solution to the current crisis in Europe, the “debt” problems of the western world are far from over.
What worries us about the spirit of good cheer that has suddenly returned to the markets is that it might lead to temporary appreciation in the euro. This, alas, could bring back the spectre of a crisis in the region and revive fears of a break-up in the currency union. One of the pre-conditions for the survival of the union is an orderly deprecation of the currency towards some sort of “fair value” that we think could lie anywhere between 1.15 and 1.20. This would make the beleaguered countries of the periphery more competitive and reduce their incentives to exit from the union. If the currency starts to appreciate again, things go back to square one and the sustainability of the union is back under a cloud of uncertainty. Financial markets tend to be prescient about these things and it is possible that while other currencies and assets rally against the dollar, the euro could at least stay put. (via Abheek Barua & Shivom Chakravarti: Deconstructing debt).
|DEBT THREATS (Debt levels as a % of GDP)
|Source: Bank for International settlements & Eurostat Table source & courtesy – business-standard.com
Estimates vary. Assumptions change.
Regardless, of difference in estimates, or the variation in assumptions, debt levels of the developed world are awesome.
The table on top is based on McKinsey Consulting’s estimates released in 2009.
Some figures were revised after McKinsey estimates were made. Like from Ireland. Or after the QE and QEII, US govt debt has ballooned from roughly US$9 trillion to 15 trillion.
The deficit has ballooned to nearly $48,000 for every man, woman and child in the U.S. This year alone, the U.S. will spend $1.3 trillion more than it takes in.
The debt has expanded at an alarming pace, from $7.5 trillion in 2004 and $5.6 trillion in 2000. At the current rate, Debtclock.org reckons that the debt will top $23 trillion in 2015, though the nonpartisan Congressional Budget Office puts the estimate at $17.6 trillion. (via U.S. Debt Tops $15 Trillion Mark Today – ABC News).
Looking at these two sets figures, two questions come to my mind.
One: How does the West+Developed world plan to repay these debts?
Only two things can happen from here. Either governments are going to default outright. Or they are going inflate away their debts, using compliant central banks to keep interest rates significantly below rising prices for many years. Either way, everyone is going to lose a lot of money. Whether it is through a default or inflation doesn’t make much difference in the medium term. (via France and the death of the sovereign debt market – Matthew Lynn’s London Eye – MarketWatch).
Two: If the whole of the Developed world is so deep in debt, it is obvious that someone else has lent them this money?
Obviously, the Developed World is a net borrower – and someone has lent that money to the Developed world – or underwriting this Debt, based on which this debt is being issued.
Since all the major economies of the world (except Russia and China) are deeply in debt, who is doing the lending? Russia and China are in a position to be creditors, only to a limited extent. But cannot account for major part.
This leaves us with the poor countries of the world.
Are the rich of this world, bleeding the poor?