Some Comparisons of projected general government debt for 2011 (source IMF October 2010)
Spain – 70%
Germany – 76%
United Kingdom – 82%
Portugal – 87%
United States – 99%
Ireland – 101%
Italy – 119%
Greece – 139%
Japan – 234%
A bit shocking isn’t it. Of course this isn’t the entire debt, only government debt.
Still, by this measure, since Greece and Ireland have already faced crisis, it could be said that the US is in danger.
We don’t like these enormous debt levels and we think that there will be an enormous price to pay, but we also don’t think the US will face an immediate crisis.
The Obama Budget & Factors Affecting Debt
Is the Debt Owed Domestically or to Foreigners?
There has been much written on Obama’s budget, but perhaps we can take more of an overview on the subject. Much has been argued about whether it is relevant if debt is owed to foreigners or to people within a country. Perhaps this argument is abated somewhat by the increasing globalization of money flow.
Money flows across borders with the click of a mouse now. Still retirees and residents of a particular country tend to be more comfortable investing in a place they know best.
Debt Compared to GNP
A more important argument is whether an expanding economy and expanding GNP can sustain the debts of a country.
Historically, debt becomes manageable through one of the following factors, regardless of whether assistance is obtained:
Population Growth & Economic Expansion
The economy expands at a sufficient rate in order to render the magnitude of the debt more manageable as years pass. This is a natural event brought about by an expanding population and economic expansion as a natural result.
Canada which had an outrageous debt equal to 76% of GNP some 20 years ago, dealt with its debt by allowing more immigration, and more economic activity, and although the absolute amount of the debt really didn’t diminish by much, the comparison to GNP looked better and better every year.
So Canada was the good guy in the 2008 world economic collapse, for no other reason than Canada stopped borrowing more every year and economic activity increased. This will also be an important part of the US recovery.
I don’t know if Obama was right or wrong – more about this below, but he is addressing stabilizing the borrowings. Is it enough?
Inflation
Inflation eats away the purchasing power of the currency and depending on whether the debt is in native or foreign currency, it becomes more or less manageable.
This is not the time to dwell on inflation in this blog because of space limitations. Suffice to say, that reduced demand and government intervention are holding inflation in check – for the moment.
Government Helps the Private Sector Expand
Government incentives (or lack of incentives producing the opposite effect) create increased economic activity, such as tax reduced areas or rates, or incentives for creating manufacturing or high tech, and so on.
How Do These Factors Affect us Today?
In the case of Japan, the aging of the population and the failure of a new larger class of entrepreneurs coming up the economic ladder, spells trouble. This has been their problem for some time now and it doesn’t look solvable in the short term.
Japan keeps borrowing to try and use the stimulation method, but it remains mired. Do you remember just a decade or two ago, when it seemed as if Japan was buying everything is sight, their currency was skyrocketing, and their economic needs were insatiable?
What a difference the policy of preventing foreigners from settling in Japan has caused – a change from a world power to a struggling power – all because of a shift in the age pattern of the economic class.
China is very interesting. An amazing phenomenon of economic expansion, created mostly by government actions and easing of restrictions. Yet there are severe problems on the horizon. The one child policy initiated by previous Chinese governments to abate unrest in the population, will soon create a unique Chinese phenomenon of a lack of next generation population to keep the economic expansion going.
I don’t know the long term effects of this, but there surely will be effects. If you depend on the Chinese economic powerhouse to propel prosperity in the foreseeable future, better suck it in – there will be bumps in the road.
USA – All of this brings us to the USA. The debt is bad – really bad. But compared to the rest of the world, not as terrible as FOX News would have us believe.
Nor is the debt as bad in a historical context. There have been times in the past, during the civil war, during the second world war and at other times, that the debt was comparable by various measurement metrics.
The Stupidity of How the Debt was Incurred
We don’t agree with the US having incurred this debt, especially having incurred so much of it to help the CEO’s and friends of the administration, but not the people.
We don’t agree that the stimulus was implemented properly. We think that a certain prosperity was stolen by current government from future generations of Americans.
We don’t agree that oil should continue to be imported at such tremendous cost to Americans when cheaper and better alternatives (such as natural gas & others) are in plentiful supply. This is nothing other than enriching oil related interests at the cost of the country. Some of the supposed vaunted American Patriotism might some day realize the theft of American Assets being perpetrated by this idiocy.
How the US will Recover
The US has some natural advantages. The freedom of economic choice and the ability of the individual to innovate and to create – brought about by the US culture of a belief that every citizen can aspire to great heights, cannot be ignored.
This culture of admiration for success continues to breed new entrepreneurs that are changing the world every day, changing the way we communicate, changing the way we think.
The US is addressing their debts. Maybe they should do it differently, or maybe they should do it quicker, or maybe slower. But they are doing it.
The US is an economic miracle unparalleled in history. As banks and financial institutions are forced to return to traditional lending and providing capital, rather than trading money, the economy will again start to rise.
As immigration continues to flood to American shores, entrepreneurial efforts intensify, and new economic activity rises.
As the natural order of American inventiveness continues, scholars and intelligent people from around the world, will continue to seek their success in the US. Perhaps less so now that there are other other economic areas advancing, but none have the entire package that the US has – freedom of choice, vast pools of VC capital, property rights, checks and balances between arms of government and judiciary, and so on.
Fear not! American debt will become less significant, and the dollar will not fade to nothing. It will have to share the world stage, but it will remain a power.
