Sunday, July 29, 2012

Global Public Debt

Economist has, as usual, a great interactive chart about public debt. Here are two snapshots from that showing marked increase in the debt as % of GDP across the last decade. The last picture is for 2011.

Now it is interesting to note the following:
  1. Some resource driven countries seemed to have reduced their debt. Some in Arabian peninsula and Russia come to mind.
  2. Europe and US have increased their debts, as expected. Japan continues to have high debt over the entire decade. This could be because of two reasons - GDP falling and debt rising.
  3. Britain has had it worse. It went from green to deep red. The reason again could be both GDP falling and Debt rising.
  4. Now I want to have a corresponding chart of investment in drivers of GDP. I bet between 2007 and 2011 nothing has happened in this chart.
Debt is as good as the ability to pay
Debt is good if the ability to pay exists. The quantum of debt is immaterial so long as ability to pay is reasonably certain. When large amount of debt exists but ability to pay does not exist (usually it is merely broken), then creditors often offer more debt to strengthen the ability to pay. One can argue that in this case the answer to debt is more debt. More correctly, the answer to debt is a strong ability to pay.

If more debt is taken on without improving the ability to pay then it is sure a road to bankruptcy. A good way to start the process is to write down the debt acquired since 2007-08 crisis. I am sure ample data exists to understand how much was given to whom. It is no business of the tax payer to bear these costs. Corresponding treasury bills can be settled by raising equivalent debt liability on the firms receiving the money.

I am sure some will think this to be illegal. But it is not. It is just belated government action and can be ratified by respective parliaments.