The Devastating Power of Debt

The Financial World According to Inya” Column
by Inya Ivkovic, MA

Developed economies are facing increasing risks of national bankruptcy. Some are already delinquent, such as Greece, whose debt has reached almost 108% of its GDP. Trying to import fiscal austerity at such a late hour, the Greek government has proposed that its public servants adopt a pay freeze, only to draw thousands of unionized workers onto streets of Athens, chanting a superbly apropos slogan, “We won’t pay for their crisis.”

Of course, Greece is not alone. It appears the threat of sovereign default has become the problem of democratic economies and governments, those facing unrelenting pressures for more public spending, more public subsidies and more public investment, all to be administered by the ever-growing public sector labor market. In no uncertain terms, such pressures are driving the world’s richest countries towards the edge of the cliff and the plunge into bankruptcy.

If we were to take such a view, Greece’s debt was indeed incurred recklessly, if not even foolishly. Additionally, Greece has quite respectable company. According to the Organization for Economic Co-Operation and Development, 10 more developed countries have accumulated mountains of their own debt that is very close to dangerous limits, if not past the point of no return.

Japan happens to be the most infamous on the list, with a debt burden reaching 162.9% of its GDP at the end of 2008. Incidentally, Japan has not actually defaulted, albeit the country has been laboring under the terrible stagflation/deflation environment for the past two decades. Belgium is there, too, with 90.2% in debt vs. GDP. Italy and Portugal made the list, with 97.7% and 71.3%, respectively. Britain and Austria are right in the danger zone as well, with 60.6% and 59.5% of debt vs. GDP, respectively.

Of course, there are developed countries demonstrating fiscal prudence as well. Leading the way is Australia at 5.1%, followed by Luxembourg at 8.8%, Norway at 13.8%, New Zealand at 21.1%, Mexico at 24.5%, Switzerland at 22.9% and Canada at 28.6% of
GDP at the end of 2008. However, although most of these countries have vowed to keep their national debt levels low, after unprecedented efforts to prop up the global economy from the depths of recession, national debt levels have swelled again to various degrees. Note that these statistics refer only to federal debt and disregard debt of other levels of governments (e.g. provincial, territorial, municipal, etc.). Of course, the picture worsens if all levels of government are taken into the equation.

As for the United States, over the past few years, it has managed to reduce its debt somewhat. For example, at the end of 2008, U.S. national debt was at 40.4% versus GDP. However, the worst recession in a generation has taken its toll. This ratio is expected to enter deeply into the danger zone in the next three years or so. For 2009, the ratio is expected to grow to 54.6%, for 2010 to 67.1%, and 2011 to 70.1%.

The scary picture these statistics paint is that nearly all democratic countries share the same injurious trait, which is to flush any perceived or real social or economic problem out of the system with floods of money. Indebtedness among them is separated only by the degree of recklessness, not by fiscal prudency. It appears that politicians, and not economists, have the only actual say in the matter, whereby the former spins a dangerous web of portraying debt as an accomplishment, rather than as a risk factor.

Yet, with so much “accomplished” by accumulating monstrous amounts of debt, many middle-class families are finding it harder and harder to make ends meet, even with two incomes on a full-time basis. What happens when the inevitable happens, when national debt levels rise so high that spending has to be curbed and rising taxes squeeze peoples’ finances even more? It is clear that, without radical and long-term solutions, the only other way out for grossly indebted governments would be jumping off that cliff into bankruptcy and unfortunately taking so many innocent families down with them.