Thursday, 22 September 2011

Dealing with debt

This is a tale of two tables and a moral on lies, damned lies and statistics. This morning’s Daily Chart in the Economist features a table of government debt. Streaking ahead of the rest, the dubious distinction of topping this chart fell to Japan, with gross government debt reaching 230% of GDP.

The financial markets are swirling with speculation on an imminent Greek debt default, and the Hellenes labour under debt at 165% of GDP. The article explains that Japan’s debt is more manageable than the Greeks because the vast majority of it is domestically held, and because a decent chunk is offset by other financial assets.

At the Liberal Democrat party conference, Vince Cable likened the present fiscal situation to being the economic equivalent of war. We are told that our financial position is precarious, and that austerity is the only solution. It might then be a little surprising to see Britain at the foot of the table, with a debt of 80% of GDP. Only Spain does better at a little over 70% of GDP. The stalwarts of fiscal rectitude, Germany, have a debt just above 80% of GDP and the USA has just reached 100% of GDP.

So is all this overblown? Should we pump-prime the beleaguered economy and spend for growth? Another set of statistics suggests that the caution may be justified. These are the figures for the total level of debt (set out in a recent Buttonwood column in the Economist, and also in this article from Global Finance), including government debt but also including business (financial (i.e. banking) and non-financial (i.e. business) and household debt. The graph below (click for large version) demonstrates the relative levels of debt.

Britain comes close to rivalling Japan for the top spot, with an eye wateringly high figure of 466% of GDP. At the foot of the table come the BRICs – Brazil (142%), Russia (71%), India (129%) and China (159%). This is borne out in the Economist’s map, which paints these vast countries in the reassuringly sober green reserved for those with total debt of less than 200% of GDP. Britain and Japan, by contrast, are alarmingly red. 


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