Agoracom Blog

How Bad Is Debt In The West? Short, Sweet, Scary.

Posted by AGORACOM at 9:09 AM on Monday, January 2nd, 2012

Courtesy Of This Article At Business Insider

Total debt-to-GDP levels in the 18 core countries of the Organisation for Economic Co-operation and Development (OECD) rose from 160 percent in 1980 to 321 percent in 2010.

Disaggregated and adjusted for inflation, these numbers mean that:

  • the debt of non-financial corporations increased by 300 percent,
  • the debt of governments increased by 425 percent, and
  • the debt of private households increased by 600 percent.

I’m willing to concede the debt of non-financial corporations can be nullified by the amount of cash now held by them … as long as you concede they’re able to accomplish this by slashing their work force, running operations overseas to avoid taxes and doing just about anything to hoard cash by hurting you.  In fact, the share of U.S. corporate profits in relation to U.S. GDP is at an all-time high of 13 percent (as are cash holdings), yet corporate real net investment (investment less depreciation) in capital stock in the third quarter of 2011 was back to 1975 levels.  Companies are simply reluctant to invest while demand is sluggish, while existing capacities are sufficient, and while the outlook for the world economy remains highly uncertain.

To be clear, I have no problem with the hoarding, selfish nature of corporations because that is their role … I merely pointed out the above to make it clear that corporations health has little impact on you beyond providing you with a job if they need you.

The real alarming debt figures relate to governments and private households.  In fact, the costs of the West’s aging populations are hidden in the official reporting. If we included the mounting costs of providing for the elderly, the debt level of most governments would be significantly higher. (See Exhibit 1.)

Add to this sobering picture the fact that the financial system is running at unprecedented leverage levels, and we can draw only one conclusion: the 30-year credit boom has run its course. The debt problem simply has to be addressed. There are four approaches to dealing with too much debt:

  • saving and paying back (will only make the problem worse)
  • growing faster (has almost never worked)
  • debt restructuring (“restructuring” sounds so nice)
  • write-offs, and creating inflation (gold, gold, gold)

Scary stuff.  Simply scary.  Plan accordingly because there is no miracle cure.  Somebody is going to get left out in the cold because there simply isn’t enough money to go around.

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