Monday, 18 June 2012

National Debt

In simpler times, Captain Nemo attempted to convey the extent of his wealth:
"One last question, Captain Nemo."
"Ask, professor."
"You're rich, then?"
"Infinitely rich, sir, and without any trouble, I could pay off the ten–billion–franc French national debt!"
(If you feel like checking, that's near the end of Chapter 13 in the F.P. Walter translation).

He must have been very rich indeed to build a submarine that looks like this

instead of this

Verne's novel was published in 1871. Nemo, if he were still alive, would have considerably more difficulty paying the French debt now, after it hit 1,717,256,000,000 Euros (1 trillion, 717 billion, 256 million Euros) in 2011 and continues to rise. I feel sure that not all the gold in the sunken treasure ships of the world would pay off the American national debt. As copied today (18 June 2012) from the U.S. National Debt Clock, it stands like this:
The Outstanding Public Debt as of 18 Jun 2012 at 03:42:47 PM GMT is:

$ 1 5 , 7 5 1 , 5 8 7 , 2 9 7 , 6 1 6 . 2 6
The estimated population of the United States is 312,974,798
so each citizen's share of this debt is $50,328.61.

The National Debt has continued to increase an average of
$3.91 billion per day since September 28, 2007!
Concerned? Then tell Congress and the White House!
The Canadian Debt Clock tells us this:
The Current Outstanding Public Debt of Canada is approximately:

$584,122,764,789.22 CDN

Last Updated: May 18th, 2012

Every man, woman and child in Canada currently owes $17,125.30 for their share of Canada's public debt
Clearly, the Canadian government, with debts that hover around 30% of its GDP, is in better financial condition than the United States' (whose debt is 106.6% of its GDP), Greece's (whose debt is 153% of its GDP) and the current debt champion of the world, Japan's (whose debt is 256.6% of its GDP).

However, as someone who has struggled with personal debts in the past and present, I'd say that even 30% is a burden. In 2007-2008, the Canadian Federal Government spent 2.2% of the GDP in paying the interest on the debt, which comes to $33.3 billion dollars. It follows that the $33 billion were not spent on running the government nor investing in the nation. It also follows that $33 billion were not spent by the Canadian people, so the the GDP itself is smaller.

I believe the situation is actually worse than these numbers indicate for Canada and the United States, though not so much for Japan and Greece, because the first two are federations. In a unitary government like Japan's or Greece's, the national government is in charge of the large expenditures on health, education, or welfare that, in Canada, are provincial responsibilities. So, to properly compare, say, Canada with Japan, we should add Canada's federal debt to all of the the provincial debts first.

Once we have added up our governmental debt, can we estimate how much it damages the economy? Some think we can.

U.S. economists Kenneth Rogoff and Carman Reinhart believe the danger point is a debt-to-GDP ratio in excess of 90 per cent.

"That level has historically been associated with notably lower growth," the two economists wrote in the Financial Times newspaper in January.

Once a country's debt measure pops above that level, the national GDP loses a percentage point of economic growth, they estimated.
That's economic growth, not GDP. The American growth in GDP was only 1.9% in the first quarter of 2012 and 3.0% in the second, so we can do the math.

Now, I started this particular episode in my continuing education because of a very interesting page on the BBC news web site called "Why the Young should Welcome Austerity" by Professor Niall Ferguson. He focuses on the aspect of debt which is that you can spend now but pay later. It is as true of government debt as it is of credit cards. He points out a crucial difference, though, which is that the generation that is spending now will be retired or dead before the bills come due.
The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn.
In addition, though, he criticizes the debt figures (as I did above) as incomplete.
But the official debts in the form of bonds do not include the often far larger unfunded liabilities of welfare schemes like - to give the biggest American schemes - Medicare, Medicaid and Social Security.
The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury.

Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.
By "unfunded liabilities" I think he means that some laws commit governments to pay for certain services in the future, but where that money comes from is left as a problem for the future. In many cases, the next generation must pay.

So, how can the government debt be paid down?
  1. Put the debt into long-term loans at fixed rates and then let inflation devalue the currency. This has the effect of reducing the value of the debt at the expense of the entire economy.
  2. Cut government spending significantly and hope that you are not voted out of office for it.
  3. Increase government revenue by taxing whoever and whatever has been undertaxed.
  4. Attempt, through judicious government support of the economy through low interest rates and investment to increase the gdp so that the ratio of debt to gdp will go down.
No one of these possibilities is the whole answer. Some combination of all of them will probably be tried.

However serious the government debt may be, we have to acknowledge that, except for the case of Greece, government debts have not caused the world's current financial problems. Greece is a special case because successive governments conspired to falsify its financial reports. Government debt did not cause the crises in Spain, Portugal, Ireland, Iceland, or Italy; greedy  banks and reckless borrowers have to take the blame.

The first of the disgraced New York banking houses to cause a recession was the Lehman Brothers (which will be remembered, thanks to the movie Despicable Me as the "First Bank of Evil")

Goldman Sachs is "recognized as one of the most prestigious Investment banking firms in the world," but "Goldman Sachs is reported to have systematically helped the Greek government mask the true facts concerning its national debt between the years 1998 and 2009." To my mind, this qualifies the company to be the Second Bank of Evil.

The Spanish financial crisis was not due to government debt. When compared to Germany, Italy, and France, "Spain's government also has the smallest debts relative to the size of its economy." So, "There was a big build-up of debts in Spain and Italy before 2008, but it had nothing to do with governments. Instead it was the private sector - companies and mortgage borrowers - who were taking out loans." (More here). And it was the banks who were enthusiastically offering the risky loans. We, therefore, have candidates for the Third and Fourth Banks of Evil.

So, how can the truly problematic debt, the debt that is not owed by government, be handled? That depends on reform of the banking system so that it cannot--will not be allowed to--offer risky loans. One such law was put in place in the United States in the Depression Era, the Glass-Steagall Act, but it was largely dismantled in 1999. The Dodd–Frank Wall Street Reform and Consumer Protection Act  is an attempt to reinstate some of the safeguards from Glass-Steagall. In particular, part of the Dodd-Frank law, called the Volcker Rule, forbids banks to make investments for their own profit, instead of their clients'.

These are deep waters with complex currents. Huge profits depend on people not understanding where the fault lies. In that respect, the current crisis is the financial equivalent of the global warming crisis.


  1. Hello, Gareth!
    Interesting rumination / exploration. To answer your request to 'let me know what you think' I am tempted to say 'Take my 'Economics Debunked' 3 day course this fall (Oct) because I have thought about this a lot and have much to say but best said in a somewhat Socratic classroom setting. But I will tease you a bit by saying your argument follows contemporary conventional economic thinking tied to our notions of debt (as death pledges). Now I'll challenge you with the following: Consider: the real (unstated) purpose of money is to separate the haves from the have-nots. If that is true, how would the various rationales and arguments around global debt management crisis change in perception and real versus perceived function? As you think about that, consider the role of the IMF in procuring death pledges from various third (and not so third) world countries so as to ensure the shipment of cheap tomatoes and wines.

    Are there alternative methods? Yup. Consider what Iceland did. And consider that this approach has received just about zero on the newsworthy scale. Here’s link:

    Iceland’s approach echoes what the philosopher Solon did with the Athenian debt crisis. (John Ralston Saul describes it in his book Voltaire’s Bastards: The Dictatorship of Reason in the West.) Naomi Klein describes something similar being done with South and Latin American debtors in the final chapter of her book The Shock Doctrine: The Rise of Disaster Capitalism.

    BTW, I really enjoyed your blog. I was going to follow it, but don’t see the ‘Follow this Blog’ link.

  2. Hi, Guy. I rescued your comment from the "Spam" folder, since it is definitely not spam. Your link to the Bloomberg story on Iceland is very interesting indeed. The parts that stood out to me is that the banks were dissolved, new state-owned banks were created, the heads of the old banks have been charged with crimes and are in custody (in one case, in solitary confinement), foreign loans have been disowned and exorbitant personal loans have been rolled back. So, yes, the banks are a corrupt and powerful cartel with strong links to governments. If it were not so, then a Tobin Tax would have been instituted long ago.

  3. Thanks for the comment rescue, Gareth. As I am currently on a bit of a Noam Chomsky binge, what I find even more interesting than what Iceland did — which is truly fascinating — but that this story has had almost complete zero news coverage. Iceland's solution is a serious challenge to conventional fixes the media espouses almost daily, as it applies to Greece or Spain or Ireland, etc. But not a word. I am not a serious news watching, but my wife is. She vaguely remembers a small item about Iceland's debt, but the story lacked even enough detail to pique her curiosity.

    When I saw the phrase' Tobin tax' I almost laughed my coffee out of my mouth! It has been so long since I'd heard the phrase I had forgotten it even existed. Thanks for bringing back old memories. LoL.

  4. I forgot to ask if you had seen the two British comics, Bird and Fortune, describing the banking 'crisis':

    But also look at their the financial crisis in two parts:

    1. Those are too true to be funny :-(