There are many different ways to measure debt as a factor in a nation's economic health. In fact, there are so many that we can sometimes lose the meaning of any one measure. In this article, we'll look at two different measures of debt and how they change the landscape of the most indebted nations.
Debt Compared to Cash Coming In
One of the most popular, measures is debt as a percentage of GDP. This tells you how likely it is that a nation is going to be able to pay its bills. In this sense, GDP is income, so the more GDP you have, the more debt you can service.
As far as measuring which nations are struggling, the debt to GDP is an excellent measure. The public debt to GDP listing, compiled in the CIA World Factbook, is reassuring in this sense. It's top 10, based on 2009-2010 data includes:
1. Zimbabwe 234.10%
2. Japan 197.50%
3. Saint Kitts and Nevis 185.00%
4. Greece 142.80%
5. Lebanon 133.80%
6. Jamaica 126.50%
7. Iceland 126.10%
8. Italy 119.10%
9. Singapore 105.80%
10. Barbados 102.10%
The United States is far down the list at number 32. The U.S. has the highest GDP for a single nation, in other words, excluding the E.U.. The U.S. GDP hasn't come in under $1,400 billion since it broke that level in 2007, so the debt situation of the U.S. isn't as bad in this context, when compared to Japan. Japan has a GDP of around $4,300 billion and public debt over $10,000 billion.
The reason that Japan hasn't folded, is that over half of all Japanese debt is held domestically. This gives Japan the advantage of relatively friendly hands holding its IOUs. There is also another economic advantage that economists see in the Japanese situation: most of the interest payments on the debt, make citizens wealthier and more likely to buy things domestically. This makes some sense, but the theoretical domestic buying boom either hasn't yet hit its stride in Japan, or the debt situation has grown beyond the point where this beneficial side-effect is noticeable.
Japan's woes aside, the debt picture shifts quite noticeably when, instead of looking at debt-to-GDP, we focus on external debt.
Measuring External Debt
External debt is a measure of the public and private debt, that is owed to non-residents. This list, also compiled by the CIA, gives a different top 10.
1. United States $13,980 billion
2. European Union $13,720 billion
3. United Kingdom $8,981 billion
4. Germany $4,713 billion
5. France $4,698 billion
6. Japan $2,441 billion
7. Ireland $2,253 billion
8. Norway $2,232 billion
9. Italy $2,223 billion
10. Spain $2,166 billion
Now, there is no reason to panic, despite the U.S. taking over the top spot. The foreign holdings of treasuries total about $4,500 billion, so this is not all public debt, by any stretch. Unlike domestically held treasuries, however, the external ones are making interest for non-citizens, making it less likely that the money will be put back into the economy in any way. In the end, external debt just means interest and principle payments that are going abroad and adding to another country's GDP.
How Did We Get Here?
The U.S. has a lot of external debt, true. There are two ways of looking at it, one is the debtor nation view, where the more external debt a nation has, the more likely it is giving away its future, in the form of interest payments to foreigners. The second way is the investment destination view, where so many foreigners are looking to lend and invest in the debts of U.S. citizens, companies and the government, that the low interest loans can be used to build more economic capacity, to produce more capital to pay off these cheap loans.
The truth is that the U.S. is a bit in between the two scenarios. It's strong GDP numbers make it one of the most attractive investments compared to other struggling nations, but this huge foreign debt load has passed the healthy level and is edging up to dangerous levels. Just because other nations are willing to lend cheap, and the U.S. is willing to spend, doesn't mean there aren't long term consequences.
The Bottom Line
Debt is a matter of perspective. The health of a nation is not so different from the health of a business. If a nation is borrowing to build infrastructure that will pay off in the future, then having a lot isn't necessarily bad. If, however, the money is being poured into areas with little or no return, then the burden on the economy to pay those debts will eventually lead to more economic hardship in the future. A fair assessment would involve tracking what each dollar of private and public debt, goes towards purchasing. Some studies exist on this subject, but it is best left for another day, perhaps Halloween.
Debt Compared to Cash Coming In
One of the most popular, measures is debt as a percentage of GDP. This tells you how likely it is that a nation is going to be able to pay its bills. In this sense, GDP is income, so the more GDP you have, the more debt you can service.
As far as measuring which nations are struggling, the debt to GDP is an excellent measure. The public debt to GDP listing, compiled in the CIA World Factbook, is reassuring in this sense. It's top 10, based on 2009-2010 data includes:
1. Zimbabwe 234.10%
2. Japan 197.50%
3. Saint Kitts and Nevis 185.00%
4. Greece 142.80%
5. Lebanon 133.80%
6. Jamaica 126.50%
7. Iceland 126.10%
8. Italy 119.10%
9. Singapore 105.80%
10. Barbados 102.10%
The United States is far down the list at number 32. The U.S. has the highest GDP for a single nation, in other words, excluding the E.U.. The U.S. GDP hasn't come in under $1,400 billion since it broke that level in 2007, so the debt situation of the U.S. isn't as bad in this context, when compared to Japan. Japan has a GDP of around $4,300 billion and public debt over $10,000 billion.
The reason that Japan hasn't folded, is that over half of all Japanese debt is held domestically. This gives Japan the advantage of relatively friendly hands holding its IOUs. There is also another economic advantage that economists see in the Japanese situation: most of the interest payments on the debt, make citizens wealthier and more likely to buy things domestically. This makes some sense, but the theoretical domestic buying boom either hasn't yet hit its stride in Japan, or the debt situation has grown beyond the point where this beneficial side-effect is noticeable.
Japan's woes aside, the debt picture shifts quite noticeably when, instead of looking at debt-to-GDP, we focus on external debt.
Measuring External Debt
External debt is a measure of the public and private debt, that is owed to non-residents. This list, also compiled by the CIA, gives a different top 10.
1. United States $13,980 billion
2. European Union $13,720 billion
3. United Kingdom $8,981 billion
4. Germany $4,713 billion
5. France $4,698 billion
6. Japan $2,441 billion
7. Ireland $2,253 billion
8. Norway $2,232 billion
9. Italy $2,223 billion
10. Spain $2,166 billion
Now, there is no reason to panic, despite the U.S. taking over the top spot. The foreign holdings of treasuries total about $4,500 billion, so this is not all public debt, by any stretch. Unlike domestically held treasuries, however, the external ones are making interest for non-citizens, making it less likely that the money will be put back into the economy in any way. In the end, external debt just means interest and principle payments that are going abroad and adding to another country's GDP.
How Did We Get Here?
The U.S. has a lot of external debt, true. There are two ways of looking at it, one is the debtor nation view, where the more external debt a nation has, the more likely it is giving away its future, in the form of interest payments to foreigners. The second way is the investment destination view, where so many foreigners are looking to lend and invest in the debts of U.S. citizens, companies and the government, that the low interest loans can be used to build more economic capacity, to produce more capital to pay off these cheap loans.
The truth is that the U.S. is a bit in between the two scenarios. It's strong GDP numbers make it one of the most attractive investments compared to other struggling nations, but this huge foreign debt load has passed the healthy level and is edging up to dangerous levels. Just because other nations are willing to lend cheap, and the U.S. is willing to spend, doesn't mean there aren't long term consequences.
The Bottom Line
Debt is a matter of perspective. The health of a nation is not so different from the health of a business. If a nation is borrowing to build infrastructure that will pay off in the future, then having a lot isn't necessarily bad. If, however, the money is being poured into areas with little or no return, then the burden on the economy to pay those debts will eventually lead to more economic hardship in the future. A fair assessment would involve tracking what each dollar of private and public debt, goes towards purchasing. Some studies exist on this subject, but it is best left for another day, perhaps Halloween.
