Sunday, May 2, 2010

Economics 02/05/2010: World Debt Wish 2

Continuing with a tour through the world debt numbers, let's take a look at General Government Debt levels:
Chart above shows the dynamics of GGD over the last 7 years. In majority of cases, except for the US, there has been virtually no break in the debt dynamics over the last two years, compared with the past. What does this mean?
  1. Firstly, this means that the entire talk about 'massive' Keynesian stimuli around the world is bogus - the governments might have re-directed their spending to new activities in response to the crisis, but the path they chose to expand their spending in the last two years is largely the same they were operating on during the boom.
  2. Secondly, this clearly shows that in 9 out of top 10 debtor nations, Governments were operating pro-cyclical fiscal policies during the boom - in other words, to maintain their role in the society, governments required increasingly greater and greater spending - a classic definition of an addiction.
  3. Thirdly, the US Republicans were about as eager to burn taxpayers cash as the US Democrats.
The same patterns are not fully present amongst smaller debtors:
In the chart above:
  1. With exception of Norway and Turkey, all governments engaged in a much more aggressive ramp up of expenditures during the last two years than before the crisis.
  2. All governments, with exception of Ireland, that did engage in extensive GGD increases during the crisis did so only starting in 2009.
  3. Ireland deployed massive increases in GGD back in 2008 - before any other country.
  4. Stimulus - in so far as our GGD increases go - in Ireland has been the most dramatic of all other comparator economies.
  5. Within a span of 7 years, Irish Government has pushed the country from 19th most indebted in the world in absolute terms to 13th. This is despite the fact that our economy is a minnow compared to the rest of the top 20 debtor nations club.
Ireland's GDP ranked 53rd in the world by the IMF in 2009, 51st by the World Bank and 54th by CIA. Our Government debt ranked 13th... Getting concerned? Or still calling for the Government to borrow more and spend more?
Obviously, it is worth taking a look at the relationship between the starting debt positions and the current levels of government debt. Scatter plot above maps all 36 countries that are the top debtor nations around the world. The US is a significant outlier, so let us zoom closer:
What the chart above illustrates is that Ireland is in the league of its own when it comes to the government reliance on debt financing:
  1. Between 2003 and 2009 Irish Government has engaged in the most extreme (relative to peers) debt expansion of all highly indebted nations (compare distance to regression line relative to levels of debt in 2003).
  2. While majority of the 36 top debtor nations did run increases in debt levels between 2003 and 2009, Ireland's position is extreme in absolute terms (compare distance to the 1-1 line relative to 2003 debt)

In the next post, I will be taking a closer look at the Banks debts, followed by the post analysing total debt levels. The final post of the series will put together debt figures relative to GDP. Stay tuned.
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