International Debt Thermometer

It's been a year since I posted this snapshot of how various countries rank on the debt scale, according to the CIA World Factbook, so it's time for a refresh. 

This is usually a pleasant surprise to anyone who's been hearing about the USA's "crushing" debt burden from people who don't place it into proper context.  And it's usually an unpleasant surprise to those who like to use fear of debt as a political lever, and therefore intentionally refrain from placing into context. 

Although the USA's "total" national debt is 66.3% GDP (see note 1 on the graphic; it's based on the "$9 trillion debt" that always appears in the headlines), the more important number is the publicly held debt level of 37.5% GDP (see note 2), for reasons I've explained many times at this blog. 



After WW-2, publicly held debt was 121% GDP; although the debt level has increased many times over since then, the debt ratio has dropped to 37.5% because of sixty years of economic growth.   

By the way, I haven't found anyone yet who can justify an estimate as to how high that ratio could go before the markets would start giving unmistakable negative signals, and that includes me.  At least we know that our current debt level is perceived favorably, because interest rates, inflation rates, and exchange rates are remaining steady in safe territory.  I've always wondered if a ratio of 150% or more might be a tipping point (still lower than Japan's)—but am not sure I want to find out empirically.  I do think 40%-80% would be a good target for objective, long-term fiscal policy—even though I have no argument as to why 80% should be a ceiling, and little hope of finding objectivity in the fiscal policy debate, especially in an election year. 

In any case, the USA appears to be in very safe territory—especially considering that the outstanding public debt is denominated in US dollars. 

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End note:
The data came from the CIA World Factbook's Public Debt Ranking page.

If you have questions about any of the numbers, especially Canada's number (which is always controversial for some reason), please take it up with the CIA Factbook folks.  Last year I tried several times, with no success; maybe you'll have better luck than I did.

Comments

[Knox]

I always enjoy your updates on this issue. I would suggest that 50% would be a good target, instead of the current 63%. I think there a number of horribly negative events that could occur where we would need to borrow a lot more money. Oil supply shock because Iran and Israel trade nukes, etc. My question is how much growth would we give up at 50%?

[mark]

In previous post you said the public debt represents the net financial wealth of the private sector. That makes sense to me since all those Teasury securities are a financial asset to the holder. So wouldn't the amount of debt the govt can have before it leads to doomsday be determined by how much net financial assets the public (including foriegners) wants? In other words, if the govt forces more financial assets on the public than the public wants, the result would probably be higher interest rates and inflation.
I have always heard the Japanese are big savers. It shows in the chart. During WWII the American public bought war bonds allowing the govt to run a high debt.
With baby boomers attempting to save for retirement I wonder if a public debt to GDP ratio of 37% is high enough. Consumer spending drives the economy. Can the public save and spend enough at the same time? Could a higher debt to GDP ration allow the public to save and spend?

[Bob]

Let's talk about focus. As in focusing on those critical elements that will enable growth. And let's discuss what thinking, other than eliminating debt angst, will have to come about if we are to move beyond the self imposed barrier of 2.5% GDP growth.

Steve is focussed on productivity improvement and that's good. However, is that alone the silver bullet and the be all and end all?

Let's come up with a short list of ideas that, if focussed on with laser-like intensity, have a very high probability of contributing to faster growth.

A framework to get us started is needed. I request that our generous blog owner give some thought to this.

[rufus]

Question: Do any of those other countries have the same type of public debt/total debt dichotomy that we have? If so, which ones; and, more importantly, which of the numbers (total vs public) was used in the chart?

Thanks.

[rufus]

Bob, someone walks in the Federal Reserve with a Bullwhip, and a 3-legged stool, and forces them to reduce the FF to 4.25% (where it should have been the whole time.) Growth would go to 4%, and core inflation would drop to 1.5% (about as good as it's ever going to get in our economy.)

[Bob]

Rufus,

I'm beginning to question how relevant the Fed is in today's environment. I'd rather see more incentives and less restrictions on innovation in the private sector. I don't want to be dependent on the Fed for growth.

[rufus]

Bob, the Fed still has the power to cut the small businessman off at the knees, and, right now, the American small businessman is looking pretty short. It's tough paying 8.5% + for your money and then sallying forth to compete with Chinese Companies that pay a buck an hour wages, and don't even pay back the Principal, much less the interest.

Personally, I'd like to see the Fed replaced by a laptop with a very complicated "take the 91 day T-Bill, add ten basis points, and print" program. :)

[rufus]

For instance, your factbook link gives the USA's Publicly held debt figure as 64% of GDP. If this is an example of it's accuracy I'm afraid it's not of much use.

[Bob]

Rufus, you're right about small businesses and bank loans or lines of credit. However, I don't think that even a 1% rate will do much to help when it comes to the Chinese. Tariffs are the only way to balance that and I'd prefer we don't go there.

[Steve]

Mark:
You're right; the bottom line is the worldwide investing public's perception of the USA's creditworthiness, as measured by the inflation rate, the interest rate on the long bonds, and the trade-weighted value of the dollar.

Growth is what we need, and if growth is enhanced by a higher mix of borrowing vs taxes, then 37% is too low. Borrowing money for good investments is sound financial practice; nothing ventured, nothing gained.

rufus:
Try digging into the explanatory notes at the Factbook site. I spent some time on that last year, and determined that they are trying to get an apples-apples set of numbers, but are sometimes stymied by issues of timing, data quality, and methodology differences. Canada's number, for example, apparently includes provincial and territorial debt because it's backed by the central government; by contrast, the USA's does not include state or local debt, because it is not backed by the central government. In any case, I'm all finished trying to reconcile the Factbook numbers; it's a waste of my time when they won't respond to questions.

Bob:
I think the best place to start is revenue neutral tax simplification that maintains progressivity but reduces the tax code to 1% (or less) of its current size. Benefit: smaller, less intrusive IRS, and tons of private sector resources freed up to grow businesses instead of avoid taxation. Obstacle: every politician and lobbyist inside the beltway.

[Matt]

http://www.optimist123.com/optimist/2006/04/cia_gains_new_i.html

You got Canada wrong, according to your post from last year.

[Steve]

Matt:
I take Canada's number from the Factbook. Last year, they changed from around 64% to around 32%, then changed it back to the 64% range a couple months later. I post what they post. If you can find out why they changed it down then up again, that would help.

[Syphax]

Based on the OECD website numbers I copied onto my computer(its on their website I just can't find it), the 64% is most likely correct.

My guess is that Canada's situation is much like that of the United States and the 64% is the total while the 32% is the public debt.

[Zbigniew Mazurak]

Steve, according to the French statistical office the French public debt is 'only' 64%, not 65%, of GDP. Link: http://www.insee.fr/fr/indicateur/cnat_annu/base_2000/secteurs_inst/admin_publiques.htm

[Jay Larson]

I am very concerned about your seeming disregard for the total federal debt for a couple of reasons. First of all, you compare the debt as a percentage to the size of the total economy which is meaningless because it is the rate of taxation that pays down the debt. A large economy does not pay down the debt if tax rates are low or going lower. Secondly,the interagency debts of the US are stagering $4trillion+ and rapidly getting worse.THe PV of the unfunded liabilities associated with Medicare and Soc Sec are estimated at approximately 50 Trillion dollars. The 1.9 trillion dollars of non marketable unfunded IOUs that the govt owes Soc.Sec plus trillions of other dollars owed to Fed Employees retirement fund and the Armed Services plans are huge but you tend to discount this debt which is comming due very soon. Unless I am missing the mark I think that your comments are extremely ignorant socially irresponsible

[Steve]

Jay:
Would you agree that holding net interest payments to less than 10% of tax receipts is financially safe?

If so, I can demonstrate that debt and interest payments can continue to grow indefinitely without violating the 10% rule.

If not, and if you have already read the growing number of posts at this blog on all the things you mentioned, I guess we'll just have to agree to disagree.

[clive]

Wow
Can no-one see the combination of falling gdp (due to baby boomers retiring who will also increase state costs for medicare etc) at a time where oil is due to rocket due to shortages (only a 5% shortfall in supply versus demand caused the 1970,s recession)will cause GDP to fall, and dramatically increase the debt to GDP ratio? i haven,t even mentioned food shortages due to grain being diverted to biofuels, note the world grain reserves are already as low as the 1970,s, remember you can,t eat money..

[Gary Dee]

I believe the controversy is between use of Canada national (federal) debt or its gross country (federal, provincial, municipal) debt. The 64% number seems to be from using the gross country debt.

http://www.ndir.com/SI/education/debt.shtml

[Dan J]

Steve, I have a hypothetical question for you that might be the subject of a great post - regarding this issue.

What if, by some miracle, the entire national debt of the United States was "paid off" tomorrow? (using legitimate, non-inflated money)

My hunches:

- People would take their redeemed bond cash and put it into productive investments or spend it (stimulating the economy). I guess this would be a good effect.

- The government would, in the ultimate display of "missing the point" - consider that they now have a 9 trillion dollar equity line of credit that is "untapped" - and would get to work quickly selling new Treasury bonds to fund whatever economically unfeasible projects they could come up with.

- The problem with the scenario is where the miracle money comes from. If the government taxes it out of the people and then returns it to the bond-holders, it's sort of a fool's game. (And, I'm sure at least one political party would notice that this is "unfair" to non-bond holders).

- Would this have any effect on currency values?

- What effect might it have on other economies, that have heavy investments in US securities?

- If the government, by another subsequent miracle, decided to spend only money received each year, would this harm the economy or be neutral? (Or, would it slow growth?)

- If taxes were cut in proportion to the interest payments we would no longer have to make, how would this effect the economy?

I don't know, what do you think? There are a number of directions we could go with this discussion.

[Steve]

Has anyone ever charted Debt vs. (GDP - GOVERNMENTAL GDP). To me this would also be a relevant graph. I am not for sure what this will tell us. As I see it the government can not pay itself back.

[Deb V.]

Great site! My interest in this subject was peeked by a speaker I heard on the Joey Reynolds show this past week, some prof. at NYU who has a new book out about America's national debt. He said that we paid it off completely at some point???!!! but now it is clearly back with a vengenance. If we did it before, why can't we do it again?