The United Nations of Debt

[pmaitra]

The United Nations of Debt

Someone jokingly remarked that the G7 like to tout themselves as the seven most wealthiest nations in the world because together they represent three quarters of the world’s debt.

While it is possible for a country to be in debt and yet manage to service it debt by maintaining a high enough Gross Domestic Product, the question is, is it sustainable?

I have two visualizations from the source “Visual Capitalist.”

The United Nations of Debt

Countries Scaled to the Unsustainability of their Debt

This incites curiosity:

• Are these economies indeed unsustainable?
• What could happen if the major indebted countries were to default?
• Who are the creditors?
• Are the creditors that powerful that they can have countries and governments indebted?

 

[tarunraju]

The G7 gets its credit-worthiness out of a never-ending feedback-loop of "we have the biggest stick" and "we need money to have the biggest stick."

Classical currencies weighed against gold, then we had fiat currencies. At this point USD is neither. It's a classical currency backed by the US military instead of gold.

Nobody is going to come knocking when US debts come due.

 

[Illusive]

.

 

[Illusive]

The G7 gets its credit-worthiness out of a never-ending feedback-loop of "we have the biggest stick" and "we need money to have the biggest stick."

Classical currencies weighed against gold, then we had fiat currencies. At this point USD is neither. It's a classical currency backed by the US military instead of gold.

Nobody is going to come knocking when US debts come due.

China is buying US real estate, and they have a big stick too which is getting bigger by the day. The question is will China look to collaborate or dominate, when the time comes to knock.

 

[Sakal Gharelu Ustad]

Who holds the debt is also important. For eg. In case of Japan it's usually Japanese citizens. So the government is not going to default on its own citizens because it does not make sense. In worst case scenario, if Japan's growth becomes negative and is becomes impossible to service interest payment there might be partial default to bring down debt servicing.

Normally govts would not care defaulting on foreign debt but given international business connectedness now, that is a foregone conclusion because you stand to lose more by default than gain. As long as there is some gdp growth, in most cases debt is serviceable. In any case, I do not think that big economies would completely default.

Another important point is the currency you hold the debt in. For example, if it's US $, then US would not default but just print itself out. That is the reason most domestic debt does not matter because govt can always print money and use inflation to erode debt. It's a kind of soft default and probably not that worrisome unless you become Zimbabwe!! Problems arise when you borrow in foreign currency because then the option of soft default is not available. But given most advanced countries usually substantial part of their debt in local currency, the soft default option is always available.

But the above conditions will arise if world economy is down and there is massive deflation. But if that's the situation, then things are already crazy bad, defaults would just increase the pain a bit more. Technically a low probability event!

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