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Advanced Economics

MORE DEBT

Another way of looking at the same data is through what's called descriptive statistics. These are basic statistical calculations that provide some idea of what it is that a bunch of data looks like. We are only interested in a few of them represented in the table below.

Statistical Intro

If we would like to cheat, we would have chosen the Mean values (they look far worse) instead of the Median, but we won't. The Median values are a better representation of the status of a middle-of-the-road country. So ignore the Mean column.

Also, take a look at the column labeled Std. Dev. (Standard Deviation). This statistical parameter measures variability or, in different words, uncertainty. Statistical Deviation is usually expressed in the same units as the item we are measuring. In our case, they are also expressed as %GDP. A typical scientific study would express data as:

Result +/- Standard Deviation

What this means is that some measurement produced a certain Result, but we are not absolutely sure about its value because there are errors of measurement in it. Those errors are expressed as +/- Standard Deviation. What this means is that the "true" value of the Result is somewhere between:

  • Result + Standard Deviation
  • Result - Standard Deviation

A quick example. Let's say that we measure 6 fingers from different people and we perform the relevant statistical calculations. What we get is something like:

5 cm +/- 0.1 cm

Which means that the true length of the average finger is somewhere in between 4.9 and 5.1 centimeters (sort-of - this is the most basic explanation and as such it is oversimplified, but it will serve our purposes).

One thing to note is that the error could be huge thus making the data less reliable. If we would have measured fingers by eye at a considerable distance instead of using a measurement tape, we would have obtained something along the lines of:

5 cm +/- 5 cm

Which means that the "true" length of the average finger is somewhere between 0 cm and 10 cm! It is obvious that the larger the Standard Deviation the less reliable the data.

The Data

World Debt Statistics

Horrid data

If you now go back to the table above and take a look at the corresponding Standard Deviation numbers, you will notice that they are horrid indeed! How is this possible? There are two factors.

  1. Variations between countries
  2. Lousy data

The first one is to be expected and it is nothing unusual. Different countries do different things at different times. That's OK. However the second reason is something altogether different. Why is that passable data can only be obtained starting around 1960? What happened before that? Well… nobody actually cared or bothered keeping track of it. That's right! Almost 150 years worth of debt data never existed; were never recorded. Of course! the debt existed, but, it would seem that it was not something important until recently. But, as we have seen in Figure 1, since about 1850 the amount of debt in relation to the GDP was more-or-less constant. So, it is not the size of the debt that mattered, but the fact that politicians were able to get away with it!!!

It must be fantastic. As a politician or bureaucrat in a high government position you can borrow and borrow and then borrow some more without any oversight or publicly reviewable accounts whatsoever! We can already see the accounting process: "one for me, one for the country…one for me, one for the country…"

It is exceedingly strange how no economic bureaucrat ever mentions this "tiny" lack of data. We wonder why….

Overall Balance

As we explained in the first part of this article, the Overall Balance is the type of balance you would expect to see; this is all income minus all expenditures. No mumbo-jumbo such as the "Primary Balance" (we were wondering if its name derived from the fact that such monstrosity never made it past primary school…but we digress).

The data that interests us is the Median value of the Overall Balance or -1.0% because it is the most conservative the authors of the article calculated. What this means is that a typical country overspent by about 1.0% for over 200+ years, every year. Obviously governments did spend that 1.0% so the question is: where did they get it from? It wasn't from taxing because taxes were already factored in the original budget and it wasn't from printing for the same reason. This leaves us with only one option: borrowing.

Now, to borrow 1.0% per year does not seem like much, but if we do a crude compound interest calculation over 211 years we get 616 %. This is, that "tiny" 1.0% per year burned through the equivalent 6.16 times the world GDP!!! Obviously, this is a very crude calculation and it does not take into account that some of the debts were paid off. As such this number provides only the highest limit of the amount of burned debt.

We also know that currently the world debt is in the area of 1 world GDP (see Happy Breakeven Year). Which means that over the last 211 years government burned anywhere between 1 and 6.16 world GDP!!!

Using the tried-tested-and-true highly scientific procedure called "to make a calculation on the back of a napkin" we will take the average of those two numbers arriving at something in the order of 3.5 times the world GDP.

In other words, over the last 211 years politicians have burned through the equivalent of 3.5 times the value of all goods and services produced by the entire world in a year in debt alone!!!

If we now consider that the average lifespan of a human is in the order of 80 years, but the typical productive years are about 45, we can calculate that just to pay that "tiny" 1.0% you worked about 2.4 years (about 5%) of your entire productive life for free just to satisfy government spending. This is how much life they sucked from you due to debt alone. And this figure does not include taxes which are the biggest waste on the bill.

The point we are trying to make is simple. Economic bureaucrats will tell you that governments are typically "only" 1.0% overbudget per year. But when you actually calculate how much of your life went up in smoke just because of that "tiny" 1.0%, the numbers are staggering!

And yes, we also acknowledge that you did get some benefits from that 1.0% but the reality is that you didn't want nor need those so-called "benefits" to begin with. If somebody pulls a gun on you and tells you to buy a widget you don't want, is this a benefit? Of course not! You had to acquire it against your will. Furthermore, considering the gigantically enormous waste of money, resources and - most importantly - productive capital that governments spent in so-called benefits (even if they actually existed), they are dwarfed by the loss of standards of living produced due to the annihilation of that "tiny" 1.0%.

Debt

We have already talked about debt, but we will talk about it again. The table as well as Figure 1 point towards the fact that the median debt for any government over the last 211 years is about 38%. Again, we are taking the most conservative number we can find. This number, 38% does not seem to be so horrible; as a matter of fact, it seems to be quite "manageable" if we consider that the EU Stability and Growth Pact puts the upper limit at 60%. We also know that countries can take up enormous amounts of debt without defaulting, particularly in modern times. The "default point" that we uncovered in our Default Index (DI) project is about 1580% of Real GDP (not GDP). So, what's the problem, right?

Well… there is one big problem. It so happens that the median or the average does not provide good images of what's really going on. This is so because the debt of all countries is interlinked in the world financial system through Credit Default Swaps (as we explained in the article Happy Breakeven Year). What is important is the total amount of debt in the world (now close to 100% of the world GDP) because this number it is racing towards our default point which should occur somewhere near 2026 (see The Year The World Defaulted).

When economic bureaucrats talk about "manageable" debt of "only" a median of about 38% of country GDP they forget to mention that the total amount of world debt is in reality in the order of 100% world GDP! What this means is that some countries have huuuge debts thus being inherently unstable and unsustainable. It is one of those countries that will trigger the world default, not the countries with moderate debts. Not to mention that all these figures are "official" data and we know that governments never lie, right?...

Note: please see the Glossary if you are unfamiliar with certain words.

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