The borrowing feats …

I will start this post with a BIG disclaimer : I am not an economist, nor do I have any competency in analysing how nations run; but I am a commoner with some basic views that I claim as “common-sense”. I am sure the experts will disagree with my views – but if they do so, I would appreciate if they help me ‘learn’ by explaining the rationale behind their disagreement.

The experts say that the world is interconnected – and in all sphere’s of life. It’s just not the internet that is the backbone behind the interconnection, but all financial markets, nations economies, the quality of your and my life – all are interconnected. That is why, we poor Indians were waiting what will be the decision in US on their handling (or mis-handling) of public debt – because that decision might have an impact on our Sensex.

As a lay-man and a commoner who is worried on whether his stock investments will be hit because of the US decision, I decided to learn something on the borrowing feats by the most powerful nation of the world, United States of America. What I saw, what I learnt made me feel that is this the way power is defined at an international level ? Maybe I am too naive to question the very basics, maybe my conclusions do not make any sense … time will answer me surely.

The above figures have been taken from IMF site and depicts the public debt as percentage of the country’s GDP. Though I could not find out the benchmark value against which nation’s performances are to be compared; what strikes me that apart from Japan (again, don’t understand why the values are so high and yet Japan does so well), US leads the above elite group of nations with not only 99%, but with an increasing trend (at that high value) of public debt as compared to other nations. Singapore is also quite near to that, but at least it has a decreasing trend. Amongst the BRIC countries, probably China leads the way by such an aggressive value. Experts say that with such high public debt figures (w.r.t. the GDP) will lead to lesser economic growth, more job losses, more spending cuts, less development projects, etc

What perhaps is more alarming for US is that the figures increased from around 70% in 2007 to ~ 99% in 2010 – which basically means that the huge amount of debt was taken in last 3 years compared to the yield that the country had produced. I am sure this was in line with the financial crisis (or scams) that rocked the country – but again, there were huge write-offs that also eliminated bad debts from the corporations.

 

The above chart from Wikipedia shows that China has increased their debt holdings dramatically from 2005 till now. Currently it holds more than 25% of all foreign-held treasure securities. Interestingly, all the major nations are there in this chart, except for say UK and France … and India. What will happen if China decides to sell all their 25% of the securities overnight ? Maybe a theoretical question – but the impact will be HUGE … maybe, that can trigger off a nasty Third World War !

What I also learnt was that total national debt in US will nearly double in dollar terms between 2008 and 2015 and multiple government sources said the U.S. is on an unsustainable fiscal path. This indeed is worrying – and now I can appreciate when I read reports that President Obama did not have much sleep in the last few days, till he found an agreement on passing on the US bill to raise the debt ceiling level. Whether this solves the problem in the longer term, I don’t know – but definitely this will save US from international embarrassment and obviously will allow the politicians to fight a big election battle next year.

Net-net – What I have understood that some very fundamental, basic decisions needs to be taken by the most powerful nation to override the fundamental problem. Currently, their strategy is perhaps postponing the problem as long as they can – specially keeping the impending elections in view. But if drastic spending cuts, increasing of GDP and yet not to borrow proportionately is done, will this be a big balloon which will eventually burst one day ? And in that process, not only the country, but the entire world gets heavily impacted ? …. If the policies don’t change drastically, then the borrowing feats will continue and we can then only keep our fingers crossed …..