A Little Debt Ditty

05 Feb

A recent article from Paul Krugman got my little gears turning.  In the article, Debt Is (Mostly) Money We Owe to Ourselves, he makes the comment that “…the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.”  He bases this comment on the following graph

What This shows is that most of the debt that we owe – government, personal, and “non-financial” business is mostly owed to ourselves. The Chinese do not “own us” as the conservatives and tea-partiers like to rail on about, to any extent . But what does this mean? Well what it says to me (and feel free to correct me) is that it is essentially a closed system. You have Ted, Bill, and Jon.  Bill owes Ted $6; Jon owes Bill $3; and Ted owes Jon $2.  In aggregate everyone has a total debt of $11.  But lets say you reduce down the Jon/Bill/Ted triad.  You end up with you end up with Jon owing Bill $1 and Bill owing Ted $4.  Seems a bit more manageable, no?  As an extension of this thought, If you look at the following graph (courtesy of Wikipedia/CIA) of external debt (debt owed to entities outside the country) You see that almost every country owes someone else.  I will note this is not net external debt so there are nations owed money by others nations and will have a net negative debt.  But I believe the aforementioned principle at the least loosely applies.

(in US $; 2005)

Now back to the first graph.  If you add in “financial sector” debt (see here) our total debt as a nation is 300% of the GDP.  To give a sense of scale, our GDP is in the ~$15T range, so our total debt is around $45T.  Now the total national household wealth is  ~$50T depending on your method of calculation.  I showed before in National Debt … that the government debt, while somewhat painful, is completely manageable when scaled in terms of personal wealth.  Using the total debt number, $45T, that assumption becomes just simply painful.  The bottom 90%, in theory, on average owe one and a half times their yearly earnings to retire all debt.   But I have to think that that large fraction of that amount that we “owe ourselves” can be ‘reduced’ using the Bill-Ted-Jon methodology above.  I wonder about this because given the logic used and screams of doom from the right, and given the numbers above you would think that the whole thing would have collapsed long ago.  But look at Japan.  Their total public and private sector debt is almost 500% of their GDP (and has been that way for sometime) and they have not imploded.  If you look at the following historical chart you can see that while our debt is at all time highs it is on the same order as historical trends.

I am in no way trying to say that debt is unimportant, but that it is manageable, for now, and that perhaps we should be spending money on jobs, social programs & infrastructure, as opposed to this austerity agenda being put forth by the GOP.  An austerity agenda which has been tried and demonstrably failed in Europe.

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Posted by on February 5, 2012 in Economy


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