Countries Are Deeply Indebted & Headed For Trouble – Here’s Why

“The history of financial crises is that when an accident is waiting to happen, it eventually does and, when countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are but the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

So said Carmen M. Reinhart and Kenneth Rogoff in a book entitled “This Time Is Different” which gave us the first really comprehensive analysis of what happened in over 250 historical financial crises in 66 countries. If you are a serious student of economics, you should read this book. If you want to get a sense of the problems we face, the authors conveniently summarize the situation in chapters 13-16, purposefully allowing people to get the main points without drilling into the mountain of details they provide.

Pertinent to the debt situation we find ourselves in today the authors said in their book:

“If there is one common theme to the vast range of crises we considered in our book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is.” Sound familiar?

They go on to say:

“Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly.”

Below is a summary of various countries’ debt as a % of GDP in graphic form.

USA: http://www.usdebtclock.org/
Canada: http://www.debtclock.ca/
Australia: http://www.australiandebtclock.com.au/
U.K.: http://www.debt-clock.org/
Germany: http://www.nationaldebtclocks.org/debtclock/germany
Japan: http://www.nationaldebtclocks.org/debtclock/japan
China: http://www.nationaldebtclocks.org/debtclock/china
Other Countries: http://www.nationaldebtclocks.org/#countries

Below is a ranking of national debt as a % GDP for a number of prominent countries. For an expanded list visit https://commodity.com/data/debt-clock/#countries.