Indonesia Advisory

Investopedia.com
Andrew Beattie, On Thursday 27 October 2011, 0:45 SGT

There are many different ways to measure debt as a factor in a
nation's economic health. In fact, there are so many that we can
sometimes lose the meaning of any one measure. In this article, we'll
look at two different measures of debt and how they change the
landscape of the most indebted nations.

Debt Compared to Cash Coming In
One of the most popular, measures is debt as a percentage of GDP. This
tells you how likely it is that a nation is going to be able to pay
its bills. In this sense, GDP is income, so the more GDP you have, the
more debt you can service.

As far as measuring which nations are struggling, the debt to GDP is
an excellent measure. The public debt to GDP listing, compiled in the
CIA World Factbook, is reassuring in this sense. It's top 10, based on
2009-2010 data includes:

1. Zimbabwe 234.10%
2. Japan 197.50%
3. Saint Kitts and Nevis 185.00%
4. Greece 142.80%
5. Lebanon 133.80%
6. Jamaica 126.50%
7. Iceland 126.10%
8. Italy 119.10%
9. Singapore 105.80%
10. Barbados 102.10%

The United States is far down the list at number 32. The U.S. has the
highest GDP for a single nation, in other words, excluding the E.U..
The U.S. GDP hasn't come in under $1,400 billion since it broke that
level in 2007, so the debt situation of the U.S. isn't as bad in this
context, when compared to Japan. Japan has a GDP of around $4,300
billion and public debt over $10,000 billion.

The reason that Japan hasn't folded, is that over half of all Japanese
debt is held domestically. This gives Japan the advantage of
relatively friendly hands holding its IOUs. There is also another
economic advantage that economists see in the Japanese situation: most
of the interest payments on the debt, make citizens wealthier and more
likely to buy things domestically. This makes some sense, but the
theoretical domestic buying boom either hasn't yet hit its stride in
Japan, or the debt situation has grown beyond the point where this
beneficial side-effect is noticeable.

Japan's woes aside, the debt picture shifts quite noticeably when,
instead of looking at debt-to-GDP, we focus on external debt.

Measuring External Debt
External debt is a measure of the public and private debt, that is
owed to non-residents. This list, also compiled by the CIA, gives a
different top 10.

1. United States $13,980 billion
2. European Union $13,720 billion
3. United Kingdom $8,981 billion
4. Germany $4,713 billion
5. France $4,698 billion
6. Japan $2,441 billion
7. Ireland $2,253 billion
8. Norway $2,232 billion
9. Italy $2,223 billion
10. Spain $2,166 billion

Now, there is no reason to panic, despite the U.S. taking over the top
spot. The foreign holdings of treasuries total about $4,500 billion,
so this is not all public debt, by any stretch. Unlike domestically
held treasuries, however, the external ones are making interest for
non-citizens, making it less likely that the money will be put back
into the economy in any way. In the end, external debt just means
interest and principle payments that are going abroad and adding to
another country's GDP.

How Did We Get Here?
The U.S. has a lot of external debt, true. There are two ways of
looking at it, one is the debtor nation view, where the more external
debt a nation has, the more likely it is giving away its future, in
the form of interest payments to foreigners. The second way is the
investment destination view, where so many foreigners are looking to
lend and invest in the debts of U.S. citizens, companies and the
government, that the low interest loans can be used to build more
economic capacity, to produce more capital to pay off these cheap
loans.

The truth is that the U.S. is a bit in between the two scenarios. It's
strong GDP numbers make it one of the most attractive investments
compared to other struggling nations, but this huge foreign debt load
has passed the healthy level and is edging up to dangerous levels.
Just because other nations are willing to lend cheap, and the U.S. is
willing to spend, doesn't mean there aren't long term consequences.

The Bottom Line
Debt is a matter of perspective. The health of a nation is not so
different from the health of a business. If a nation is borrowing to
build infrastructure that will pay off in the future, then having a
lot isn't necessarily bad. If, however, the money is being poured into
areas with little or no return, then the burden on the economy to pay
those debts will eventually lead to more economic hardship in the
future. A fair assessment would involve tracking what each dollar of
private and public debt, goes towards purchasing. Some studies exist
on this subject, but it is best left for another day, perhaps
Halloween.