>Are our debts sustainable?

>We’ve talked before about the Austerity-Stimulus debate, but a lot of it lies in the sustainability of our debts. According to economists D.Miles & A.Scott:

 “the sustainability of the public debt is a function of the size of the stock of debt, its average maturity, and the relationship between the average interest rate and the rate of growth of GNP.”
So saying, are the debts of the developed world sustainable?

One comment

  • >Of course it depends which country your talking about but in general I would say yes. Take Britain for example. It's been said that 250% of debt to GDP ratio would be sustainable, partly because we had that level of debt before (Napoleonic Wars). However I don't think this would be sustainable today because of the: greater size of the market, and hence greater amount of market and currency speculation; the smaller role Britain plays in the world, relatively speaking; any big war allows greater levels of debt, because people are unwilling to speculate against the state when it's fighting for them; and the type of debt employed. Japan sustains 200% debt, and meanwhile Greece invites constant talk of a default, while it doesn't have anywhere near that level. Why? It's essentially because all of Japan's debt is financed from within the country by high savings rates. Hence Japan as a hole is made no poorer because of its debt. And in addition it has control of its own currency.There is also a difference in average maturity. When the markets expressed concern about Britain, which has only 60% debts, it spread panic amongst a few circles, and indeed the electorate at large, but was largely dismissed by the experts. Although Britain still has one of, if not the biggest deficits amongst rich countries, it has good growth prospects, the length of time until maturity for its debt is much longer than Greece, meaning it doesn't have to be paid as quickly, and it has control of its own currency, meaning it can devalue to increase exports as Greece cannot.The markets are currently expressing fears about America, with the property markets in serious worry again. But it is possible for Obama to employ another stimulus package. Indeed one has already been put aside. I would argue that an additional increase in debt, although it will certainly worry the financial markets and backers of austerity, will be sustainable. America is a huge power, and no one has even predicted default, because America is simply no where near the limit of what debt can be sustained.

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