By Akshay Kumar
During the Great Depression, when classical economics principles were being thwarted away, a new Einstein of economics, John Maynard Keynes pioneered his theory, that could be defined as theory of relativity of economics, by the name of ‘The General Theory of Employment, Interest, and Money’. In most simple terms, Keynesian theory states that-
…during an economic downturn the government should increase its expenditure to compensate for the decline in private demand for goods and services. Conversely, during an economic upturn the government should decrease its expenditure to make room for productive investment and consumption.
In other words, governments should increase the national debt during economic downturns and enhance it during economic upturns. With this fundamental economic principle in hindsight, let one break the laws of relativistic physics and jump 77 years hence and foray a glance at the today’s global debt scenario. Current global public debt of planet earth, in terms of modern economics, amounts to about $ 51 trillion (~ $ 51, 175, 114, 545, 290) and it’s tickling vociferously at a higher and higher rate. On an average, every member of homosapien species today is under a debt of close to $10,000 before a new sapling of the same species breathes air. The first valid doubt that should arise is that global debt is not a very meaningful figure since it owed to earthlings. If the debt becomes unbearable the clock can be just reset to the inception of process that is in economics terms ‘defaulted’. However, the fact is that default in this case would mean ‘defaulting by impoverishing ourselves’, an inability to create wealth at the same or higher rate than the rate of consumption.
Moving on, given that the tax and other forms of collection do well to collect $10,000 apiece from the richest few people in the richest few countries, and given that over half the world’s people have no income at all at a level that would interest a tax collector (less than $1000 per year gross), paying off this debt seems patently impossible. So, the progression leads us into a phenomenon referred to as ‘debt trap’. The economies might never pay the entire debt off, but may continue to pay interest on it forever, which will result in significant international cash flows with attendant distorting effects on economics, politics, and society. If interest is estimated at $500 (at 5% per annum) per year per person, interest payment is probably manageable, on the average, for a while, especially since the richest countries owe the most. The problem, of course, is that debt is growing faster than population or prosperity which means that eventually something must change. And hence the breakdown point on modern economics charts is left to calculations for students of Batman fantasy ‘League of Shadows’ sophisticated weaponry instruments and derivatives, the economics.
Who is rich, who is poor!
Upon travels and travails from past to present to future, let us again focus and live in the present- analyse the current macroeconomic global debt outlook. Let us take three sets of economies for analysis- the US, the EU, and the BRICS, accounting for about 80% of the world’s GDP. The debt scenario in three sets can be evaluated on the basis of 3 critical parameters- public debt as % of GDP, external debt as % of GDP, and public debt per person. Germany, arguably the only turbocharged EU
economy and Greece, the culprit, can be taken as representative economies to represent EU members with both potential positive and negative outlook.
Figure 1: Global debt analysis – evaluating the potential and outlook
A close look at the figure clearly demonstrates the status-quo of leading economies of the world. A summary can be presented in the table below-
Hence, clearly BRICS offer the promising outlook on critical analysis of these 3 critical debt indicators. This can act a supporting evidence to substantiate the claim that BRICS are relatively far more sustainable in terms of economics strategy, labour market, enterprise support, tax policy, and budget allocation than the capitalist models, governance structures and policies. The analysis reflects that Socialist Market economy, substantiated by Chinese example, need not be debt financed. It also has huge credit score to back the claim. Each capitalist democratic country performs poorly on all three indicators against each socialist or mixed economic market counterparts.
European Union (EU) is the worst economy in the present scenario as indicated by the worst scores on all three indicators. The analysis also serves best to explain the importance of balanced external debt. EU rates very high on external debt. The same has been illustrated by the case of comparison between Portugal and France or Belgium. While both economies on the fiscal side are in the same state of fiscal turmoil (carrying same debt to GDP ratio), the critical factor that renders Portugal unstable is exceptionally high external debt in case of Portugal leading to negative market speculations. All the IMF packages to Eurozone can be termed as ‘It’s Mostly Fiscal’ (IMF). Hence, an argument can be advanced at the inefficiency of fiscal bailout packages in Europe.
US also fairs poorly on all three indicators. And the EU analysis on debt crisis, as done above, teaches critical lessons to the US as US public are on the same sort of unsustainable path. The most important lesson that can be derived by comparing debt levels of US and EU is that US must at all costs avoid the fiscal profligacy like Greece. To add on, vital lessons can be derived from the problems of massive fiscal retrenchment as evident in the case of Spain and Ireland. Last but not the least; US should not rely on long term interest rates rather than the adoption of credible medium-tem budget adjustment.
Hence, it can be concluded that the brief model on global debt presented above not only helps us to validate few important trends prevalent in current macroeconomic scenario but also aids in evaluating the potential of economies and deriving or substantiating key lessons.
Akshay Kumar: He is an undergraduate in Civil Engineering from IIT Delhi and, currently, working at Ernst & Young in strategy consulting. He has been engaged in debating for the past 11 years at various levels. Since past 4 years, he has primarily focused on policy and economics debates and research papers and has been engaged at premier global debating platforms such as G8-G20 Group, Harvard debates, EUDC. Recently, he has developed debating models and tested them at national debating conferences
– akshaykumar.iitd@gmail.com
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