Graphs of scale of national indebtedness

I dip into the Zero Hedge blog on all things financial when I’ve a moment or two to spare.

Appearing on the blog recently is a link to the home of  insightful infographics at Demonocracy. The lovely image  of French Debt is a small part of an infographic showing truckloads of $100 bills equating to sovereign debt.

There’s an equally good infographic on the exposure of banks to Portugal, Ireland, Italy, Greece and Spain [PIIGS], which shows the truckloads of cash that are needed to rescue the insolvent PIIGS.

Looking at these charts, I sought out other sources on the state of national indebtedness. Here are a couple.

The Economist’s  interactive overview of comparative debt as a % of GDP [Gross Domestic Product] provides another view of debt by country. 

The UK’s position isn’t good. Tullett Prebon’s July 2011 paper  ‘thinking the unthinkable’ , provokes some serious concerns about the UK’s position. 

I know it’s all scary stuff, especially when the UK’s National Debt now tops a £1trillion. I’m not a pessimist or a believer in financial armageddon, as there are some causes for optimism, as my next blog post will show.

Have a strong cup of coffee at the ready …

…. because after reading the This is going to hurt article, by renowned editor of City am newspaper, in The Spectator, you’ll certainly need it.

The bottom line is that most Western countries have been living beyond their means for years, and the day of reckoning is approaching about their addiction to borrowing to pay for it. I’ve written a lot about our debt, Our Economic Health: Part 1 National Debt is a useful primer.

Britain’s Trillion Pound Horror Story

‘Britain’s Trillion Pound Horror Story’  on Channel 4 last night should be shown to all secondary school children. Why? For no better reason than Bill Bonner’s quote from the programme, about the scandal,

“The only way they [government and politicians] get away with this is that the unborn and young don’t vote.”

It’s today’s and tomorrow’s children who’ll have to solve this problem. The sooner they understand it, the better for all of us.

Channel 4 describe the programme as an explanation of “the full extent of the financial mess we are in: an estimated £4.8 trillion of national debt and counting. … that to put Britain back on track we need to radically rethink the role of the state, stop politicians spending money in our name and introduce, among other measures, flat taxes to make Britain’s economy boom again.”

The programme began with some MP’s asked to describe the difference between the Deficit and the National Debt, and shockingly they didn’t know. 

This was an excellent programme, describing the disastrous handling of our economy through the Blair and Brown years, and offering us a solution. No surprise here, low taxes, smaller state payroll, and less regulation. In summary, freeing the populace from the tyranny of state control, so that we can become prosperous again.

Our economic health: Part 1 National Debt

I’m getting back on track after a flurry of meetings, events, and necessary recovery time. I’ve been meaning to do a series of posts on our economy. Now seems a good time, after the first coalition budget, defence review, and comprehensive spending review.

The starting point is to look at the key indicators of our economic well-being; the National Debt, Budget Deficit and Structural Deficit, Balance of Payments, and Inflation.

The National Debt is, in theory, the total amount of money the government has borrowed to pay for wars, and infrastructure. Stuff you could define as investment.

Looking at the National Debt as a % of GDP,which is the total value of everything produced in the country, is a good way of relating it to the size of the economy.

What’s the size of the National Debt?

You’d think there would be a simple answer to this question. Nope, it depends what you include in the calculation. The official national debt is £932billion, equivalent to about 62% of GDP Some people think our national debt is as high as £7.9 trillion. These two sources describe the difficulty in measuring the national debt.

Where does the money come from?

The government sells ‘gilt-edged’ securities, for which it receives money against a promise to redeem the loan at some future date, and on which they pay a small but guaranteed and regular interest. UK pension funds and insurance companies are the biggest purchasers of gilts, followed by foreign investors, all of whom are looking for a safe investment.

What are the problems?

There are a number of problems, which are:

  • Borrowing for lifestyle not investment. It’s possible to argue the case for using debt to invest in roads and the like, but to borrow to pay for welfare and health spending is not investment, it’s living beyond your means, which is what we’ve being doing for some years. It’s unsustainable, even in the short-term.
  • Speed of its increase. In the year 2000-1 the national debt was £311 billion, by 2010-11 it’s reached £932 billion. Uncontrolled increases in debt cause investors to worry about the ability of governments to repay the loans, and also to meet the interest burden, which results in an increase in the cost of borrowing money. Strong investor confidence lowers borrowing costs.
  • Size of the interest bill. The interest we pay for borrowing £932 billion is £42.9 billion, which is more than we spend on defence. Again unsustainable.
  • Difficulty of reducing the national debt. It took until 2006 to repay loans from the USA to pay for World War II. The debt can be paid down only when our economy grows and national income is higher than spending. Now that’s a tough call at present.

In summary, managing the national debt is hugely important. It’s not an arcane subject. It’s an accurate reflection of the state of our economy.