Cliffhanger or Falling Off the Cliff

Cliffhanger or falling off the cliff was the title of a discussion we recently had at the Stammtisch of the Freiburg-Madison-Gesellschaft about US monetary policy. Despite a favorable vote of both the US Senate and House of Representatives in the early hours of January 1st, 2013, on the compromise American Taxpayer Relief Act of 2012, it seems that both the fiscal cliff and the debt ceiling will remain cliffhangers in the States throughout the year.

Looking through the Internet for an illustration of a cliffhanger, I discovered
that others had the idea of a person falling off the cliff earlier (©Cardow Cartoon)

As a layman, it is always astonishing to see how national economies get away with accumulating debts. At the same time, private persons, e.g., must leave "their" houses when they can no longer serve the interest of their loans. The difference is that states will refinance their debts, an exciting practice, particularly at this moment. With the massive volume of money circulating around the globe, new bonds are issued at low interest rates. This practice also means that the interest rates on private investments approach zero, that future benefits of pension funds will no longer cover the needs of older adults, and that inflation will loom. Experts have coined the term "financial repression."

The following table presents the financial situation in 2012 for a couple of countries. For the sake of comparison, figures are given in US$ (source Wikipedia):

Country	Debt in TriUS$	Per cap US$	% of GDP	2012 >13 in %
USA	17.48	5555	107	+4.7
Germany	2.85	3495	83	-1.2
Japan	14.65	11508	237	+3.4
Greece	0.49	4404	171	+6.4
Italy	2.65	4345	126	+1.6
France	2.50	3937	90	+2.2
Spain	1.36	2915	91	+6.6
Cyprus	0.02	2520	93	-6.5

The world's burden of debts (©The Guardian, UK)

As far as indebtedness per capita is concerned, Japan sets the pace. The figure of 11508 US$ appears impressive, but the Japanese state holds only a few foreign bonds; it primarily owes the money to its citizens. Other countries buy their bonds in all major currencies on the international market at the lowest possible interest rate. Regarding its per capita debt, recently bailed-out Eurozone country Cyprus appears favorable, with only 2520 US$.

Leverages shown in the table range from 83 to 237% of the Country's Gross Domestic Product (GDP). The classical view had it that a country is considered bankrupt when this figure exceeds 100%. Here, the number for Greece stands out in particular because its leverage is projected to increase from 171 to 182% in 2013, whereas Cyprus will decrease its leverage from 93 to 86%, possibly due to the substantial financial assistance the European Union recently provided to the country.

There were times when financial situations were worse, as in Freiburg in 1477. With the choir of its Münster church still under construction, the city had a per-capita debt of approximately 23,000 US$ for a population of only 6,000. The leverage was 1000%, such that 50% of Freiburg's budget had to be earmarked to pay the interest on the accumulated debt. There was no prospect of repaying the loans. To remedy the financial situation at that time, Freiburg's master, King Maximilian, increased the city's income by placing the iron and salt trade under its control.

Today, people complain about Freiburg's "enormous" indebtedness, amounting to approximately 280 million US dollars. This, however, amounts to a per capita debt of only 1200 USD and represents 35% of the city's current budget. These figures are not negligible but are low compared with cities in some regions of Germany where unemployment rates remain high; Duisburg, a city in the Ruhr district, has a debt equivalent to US$ 2.9 billion, or US$ 5,860 per capita.

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