Monday, April 8, 2013

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. In spite of a positive vote of both 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 cliffhanger I discovered that others had the idea of a person falling off the cliff earlier (©Cardow Cartoon)
For me as a layman it is always astonishing to see how national economies get away with accumulating debts while private persons, e.g., must leave "their" houses when they are no longer able to serve the interest of their loans. The difference is that states will refinance their debts, an interesting 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 interest rates of private investments approach zero, future benefits of pension funds will no longer cover the needs of old age people, and inflation looms. Experts have coined the term: Financial Repression.

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

Country Debt in TriUS$ Per cap US$ % of GDP2012>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 a the indebtedness per capita is concerned Japan sets the pace. The figure of 11508 US$ looks impressive but the Japanese state only holds few foreign bonds, i. e., mainly owes the money to its citizens. Other countries buy their bonds in all major currencies on the international money market at the lowest possible interest rate. With respect to its debt per capita recently bailed-out Euro-country Cyprus looks remarkably good 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 sticks out in particular in view of its projected increase from 171 to 182% in 2013 whilst Cyprus will decrease its leverage from 93 to 86% possibly due to the massive financial help the European Union recently gave 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 debt per capita of an equivalent of 23 000 US$ for a population of only 6000. 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 hope of paying off the loans. To remedy the financial situation at that time, Freiburg's master, King Maximilian, increased the city's income by placing the trade of iron and salt under its control.

Today people complain about Freiburg's "enormous" indebtedness of an equivalent of 280 MioUS$. This however amounts to a debt per capita of only 1200 US$ and corresponds to 35% of the city's current budget. These figures are not negligible but low in comparison with cities in some regions of Germany where unemployment rates are permanently high: Duisburg, a city in the Ruhr district, has a debt of an equivalent of 2,9 BioUS$ or per capita US$ 5860.

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