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 of private investments approach zero, future benefits of pension funds will no longer cover the needs of old people, and inflation will loom. Experts have coined the term: Financial Repression.

The following table presents the financial situation 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$ looks impressive, but the Japanese state only holds a few foreign bonds, i.e., it mainly 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. Concerning 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 because of its projected increase from 171 to 182% in 2013, while 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 iron and salt trade 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 compared to 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.

*