esoteriic.com

This post is was originally posted to Facebook on October 5th 2011. I'm reposting here for a potential wider audience. I was curious to find some numbers of who held what debt and what the ratios of debt to GDP looked like. Ultimately, I'm curious to know who the net creditors and net debtors are. From this I argue in favour of defaults and letting bankrupt sovereign states go bust.

 

 

 

I did some more Excel work on world debt using information freely avaible from Wikipedia (primarily from IMF, CIA, World Bank) and had a somewhat interesting find, the wiki page is missing a calculation of the world's NIIP. I chose to look at NIIP as it shows what the potential bottom line is, high debts are a problem but they can be offset against high savings. The net position is the one that should concern us, imo.

 

NIIP:

The difference between a country's external financial assets and its liabilities (also referred to as external debt) is the net international investment position (NIIP).[1] Both public and private held external assets and liabilities by legal residents of the respective country are hereby taken into account. [2]

A country's international investment position (IIP) is a financial statement setting out the value and composition of that country's external financial assets and liabilities.

International Investment Position = domestically owned foreign assets - foreign owned domestic assets.

 

http://en.wikipedia.org/wiki/Net_international_investment_position

 

 

(NB: All numbers are nominal, not PPP or per capita. I also used XE to convert local currencies into dollars)

 

Roughly =  foregin savings - foreign debt. My first guess is that this should be a zero sum game. Everyone can have (gross) debt but not everyone can be a net debtor. This ignore internal debt that a gov't owes to its people and it ignores internal savings.

 

The net creditors are (ed: the good guys): Singapore, Taiwan, Switzerland, Luxembourg, Norway, Japan, Belgium, Germany, The Netherlands, Malta, Finland, Denmark, Israel. For some reason there is no data listed for China, Hong Kong or Russia which ihs quite troublesome as China is listed as have 37% of GDP in net foreign investments which is circa $2 trillion ( ~ 0.4 * $5T).

 

Ignoring the countries with no data the NIIP is $7.5 Trillion.

 

 

On the otherside of that (the shit list) we have data for most countries except Canada and Australia (7% and 60% of GDP, roughly (0.07 * $1.5T + 0.6 * $1.2T = $0.825T). The NIIP of the shit list is -$5.3T.

 

First conclusion: The NIIP of the world is $2.16T (excluding China and Russia, whom are very significant and will boost this number greatly). This is obviously not a zero sum, so some of the foreign investments can't be classed as net (perhaps it is equity or currency ?). It also suggests that if the $5 trillion of the debtors disappeared in a default then there is still $2 trillion left in foreign investments across the world. Yes that is overly simplistic but as a simple first glance there is less reason to be worried about bankruptcy etc.

 

The list on wiki notes that Eurozone NIIP is -$1.25T, I haven't checked this but the numbers appear to be of the correct magnitude (cf the eurozone countries listed with the total for the eurozone). I presume this includes the net credit positions of Germany, Belgium etc.Second conclusion: The entire debt of the eurozone, including the good guys, is still less the NIIP of China alone.

 

The NIIP of the eurozone is seriously weighed down by the PIIGS, the NIIP of the latter is -$2.53 Trillion. This figure slightly larger the net NIIP of the world. It is also slightly lower than the NIIP of China alone.

 

Third conclusion: If the PIIGS defaulted then this figure of -2.5T is my naive estimate of the entire loss. Assuming they are not propped up using the savings of the others. If there is a default then $2.5T is removed from the total world debt but assuming this is equally deducted from savings to 'plug the gap' then the world is still a net saver by 2.16T: ie the original number (you remove 2.5 from both the good list and the bad list -- the difference between the two doesn't change).

 

Of note (!!!!):

* World GDP is $68 Trillion

 

* As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion

http://en.wikipedia.org/wiki/Bond_market

 

(both of those alone **dwarf** the entire NIIP of the world and the debt of the PIIGS (2.5T is a blip in the ocean of 82.2T).

 

PIIGS net debt to world GDP = 2.5 / 68 = a measely 3.8%.

PIIGS net debt to size of the bond market = 3% (far into shrug territory).

 

I realise that this numbers are somewhat naive and rough but it does give an estimate of the total magnitude of the problem and what the world, as a whole, would look like. It is an attempt to demystify the numbers involved and is a data-driven attack again such statements as "if the PIIGS defaulted we'd go back to the stone age": my response is "Orly? let's have a look at the numbers". Markets always tend towards basic arithmetic: too much debt will eventually cripple you. A problem of too much debt and too much consumption will not be solved by more debt and more consumption. If low interests and credit stimulus created the last few financial bubbles then guess what: more credit stimulus and even more low rates won't fix what ails us.

 

It is perhaps amusing that the PIIGS countries are traditionally Christian, it brings to mind the following: "forgive us our debts as we forgive our debtors". How sobering, perhaps the Christians understand default? :-P

 

Some examples of default have worked out favourably: Iceland (08), Chrysler (08/09), Russia (late 90s), Scandinavian banks (92/93).

 

Russia has boomed since 98. Scandinavia has had its best 2 decades (probably in their entire history) since 93. Once the debt is gone then your monthly costs is phenomenally smaller, it is perhaps harder to raise external debt but that says nothing of raising internal debt (as Russia did).

 

Iceland and Chrysler are turning around, it is admittedly too early to know their fate.

 

Japan is an obvious example of not letting companies default, it propped them up and has had 2 decades of no growth.

 

Now the ball is in the other court for people to provide numbers to say this can't be the case.