Wednesday, 25 July 2012

09:29 – The economic news continues to get worse, with both the UK and US numbers tanking. Nearly the whole world, it seems, is determined to spend massively more than it can afford. There will be a reckoning. It will not be pretty.

It amazes me that people casually treat sovereign indebtedness figures of 100% and more of GDP as though they’re no real cause for concern. People tell me that families run similar or higher debt levels when they buy a house. But there’s a huge difference. When a family buys a house, they’re going into debt to purchase an asset. Over the course of 15 to 30 years, they devote a significant percentage of their “family GDP” to paying down that debt. And when they pay off that mortgage they are out of debt and own a valuable asset. With countries, on the other hand, the debt is structural. They are not going into debt to purchase an asset, and they are not paying the debt down. The converse, in fact; they’re adding more debt every year. And even if they do eventually pay it down, they’re left with no asset.