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The debt equation


15 February 2010


Last week, a debate over debt became the central focus of economic discussion about the global financial crisis and the assumed recovery. National Party Senator Barnaby Joyce kicked off the debate with speculation that Australia may be unable to pay back its debt.

Barnaby was condemned and attacked by the federal government and a wide range of economic commentators. The head of Australia's Treasury, Ken Henry, dismissed Barnaby's debt probing in Senate hearings during the week as being naive.

But then on Friday (12 February) Alan Kohler from Business Spectator began an article with the words "Ken Henry ... should spend less time sneering at Barnaby Joyce and more time contemplating the unfolding calamity in Europe, and coming to grips with what's really going on in Australia." Kohler, one of the most respected economic commentators in Australia, presented evidence that "Australia's debt-funded fiscal stimulus is double what was announced.... " and the global government debt situation is much worse than governments are declaring when pension fund liabilities are included.

What's apparent is that the GFC happened because of massive accumulated private-sector toxic debt. Governments 'managed' the crisis by moving the debt to the government sector and pushing money on to consumers, hoping for a consumer-led recovery. Now the question is, how will governments manage unfolding the debt and how will Australia preform in this environment? The Financial Times' comments on the EU problems reflect much of Alan Kohler's concerns.

This debate is confusing for the lay person because economists argue about what is 'good' and 'bad' debt and how 'bad' debt should be identified. One important question is: is it government debt that's the problem or total national debt?

For example, Australia's 'net foreign debt liability' reached $A637.5 billion in September 2009, equating to about 45 per cent of Australia's (approx) $A1.4 trillion GDP. (Aust Bureau of Statistics). Yet The Age says 'Australian net debt' will only be $A153 billion in 2013-14.

We've put the following table together from a variety of sources.


What' obvious is that Australia is in a comparatively low-debt situation, although there are others, economist Steve Keen for example, who's long been saying that Australia's debt position is much worse than it appears. He has some enlightening graphs!

Japan's debt is staggering. It raises the question of how such high levels of debt don't trigger a massive financial crash. Maybe the answer is that Japan has been in a decades-long economic slump. Given this, it's surprising that Japan still has an unemployment rate below that of Australia.

Debt figures for the US are almost beyond comprehension in raw numbers. With a GDP of over $US13 trillion, US government debt must be around US $11 trillion---more than ten times the size of Australia's GDP.

Whatever the specific facts, it's hard to believe that this massive global debt is not going to be resolved without considerable turmoil.

Table Sources

The Australian
Business Spectator
Financial Times
Daily Telegraph
The Age
Steve Keen (in Business Spectator)