I read an unusual article the other day about USA Debt versus World Debt. The author was comparing the USA Debt against World Debt to explain why USA Debt situation was so much better than the rest of the world.
He went on to explain that while the USA Debt per person was higher than the rest of the world’s population, still American citizens are so much better off because they have some hope of some day being able to repay some of the debt without going bankrupt. He estimated that it could take about 50 years for the USA Debt issue to get under control. Whereas he estimated that world debt was such a bigger issue as a percentage that it would require numerous defaults by countries before it ever becomes manageable.
USA DEBT VS WORLD DEBT – Hey We’re Still Better Than You Are!
A number of charts were used in the argument about USA Debt being better than World Debt. For example here is the public debt per country as of 2010. This chart is from nationmaster.com’s website. But the author goes to say that while the US has the highest debtload in the world today, its okay because per person, it’s actually a lot better.
Here are some of the examples by country for Public Debt. All figured quoted were from 2010.
Per Person: $37,784.00
Percent Of GDP: 76%
Per Person: $39,826.00
Percent Of GDP: 81.9%
Per Person: $28,691.00
Percent Of GDP: 77%
Per Person: $35,550.00
Percent Of GDP: 76%
Per Person: $35,550.00
Percent Of GDP: 121%
Per Person: $35,814.00
Percent Of GDP: 140%
Per Person: $32,095.00
Percent Of GDP: 84%
Per Person: $41,828.00
Percent Of GDP: 128%
Per Person: $87,549.00
Percent Of GDP: 204%
Per Person: $12,448.00
Percent Of GDP: 22%
Per Person: $10,627.00
Percent Of GDP: 32%
Per Person: $38,000.00
Percent Of GDP: 44%
Per Person: $18,898.00
Percent Of GDP: 39%
Therefore based on the above figures the author felt that USA Debt is in far better shape than most other indebted nations simply due to the sheer size of the USA and its ability to repay its debt.
The other argument that made no sense was the opinion that it was the socialism of Europe that was destroying their economies. But based on the above figures socialism appears to be doing just fine in many of the countries including Sweden which is among the most socialistic in the world today.
USA DEBT VS WORLD DEBT – The Figures Don’t Tell The Whole Truth
But the above figures, which actually vary somewhat depending on the sources quoted, are not the whole truth. The USA Debt and World Debt do not take into account future entitlement programs. In the United States alone those figures are quoted as being anywhere between 40 trillion and 60 trillion dollars. This is a staggering amount which completes changes the USA Debt figures from 13.9 trillion to around 53.9 to 73.9 trillion dollars. No nation on earth has figures anywhere near these amounts.
So when entitlement and future obligations are taken into account the argument about USA Debt being better than World Debt is even more ludicrous. How can the writer even hint that USA Debt is better. What is this? One upmanship… “Hey guess what, we owe some 50 trillion dollars and we are still so much better than the rest of the world… In Your Face… take that!”
The author is taking a weird stance. This is the ultimate of seeing a silver lining. So guess what – IT’S ALL BAD. It doesn’t matter if it is USA Debt or World Debt. This has to be the most ludicrous article I have ever read.
USA DEBT – TAKING ISSUE
Leaving aside what is obviously the weirdest argument for why “we are still better than they are”, his article on USA Debt did get me thinking about how in the world we got into this mess in the first place.
The collapse of Lehman Brothers in 2008, in a nutshell was a direct result of owing too much and not having enough assets to cover. In other words the balance sheet was tipped the wrong way.
Quality assets are King. They always have been and always will be. Despite what Lehman Brothers thinks, in the end they loaded up on a lot of assets that were not quality but questionable. It really doesn’t matter what the rating agencies report on. Lehman Brothers was full of “experts” who knew what they were holding and no one needed to tell them whether it was AAA or C. The same holds true for every financial institution. These guys are supposed to be experts. Period.
When Bank Of America purchased Countrywide Financial, analysts everywhere were shocked, which included Bank Of America shareholders and I am sure, many Bank Of America personnel. Everyone knew that Countrywide was a disaster in the making. It would have been better to let Countrywide implode, than buy it. Everyone it seemed except for Lewis who was determined he was right. Ego is more often than not an integral reason so many purchases are bad choices.
European Banks are no different. They are holding lots of European Sovereign Debt. Yet everyone knew some of these countries, like Greece and Ireland were basket cases. Every statistic showed that balance sheets were tipped the wrong way. They were over spending by a huge margin and setting up retirement and health care systems that are beyond the capacities of their own citizens to support. Yet the belief among these banks seemed to be that it was sovereign debt, so why worry. It will get bailed out because, after all, it is sovereign debt.
But the only way to bail them out is to take on more debt which just compounds the issue and again brings us back to USA Debt VS World Debt.
Yesterday I read an article about how any default from Greece will have little impact on American banks because they are owed only anywhere from 40 to 60 billion dollars. What? Losing just 40 to 60 billion won’t have any impact? How about all the debt that is related to these losses? Do banks even know what is on their balance sheets? How much Ireland Debt or Italian or Spanish?
USA DEBT VS WORLD DEBT – How I See It
Here is the USA Debt VS World Debt debt problem as I see it. I started investing in the 1970’s. If you look at the first chart below you can see that from 1975 to November 1999 the S&P 500 moved 1487.75%. It rose a total of 1283.93 points. Truly this was the ERA of BUY AND HOLD. Looking at the chart the market crashes of 1987, 1997, 1998 were nothing in relation to the overall movement in the S&P.
This chart alone is what made financial institutions the world over, come out with Buy and Hold plans for investors. In particular financial institutions came out with investing plans for baby boomers. These plans were cookie cutter templates based on the belief that through buying and holding stocks through wide based mutual funds within a highly diversified portfolio mix between stocks, bonds, commodities, fixed income and some cash, an investor would do well and the financial institutions could reap annual management expenses (fancy word for payments) from investors which could be anywhere from 1.5% to as high as 5%. There were no guarantees but then, none were needed based on the belief that stocks always rise in value.
The chart below supported this theory. Every market crash the market continued higher. Therefore is made sense to buy and hold.
But for many financial institutions, pension funds and investors, this type of return was not enough. In the mid 1990’s the dot.com bubble commenced as people and institutions borrowed heavily to invest in tech stocks. The returns by Feb 2000 were spectacular, 502.30%!
But everyone knows what happened next. Most of the listed companies were shells, with no real earnings and nothing of substance for shareholders. Most rented spaces and were working from shoe string budgets with venture capital which amounted to limited amounts of cash.
The aftermath of the tech bubble was not pretty. In the end more than 3900 points were lost. On April 4th 2000, the NASDAQ fell from 4,283 points to 3,649 and rebounded back to 4,223. The bubble was bursting yet analysts everywhere called it a correction.
One magazine however did not. In an article in Barron’s, author Sean Parker stated that over the next 12 months hundreds of Internet start ups would basically run out of cash. The article was called “Burning Up” and many investors ignored it.
In the end it really doesn’t matter what the index lost because in effect millions of investors, large and small lost entire retirement portfolios and almost 50% of listed tech companies collapsed taking shareholders with them.
So while the S&P Buy and Hold performed well up until 2000, many investors had already bailed out years earlier to jump into the tech bubble and most lost hundreds of billions of dollars.
USA DEBT – Low Interest Rates
But the collapse of stocks and the attack on the 9/11 terrorist attacks created a climate of cheap interest rates as the Federal Reserve under Greenspan’s direction, drop interest rates to historic lows. With cheap money, hundreds of investors including financial institutions thought to rebuild their lost capital through housing. As they bought more houses they borrowed even more. As housing rose in value they borrowed more against the inflated values. And it wasn’t just individuals. It was also institutions, pension funds and financial houses. All such institutions thought to rebuild their lost capital through housing.
The housing bubble lasted until mid 2006. By this point many individuals were flipping 4 and 5 houses at a time or at least trying to. Mortgage money was so cheap that neighbors everywhere piled on debt and so did Financial Institutions. The disregard for general accounting principles was evident when by 2006 the housing market began a collapse that now 5 years later continues in the majority of the market. Basically, housing was over priced to the point that a collapse was a natural event.
World debt meanwhile was no better in most developed countries. The arrival of the Euro brought a false prosperity to Europe which was built on a shared currency and again normal accounting practices were swept aside. Many countries that did not have their finances in order were allowed to fudge numbers in order to gain entry. Not only sovereign nations, but companies and individuals amassed large debt loads.
USA DEBT – Seem Simple Doesn’t It
That’s Because It Is
So the story of USA Debt VS World Debt is actually pretty easy to understand. Economists everywhere can lay blame on the Federal Reserve, European Union, China, Keynesian Economics and more. But in the end it was people and still is people who make the decisions of how much debt they can handle. Debt is actually a pretty simple concept. A balance sheet needs quality assets in order to be able to fund debt. It’s that simple. It was always that simple. Buying 3 cars, a cottage and a boat has to have quality assets behind the debt and prospects of paying down the debt through income. If an individual does not have these assets, then the debt load cannot be increased.
Nations are the same. The concept of growing a nation’s GDP beyond the debt holds merit, but only if it is plausible. In the case of USA Debt VS World Debt, it has become painfully obvious that this is not the case. So simply put, it is not plausible to spend beyond the future GDP growth that can be realistically reached.
The argument of which debt is in better shape: USA Debt VS World Debt is ludicrous at best. It is debt that is the problem. The debt was amassed over decades for many nations, companies and individuals. It has mushroomed from the mid 1990’s and it will take decades for the debt issue to become manageable.
Investors need to realize that stock markets are perhaps one of the riskiest places to park one’s money without having a serious investing plan. Any money put into stocks should be money that investors can afforded to lose or at least tied up for considerable periods of time; think decades. The serious investing plan I do not believe, should entertain thoughts of Buy and Hold. That era is over as the charts above show.
There will again be a time of Buy and Hold. But that is probably decades away. Until then anyone investing in stocks needs to turn to other strategies and learn them well. For me it is options coupled with stocks. But then, that is the same strategy I have used since the mid 1970’s when the Era of Buy and Hold was getting started.
So it is not a question of whose debt is better. USA Debt and World Debt are incredible obstacles to the health of the world’s economies and until investors realize it and plan for it, there are going to continue to be large losses in portfolios, both institutional and individual.