A good article by Ken Rogoff, the author of This Time is Different, about the impending sovereign debt defaults.
Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”
In 2008, countries rushed in to bail out banks, companies, and even citizens, but the problem is countries have been building up debt for years. Now, the lenders of last resort face a meltdown. Who will bail out the lender of last resort?
Currently, the debt levels of the countries in the G-20 are continuing to grow as the chart below shows:
What is really interesting is the “advanced” G-20 countries are expected to have a debt-to-GDP ratio of 106% whereas the emerging markets are showing more responsibility with only a 40% debt-to-GDP ratio. Rogoff points out in his book that once a nation gets beyond the 100% level then the economy suffers sub-par GDP growth.
Even more ominous for the US is some projections based on America’s potential debt-to-GDP if the unfunded liabilities for Medicare and Social Security are included. A report issued by the National Research Council and the National Academy of Public Administration discussed how America’s government debt is unsustainable. If nothing is done, our debt will be six times our nation’s Gross Domestic Product (GDP).
