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Current sovereign debt levels are truly extraordinary [ClearOnMoney]
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Current sovereign debt levels are truly extraordinary

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Commentary

Current sovereign debt levels are truly extraordinary

10 Oct 2012 by Jim Fickett.

Current debt levels in advanced economies have been higher only following WW II. Historically, high debt levels tend to come down very slowly, on average. High inflation is not the most common outcome, but it is not rare, either.

We all know government debt levels are high throughout the so-called “advanced economies”. But it doesn't hurt to be reminded just how high: higher than any time in the last 130 years, with the single exception of World War II:

(The figure is from the latest IMF World Economic Outlook, which came out this week.)

Don't get your hopes up that this situation is likely to improve right away. The IMF says, “the elasticity of the primary balance to debt is quite low at about 0.05.” Translated, that means that when debt rises by a billion dollars, governments only tend to improve the primary (non-interest) budget balance by 50 million. So progress in correcting large debt burdens is usually very slow. The IMF studies 26 historical episodes of individual advanced economies with debt over 100% of GDP, and finds that, on average, after 15 years debt has decreased by less than 10%.

High inflation is not the most common outcome, but it is a real danger. In 5 of the 26 cases there was inflation averaging at least 11% over 15 years.